Indonesia stocks sink on MSCI downgrade warning

Indonesian stocks yesterday suffered their worst rout in nearly three decades after MSCI Inc warned the country’s emerging-market status was in jeopardy, raising the prospect of its removal from global indices and stoking fears of foreign capital flight.

The benchmark Jakarta Composite Index tumbled nearly 12 percent, its biggest one-day decline since January 1998, in a selloff that triggered a 30-minute trading halt. Yesterday’s sell-off added to an already punishing year for local equities, cementing their position as the world’s worst-performing market. The rupiah also neared a record low while bonds declined.

The index provider is launching a consultation and weighing what is effectively a double downgrade for Indonesian equities, bypassing frontier status and relegating the Southeast Asian nation to standalone-market status because of the severity of its investability problems, it said in a statement.

An employee walks past an electronic board displaying stock prices at the Indonesia Stock Exchange building in Jakarta yesterday.

Photo: EPA

It expects to go ahead with its final decision in June unless there is clear evidence of material improvements in market governance.

At the heart of MSCI’s concerns are opaque shareholding structures, suspected coordinated trading and weak enforcement, it said.

While Jakarta has announced reforms, including greater ownership disclosures and higher minimum free-float requirements, the index compiler said that institutional investors want to see consistent implementation and evidence of material impact.

“It’s a massive hit to credibility,” said Felix Darmawan, an analyst at PT BCA Sekuritas. “MSCI is basically calling out the Financial Services Authority on opaque structures and lack of real enforcement. June 2027 gives the securities regulator some time to clean house, but the damage to foreign confidence starts right now.”

If downgraded, Indonesia would fall into the same country classification as Palestine or Lebanon. The review brings renewed scrutiny to governance under Indonesian President Prabowo Subianto, who has been working to restore confidence and lure investors back to the region’s biggest economy after a bruising year.

His government is already contending with criticism over funding for its ambitious lunch program, concerns about central bank independence and unease over growing state control over key industries.

Mirae Asset Sekuritas Indonesia estimates that a reclassification to standalone could trigger about US$3 billion in passive outflows based on Indonesia’s remaining weight of about 0.4 percent in the MSCI Emerging Markets Index. Citigroup Inc puts that figure at mid-single-digit billions.

In response, the Indonesia Stock Exchange said it plans to seek clarification from MSCI on the rationale behind the reclassification plan, pointing to what it called “significant progress and reform measures.”

Meanwhile, the financial services regulator said it is reviewing the assessment and is committed to strengthening law enforcement in the market.