The Zhitong Finance App learned that after the index compiling agency MSCI (MSCI)'s statement that it was considering downgrading the Indonesian stock market rating and removing it from the global index raised concerns about capital outflows, Indonesia experienced three losses in equity and debt remittance.
The Indonesian stock market experienced the worst sharp decline in nearly 30 years — Indonesia's Jakarta Composite Index fell 8% when it opened on Friday, causing the fusing mechanism to start and suspend trading for 30 minutes. The decline widened again after restarting trading, falling more than 11% at the close. The foreign exchange market and the bond market are also under pressure. As of press release, the Indonesian rupiah fell 0.42% against the US dollar to IDR 1,8007; the yield on Indonesian 10-year treasury bonds was basically flat, while the yield on shorter-term treasury bonds (including 3-year and 5-year terms) increased.
As early as January of this year, MSCI warned that it might downgrade the Indonesian stock market from the “emerging market” category to the “frontier market” category. For months, the agency has been urging Indonesian officials through public and private channels to address investors' concerns about market manipulation and inadequate disclosure of information.
But now, MSCI seems to have run out of patience and is considering more extreme measures. Currently, MSCI is seeking comments on a proposal to reclassify Indonesia as an “independent market.” According to MSCI, the downgrade to a frontier market is insufficient to reflect the extent of the country's market problems. MSCI is expected to push forward with this change unless evidence of significant substantial improvements in market governance and operation is found. This consultation will continue until April 30, 2027, and the final decision is expected to be made before June 30, 2027.
Since MSCI launched the Emerging Markets Index in 1989, Indonesia has maintained its position as an emerging market. As its economy and capital markets expand, inclusion in the index helps strengthen Indonesia's position in the global investment portfolio.
Once classified as an independent market, Indonesia will be completely excluded from MSCI's major global indices — passive funds tracking the MSCI Emerging Markets Index may be forced to sell their positions in the Indonesian stock market, and active fund managers based on these indices may also cut their exposure. The loss of opportunities to simultaneously enter emerging and frontier market benchmarks may further weaken foreign investor demand and put additional pressure on stock prices and liquidity.
MSCI stated in a statement on Thursday that although the Indonesian authorities have announced a series of reform measures, the market failure still raises major concerns. Investors reported that local cooperative transactions are suspected to continue, and there is no strong evidence as to whether related irregularities have been dealt with by substantive law enforcement.
The decline in the Indonesian stock market is likely to intensify
From January to mid-October, international funds have withdrawn nearly $5 billion from the Indonesian stock market. At this rate, the scale of capital outflows throughout the year is likely to set a record, making Indonesia the worst performing stock market in the world in 2026. If MSCI reclassifies Indonesia as an independent market, capital outflows may expand further and exacerbate the already poor performance of the Indonesian stock market.
A downgrade to a frontier market position alone could trigger a large-scale outflow of foreign capital from Indonesian stocks. Goldman Sachs analysts estimate that under extreme scenarios, the outflow of passive funds alone could be as high as $13 billion. This is because many global funds strictly track the benchmark index to allocate capital, which means that if Indonesia is excluded from the Emerging Markets Index, some funds will be forced to reduce or completely clear their Indonesian holdings.
According to Citibank analysts, if Indonesia were to be downgraded to independent market status — that is, completely removed from MSCI's main global indices — the impact would certainly be “worse.” Such a large-scale outflow of foreign capital is likely to put depreciation pressure on the Indonesian rupiah, push up financing costs, and make Indonesia more dependent on domestic savings and capital from the government background. This impact has had the greatest impact on large-cap stocks with high foreign shareholding ratios and good liquidity, especially banks and other companies that have an important position in the benchmark index. Continued loss of foreign capital may also drag down bank loans, infrastructure spending, and corporate investment, ultimately slowing economic growth and inhibiting job creation.
Indonesian regulators severely punish three cases of market manipulation
Today, the unresolved question surrounding this 565 billion US dollar market is: Can this week's sharp decline make Indonesia really pay attention to the problem and take timely measures to dispel MSCI's concerns, so as to reverse the situation before the final decision is made in June next year?
On Friday, Indonesia's market regulators took the lead by imposing fines totaling around US$117 million for market manipulation involving the three companies in an attempt to respond to these concerns. The Indonesian Financial Services Supervisory Authority said the investigation found that the coal mining company PT Dian Swastatika Sentosa involved stock trading manipulation, including carrying out planned and organized trading operations on the company's shares through multiple brokerage firms. Two other investigations revealed that energy companies PT Barito Renewables Energy and PT Petrindo Jaya Kreasi manipulated share allocations during their initial public offerings (IPOs). Regulators said that all parties linked to the controlling shareholders concealed their identity to obtain large share placements, thus causing a high concentration of shares and limiting the number of shares that can be traded in the market.
