SINGAPORE – Indonesian stocks slid to a six-year low on Oct 19 as a warning from MSCI over possible expulsion from its global indexes in 2027 rattled fragile investor sentiment, sharpening the focus on how Jakarta intends to allay the index provider’s concerns.
Jakarta’s benchmark stocks fell over 5% in early trading on Oct 19 after plunging 11.6% on Oct 16, as the world’s worst performers reeled from index provider MSCI saying it was considering shifting Indonesia to “standalone” status from its current “emerging markets” mantle.
A shift to standalone status would risk cutting South-east Asia’s biggest economy off from international capital, relegate it to an investment backwater and club it with a group of standalone markets that includes Lebanon and Zimbabwe.
The more-severe-than-expected move has raised the stakes for Indonesia’s regulators and finance officials.
On Oct 19, the Indonesia Stock Exchange said it cut its lower auto-rejection limit to 7% from 15% to give investors “an opportunity to evaluate and digest available information, helping them make better investment decisions based on Indonesia’s economic fundamentals”.
The move followed a weekend meeting between the financial regulator and capital market participants, including analysts and economists.
An Indonesian regulator on Oct 16 also unveiled sanctions against those linked to alleged trading manipulation in shares of three firms, with the fines totalling 2.1 trillion rupiah (S$148.8 million).
Angus Mackintosh, an ASEAN specialist at Aletheia Capital in Singapore, said the fact the fines were announced on Oct 16 suggests that Indonesia’s Financial Services Authority (OJK) has been working on the matter for a while.
“The fines are a positive move, but there needs to be concerted action to stamp the authority of the OJK and take direct action against certain well-known players who have been involved in market abuse,” he said.
MSCI had threatened a downgrade to “frontier” status in January because of opacity in ownership and trading behaviour but said on Oct 16 the lack of progress in remedying those concerns meant even a drop to that status would not reflect the severity of the issues.
“The burden of proof has shifted: avoiding reclassification will require clear evidence that the announced reforms have been consistently implemented and materially improved market functioning,” strategists at Goldman Sachs said in a note.
Wider risks from MSCI’s warning
Goldman Sachs estimates a full MSCI removal could trigger US$5.6 billion of passive outflows. Active funds benchmarked to these indexes hold more than US$8 billion, although any selling would be discretionary rather than benchmark-driven, they wrote.
Foreign investors have net sold US$4.88 billion worth of Indonesian stocks so far in 2026, on track for the biggest annual outflow in at least 16 years.
Aninda Mitra, head of Asia macro and investment strategy at BNY Investments, said foreign equity exposure to Indonesia has shrunk to the point where “there may not be much more downside from here”.
“But at the same time, even if there are some interesting and fundamentally sound companies and banks, attracting sufficiently large amounts of capital will be tougher in this environment,” he said.
MSCI’s warning raises the stakes for the government of President Prabowo Subianto, which has faced a series of setbacks in 2026, with Moody’s and Fitch having cut their sovereign rating outlooks to negative earlier in 2026.
Investors are also fretting over the ramifications beyond the US$500 billion stock market, with the rupiah weakening to 18,040 per dollar, not far from the record low of 18,190 hit in June.
“Our bigger concern is not index-related selling itself, but the potential near-term spillover into the rupiah and domestic bond yields, where market dislocation could translate into tighter financial conditions and a more meaningful impact on the real economy,” said Gary Tan, portfolio manager at Allspring Global Investments in Singapore. REUTERS
