Indonesian stocks fall 11.57% on proposal to move market out of emerging-market category
Key Facts
Indonesian stocks closed down 11.57% in the Friday session covered by a Reuters report dated October 16, amid a move to reclassify the market. MSCI had opened a consultation on moving its Indonesia indexes from emerging-market to standalone-market status. The benchmark index posted its biggest daily loss since January 1998, according to Reuters. The proposal puts Indonesia's continued inclusion in MSCI's emerging-market category under review, amid persistent concerns about the market's investability. The move remains a proposal subject to consultation and has not become a final reclassification decision.
MSCI said the reasons for the move included persistent "opaque shareholding structures," raising concerns about the market's investability. It also cited continued suspicions of coordinated trading in the Indonesian market among the problems underpinning its proposal. It added that concerns included a lack of evidence of effective enforcement of rules, despite reforms announced by the authorities to address shortcomings. According to MSCI, feedback from market participants indicated that a move to frontier-market status would not reflect the depth of the existing problems. It therefore proposed a consultation on a move to standalone-market status, rather than simply moving the market to the frontier category.
Reforms announced by the Indonesian authorities included enhanced disclosure of shareholders with holdings exceeding 1%, according to MSCI's statement. The package also includes a roadmap to achieve a minimum free float of 15%, among the measures announced to address market problems. The first measure concerns disclosure of shareholder holdings, while the second relates to the target free-float percentage under the roadmap. On the regulatory front, Indonesia's Financial Services Authority imposed total fines of 2.1 trillion rupiah, according to Reuters. The fines targeted entities linked to stock-trading manipulation following MSCI's announcement of its proposal on the market's future classification.
On index measures, MSCI continues to freeze certain changes involving Indonesian securities during the reclassification consultation. The freeze covers additions of securities, as well as increases in foreign inclusion factors and the number of shares used in index calculations. It also extends to upgrades of securities between size segments, according to details MSCI provided in its consultation statement. To address trading volatility, the Indonesia Stock Exchange lowered the daily limit on share-price declines to 7%, according to a Reuters report published on October 19. The previous limit was 15%, before the exchange adjusted it as part of measures aimed at curbing market volatility.
On potential capital movements, UBS estimated that implementing the reclassification could trigger outflows from passive investments. These potential outflows amount to about $4 billion, according to the bank's estimates cited by Reuters on the impact of implementing the proposal. The bank also estimated potential additional outflows of $15 billion from active investors, conditional on the reclassification proceeding. These estimates concern funds that could leave upon implementation, rather than outflows that have already occurred during the stock selloff. Meanwhile, the rupiah faces pressures including dollar strength and investor concerns about risks associated with Indonesia's public finances, according to Reuters.
MSCI said it expected to proceed with the reclassification unless the consultation revealed clear evidence warranting reconsideration of the proposal. It specified that such evidence would involve a "material improvement" in market governance and functioning, among the conditions it announced for reviewing its position. MSCI thus tied the possibility of reversing the move to the consultation's findings and any improvement they reveal in the areas that raised its concerns. The deadline for feedback on the proposal to move MSCI's Indonesia indexes to standalone-market status is April 30, 2027. MSCI is scheduled to announce its reclassification decision no later than June 30, 2027, according to the consultation timetable it set.