Jakarta’s stock market faced a severe sell-off last week following a proposal by MSCI to reclassify Indonesian equities from emerging market status to a standalone market, triggering record foreign investment outflows and heightened market volatility. The sell-off, which included an 11.6% drop on October 16 and a further 3.6% decline on October 19, marked the deepest two-day decline since the 1998 Asian financial crisis and pushed the benchmark IDX Composite index to a six-year low.
MSCI’s announcement on October 15 cited concerns about Indonesia’s capital market reforms, particularly issues related to transparency, liquidity, market accessibility, and governance. The index provider indicated that a downgrade to standalone status might follow if reforms fail to produce sustained, material improvements. This classification is seen as less favorable, placing Indonesia alongside markets such as Lebanon and potentially limiting its appeal to international investors, especially passive funds that track MSCI benchmarks.
In response, the Indonesia Stock Exchange (IDX) and the Financial Services Authority (OJK) moved quickly to calm the market. The OJK held consultations with stakeholders and has emphasized ongoing efforts to enhance market integrity, including administrative fines totaling 2.1 trillion rupiah (approximately US$185 million) against entities involved in illicit trading practices. The reform agenda includes enhanced disclosure requirements for significant shareholders, more detailed investor classification, and goals to increase market free-float liquidity.
IDX chief executive Jeffrey Herdik described the MSCI decision as unexpected and acknowledged that it triggered panic selling. Following discussions with MSCI representatives, Herdik reaffirmed Indonesia’s commitment to capital market reforms but did not disclose specifics of the talks. Meanwhile, the IDX announced new measures to reduce volatility, such as lowering the daily limit down move for stock prices to 7% from 15%, and excluding stocks with high ownership concentration from the main index to improve market transparency and price discovery.
The market turmoil extended beyond equities, with the Indonesian rupiah declining close to record lows against the US dollar and government bond yields rising sharply. The 10-year bond yield climbed to around 7.4% from 7.17% earlier in the week, amplifying concerns among investors. Analysts warn that while immediate financing costs may not spike substantially, the larger risk lies in diminished investor confidence affecting broader government bond markets and foreign direct investment.
The sell-off and MSCI’s warnings add to challenges confronting President Prabowo Subianto’s administration, which has faced downgrades in sovereign credit outlooks from major rating agencies earlier this year. Government officials convened to assess the economic situation amid heightened volatility, with markets awaiting Bank Indonesia’s upcoming policy decision, which some expect may include interest rate adjustments to stabilize conditions.
Market observers note that MSCI’s shift reflects ongoing skepticism about the pace and effectiveness of reforms. Strategists from firms like Goldman Sachs emphasize that avoiding further reclassification will require clear, consistent evidence of improved market functioning. Some experts suggest that deeper enforcement by regulators, including more decisive action against persistent market abuse by influential players, is necessary to restore investor trust and stem capital outflows.
Foreign investors have sold nearly US$4.9 billion in Indonesian equities so far this year, driving cumulative foreign outflows to a historic high of 88.19 trillion rupiah. The scale of divestment during this episode has surpassed levels witnessed during the 2020 pandemic and the 2008 global financial crisis, underscoring the significant challenges faced by Indonesia’s capital markets currently.