Indonesia Stocks Suffer Worst Day Since 1998 on MSCI Downgrade Warning — 2nd Update

By Amanda Lee and Ying Xian Wong

Indonesian stocks recorded their steepest 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 Southeast Asia's largest economy.

The Jakarta Composite Index plunged nearly 12% on Friday, its largest daily percentage decline in 28 years. The market rout continued after the benchmark index opened 8% lower, triggering a 30-minute halt.

The selloff pushed the JCI's year-to-date losses to about 40%, making it one of the world's worst performers of 2026. The rupiah, Asia's worst-performing major currency so far this year, weakened to 18,070 against the dollar, its lowest level since late July, before paring losses to trade around 18,000 to 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 tracked by global funds. If downgraded, Indonesia would join Argentina, Lebanon, Ukraine, Zimbabwe and others in the standalone category, becoming the sole Asia-Pacific country in the group.

The latest move is an escalation from January, when MSCI warned it could downgrade the country to frontier status because of 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."

Indonesia's Financial Services Authority said it is "carefully reviewing and paying serious attention to MSCI's assessments."

In a statement Friday, the financial regulator said that it and self-regulatory organizations, including the Indonesian stock exchange, will continue engaging with global index providers and institutional investors to share the progress on capital-market reforms and gather feedback to support further improvements.

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

Analysts at Citi 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.

Gov. 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, the latest MSCI 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 the index compiler'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.

--Farah Elias contributed to this article.

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 06:26 ET (10:26 GMT)