The total amount of fines relating to Dian Swastatika was IDR 1.5 trillion (approximately US$83.2 million). The company belongs to Sinar Mas Group (Sinar Mas Group), a subsidiary of Indonesian millionaire Franky Widjaja (Franky Widjaja). The fines relating to Barito Renewables and Petrindo Jaya Kreasi were IDR 500 billion and IDR 100 billion respectively. Both companies are linked to billionaire Prajogo Pangestu (Prajogo Pangestu).
The Indonesian Financial Services Supervisory Authority said that these cases had already been under investigation and were not initiated as a result of MSCI's announcement. All three companies are among the six companies excluded from the MSCI Indonesia Index in May of this year.
Indonesian President Prabowo Subiyendo was scheduled to discuss MSCI-related issues with senior officials on Friday. Participants included key ministers and Danantara's management, according to a source familiar with the matter. Danantara is an investment agency responsible for supervising government shares held in state-owned enterprises. The source said that officials were nervous and worried that the impact of the situation might spread to higher levels.
However, it is still far from clear whether the government can act quickly enough to change MSCI's decision. According to people familiar with related discussions, over the past two months, MSCI had a series of increasingly tense communications with Indonesian officials. MSCI has repeatedly warned that “bad actors” may re-enter stocks with larger market capitalization, and questioned whether recent measures to clean up the market are deep enough.
The market is betting that the Bank of Indonesia's interest rate hike is getting stronger
Concerns about the withdrawal of foreign investment are putting pressure on the Indonesian rupiah as Indonesia's position in the emerging market may not be secured. The data shows that, dragged down by capital outflows, the Indonesian rupiah has fallen by about 7% this year, making it the worst performing currency in Asia. As a result, the market believes that the Bank of Indonesia is under pressure to raise interest rates next week.
Citigroup expects the Bank of Indonesia to raise the benchmark interest rate by 50 basis points to 6.25% on October 21, reversing the previous forecast of keeping interest rates unchanged. Citibank economist Helmi Alman wrote in a report on Friday that the move may help prevent foreign capital outflows from the stock market from spreading further to the bond market and domestic investors.
OCBC economists Lavanya Venkateswaran and Ahmed Anver believe that the Bank of Indonesia may raise interest rates by 25 basis points next week. They had anticipated that the interest rate hike would not take place until December.
As the inflation rate approaches the upper limit of the Bank of Indonesia's target range, the central bank needs to weigh the pros and cons of raising interest rates and keeping interest rates unchanged. In September, Indonesia's inflation rate rose to 3.28%, a three-month high. OCBC said in a report: “Although inflation is still within the target range, the combination of increased market uncertainty and rising price pressure may make it more difficult for the Bank of Indonesia to maintain a stable exchange rate, control inflation, and promote economic growth.”
However, Joshua Pardet, chief economist at PT Bank Permata, believes that the Bank of Indonesia needs to “maintain a prudent policy stance and prioritize maintaining the stability of the Indonesian rupiah rather than immediately raising interest rates simply because the stock market is under pressure.” He said that if the reclassification measures are finally implemented, the scale of Indonesian stocks sold by foreign investors may reach 3 billion to 5 billion US dollars, and the actual amount will depend on how many stocks investors have sold before.
Pardet still anticipates that the Bank of Indonesia will keep the policy interest rate unchanged at 5.75% this month and rely on foreign exchange intervention and other measures to stabilize the Indonesian rupiah. However, if capital outflows continue, the Indonesian rupiah weakens further, and the rise in inflation caused by global events continues to ferment, then the possibility that the Bank of Indonesia will raise interest rates by 25 basis points this quarter will increase. He said, “Foreign exchange reserves cannot be used indefinitely to withstand currency depreciation pressure caused by weak fundamentals.”
“At the end of the day, monetary policy can only mitigate the impact of market fluctuations,” Pardd added. He pointed out that in order to restore investor confidence, the Indonesian Financial Services Supervisory Authority and the Indonesian Stock Exchange must make real improvements in transparency, supervision, and implementation of capital market regulations.
Additionally, PT Bank Danamon economist Irman Faiz said that market governance concerns may prompt investors to demand higher risk premiums for Indonesian assets, including Indonesian government bonds. Faiz said, “What concerns me is not only the possible outflow of existing foreign capital, but also the structural loss of new foreign capital inflows.” He said that Indonesia's reduced access to capital from global institutional investors may also drive up corporate financing costs and limit investment. Faiz also pointed out that before MSCI makes a final decision by June 2027, Indonesia needs to improve shareholding transparency, disclosure of freely tradable shares, and regulatory enforcement to restore market credibility.