Indonesian Stocks Dive as MSCI Weighs Downgrade to Standalone Market — Update

By Amanda Lee and Ying Xian Wong

Indonesian stocks were headed for their biggest drop since the Asian financial crisis in 1998 after index provider MSCI warned the country risked being removed from its indexes, reigniting fears about capital flight and the investability of one of Southeast Asia's largest stock markets.

The Jakarta Composite Index plunged nearly 11% by midday Friday, on track for its largest daily percentage decline in more than 28 years, LSEG data showed. The benchmark index's opening loss of 8% triggered a 30-minute halt earlier.

The selloff pushed the JCI's losses this year to nearly 40%, making it one of the world's worst-performing stock markets. The rupiah, Asia's worst-performing major currency so far this year, weakened to around 18,040 against the dollar.

MSCI on Thursday launched a consultation on a potential reclassification of Indonesia from emerging-market to standalone status, which would exclude the country's equities from its main indexes. Indonesia would be the first Asia-Pacific market relegated to standalone status if the downgrade occurs.

The latest move marks an escalation from January, when MSCI warned it could downgrade the country to a frontier market, citing investability and transparency concerns. That sparked a nearly $80 billion market rout in Indonesia.

Under scrutiny by global index providers and credit rating agencies, Indonesian authorities have announced a series of reforms and sought to address market concerns. MSCI in its statement said investors' responses suggest a frontier-market reclassification won't properly recognize the depth of the market problems.

"Sufficient progress has not been observed consistently across the Indonesian equity market," MSCI said. "Significant concerns remain around market dysfunction, including continued suspected coordinated trading behavior and lack of evidence of meaningful enforcement."

The Indonesian stock exchange didn't immediately respond to a request for comment.

MSCI is taking feedback through April and will announce its final decision by the end of June 2027. The index provider may also provide an interim update on investors' responses during the consultation period.

Citi analysts said a standalone status would be "unambiguously worse" than a frontier downgrade. There wouldn't be a frontier-index inflow offset, and every remaining emerging market-benchmarked passive dollar would have to exit, they wrote in a note.

Ratings companies have similarly raised concerns about Indonesia's fiscal position, citing expansive government programs that could strain public finances. Moody's Ratings and Fitch Ratings earlier this year lowered their outlooks on the country's credit rating to negative.

Monetary policy has also come under scrutiny as Bank Indonesia faces pressure to support economic growth while stabilizing the rupiah amid concerns over fiscal risks and capital outflows.

In an interview Thursday, Bank Indonesia's governor said that monetary and financial stability remains its top priority.

Governor Destry Damayanti said the central bank's decisions remain data-dependent, adding that if the global situation deteriorates, then maybe BI would see a case to deploy more policy ammunition. Currently, it is focused on creating an "economic climate conducive to real growth and job creation," she said.

For now, MSCI's latest update looks neutral to slightly negative for Indonesian equities, as a downgrade has largely become the market's base case, and much of this year's selling has already occurred, said iFAST research analyst Kok Jun Yong.

Some active emerging-market funds may trim exposure ahead of MSCI's June decision, but much of the downside appears priced in, he said.

More importantly, he thinks Indonesia's issues are governance-related, unlike Argentina and Russia, where capital controls and sanctions restricted foreign investors.

"While sentiment will likely stay cautious in the near term, I do think that if we see effective implementation, especially real enforcement, there's room for bargain hunting at these valuations," Kok said.

Write to Amanda Lee at amanda.lee@wsj.com and Ying Xian Wong at yingxian.wong@wsj.com

(END) Dow Jones Newswires

October 16, 2026 03:18 ET (07:18 GMT)