MSCI plans to remove Indonesia from global indexes
Indonesia’s stock market is no longer worthy of “emerging market” status, according to MSCI, and the index provider said it intends to cut it from a suite of products tracked by global investors. This major setback sent money fleeing.
In a surprise move, MSCI said on Friday it would put Indonesia on a path to “standalone” status, which was worse than previously flagged, and extended its review of the market by seven months to June 2027.
Jakarta stocks, already the world’s worst performers this year, plunged 10% to a six-year low in early trading, while the rupiah slid 0.6% to 18,000 per US dollar, its weakest level since August.
Indonesian equities have struggled since January when MSCI froze Indonesia in its indexes and threatened a downgrade to “frontier” status because of opacity in ownership and trading behaviour.
On Friday, MSCI said reforms to address those problems have not made sufficient progress and that even a downgrade to frontier wouldn’t reflect the severity of issues.
Instead, it proposed to downgrade Indonesia to “standalone” status, which would exclude Indonesian stocks from global indexes tracked by billions of dollars in passive investment, forcing funds that follow or are ranked against the indexes to sell.
“Significant concerns remain around market dysfunction,” MSCI said. “Accordingly, MSCI considers Indonesia’s continued classification as an emerging market no longer appropriate,” it said.
“Feedback from market participants suggests that a reclassification to frontier markets would not properly recognise the depth of the market problems.”
The Indonesia Stock Exchange said it has taken concrete steps to enhance transparency and integrity in the country’s capital market, and CEO Jeffrey Hendrik said in a statement he would request further clarification on the basis for the announcement.
Coming a month ahead of a scheduled review, MSCI’s statement stunned investors and Jakarta officials, with the chief of Indonesia’s financial regulator Friderica Widyasari Dewi saying she did not expect the announcement following a meeting this week.
Finance minister Suahasil Nazara, who chairs the country’s financial stability board, did not immediately reply to a request for comment on the MSCI announcement.
Angus Mackintosh, an ASEAN specialist at Aletheia Capital in Singapore, said the move does not reflect the health of the vast majority of listed companies or indeed the Indonesian economy, and “grouping Indonesia with Lebanon, Palestine, and Argentina does not make sense.”
“This is a wake-up call for Indonesia,” he said.
Downgrade planned for mid-2027
MSCI’s move seemed heavy-handed given the steps Indonesia has taken to address issues around market transparency and increase the free-float requirement for listed firms, Mackintosh said.
The main problem, he said, is Indonesia’s “failure to sanction those obviously involved in stock manipulation”.
MSCI said it will run a consultation with market participants for a downgrade to “standalone” status until April 2027 and then proceed with reclassification unless it finds clear evidence of improvement in market governance and function.
Standalone markets are not included in MSCI’s emerging or frontier index products, which are tracked by passive funds and treated as performance benchmarks for other fund managers.
MSCI says reclassification to standalone status may occur in the case of severe deterioration in market accessibility or size and liquidity, with the most recent example being Argentina.
Gary Tan, portfolio manager at Allspring Global Investments, Singapore, called the move a surprise, noting the prospect of a standalone status could encourage index-linked investors to further de-risk.
“But for Indonesia, in our view, the bigger concern is less the direct impact on equities and more the potential pressure on the currency from foreign outflows.”
Indonesia has faced a series of setbacks this year, with Moody’s and Fitch cutting their sovereign rating outlooks to negative, citing reduced policymaking credibility.
The benchmark Jakarta stock index has fallen more than 30% this year, making it the worst-performing equity market in the world, with net selling by foreign investors at $4.7 billion worth of shares.