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FEARS sparked by a MSCI Inc. warning of a possible market downgrade rippled through Indonesia’s markets on Thursday, driving benchmark stocks to their worst two-day rout in nearly three decades before regulators stepped in.
The benchmark Jakarta Composite Index tumbled as much as 10%, triggering a circuit breaker for a second day, as selling pressure from the previous day spilled over. The decline, which came as analysts cut their ratings, followed the index compiler’s caution over transparency and the limited amount of stock available for trading in listed companies.
Stocks staged a late-afternoon reversal after Indonesian regulators said they would double the minimum free-float requirements starting next month and that its sovereign wealth fund Danantara may step into the market. By close, the JCI was down 1.1%.
Even so, market participants remained wary over the trajectory of Southeast Asia’s biggest stock market, pushing many to wait on the sidelines before more clarity on whether regulators can reach a compromise with MSCI and deliver on tougher requirements to boost transparency.
“The sharp selloff following MSCI’s announcement has led to significant de-risking and has already priced in a meaningful portion of the near-term uncertainty,” said Clarence Li, senior portfolio analyst in the equity and multi-asset divisions at T. Rowe Price. “That said, questions remain around the medium-term policy direction, execution risks and the broader implications for economic activity.”
Thursday’s losses put benchmark stocks just shy of a technical correction. It marks a dramatic turn for the Jakarta Composite Index, which had only just reached a record closing high last week.
The angst also hit the local currency, with the rupiah down as much as 0.5% against the dollar, its biggest fall since October, before paring while benchmark yields were a touch higher.
“The tail risk I am watching out for is how this will impact the currency, and what that means for the central bank and its options for monetary policy this year,” said Yiping Liao, portfolio manager at Franklin Templeton Global Investments. “But the correction over the past two days is certainly more violent than expected.”
Earlier in the day, Goldman Sachs Group Inc. and UBS AG both cut their recommendations, with the former adding that more than $13 billion in outflows could be triggered in an extreme scenario.
At the heart of the concerns is the low free float of Indonesian equities, with the market’s biggest companies thinly traded and controlled by a handful of wealthy individuals — a structure that investors say distorts the index and risks manipulation.
The episode has intensified scrutiny over Indonesia’s financial markets, once seen as the culmination of the nation’s rapid economic rise. Investor confidence has been rattled by an ambitious school lunch program that risks straining public finances, the abrupt departure of finance minister Sri Mulyani Indrawati last year, and a widening fiscal deficit. Global funds dumped Indonesian bonds from September to November, before returning in the final month of 2025.
Indonesian regulators have pledged to meet the call for greater transparency, and have until May when MSCI reassesses the country’s market accessibility status. If MSCI deems there’s not enough progress, it could reduce Indonesia’s weighting in its indexes and even downgrade the nation from emerging market.
A reclassification would put Indonesia in the same place as Pakistan, which lost its emerging-market status in 2021 just four years after it was upgraded due to shrinking market size and liquidity.
This week’s selloff traces back to months of consultations after MSCI proposed to tighten the definition of free float last year. The firm had said it was considering an alternative data source, the Indonesia Central Securities Depository, also known as KSEI, to assess actual tradable shares. But in its statement on Wednesday, MSCI said that many investors raised “significant concerns” about relying on this data set.
“Based on what’s been disclosed so far, the discussion around KSEI has mainly been about concerns over aspects of its data methodology, but there hasn’t been enough detail to draw firm conclusions yet,” said Bloomberg Intelligence Strategist Sufianti. “So for now, it’s very much a wait-and-see in terms of what actions might follow.”
Across Asia Pacific, Indonesia has the lowest average free float among major markets with a minimum of 7.5%, compared with minimums of 25% in Hong Kong and India and 15% in Thailand.
Even before this week’s rout, foreign investors had already turned cautious, selling a net $192 million worth of stocks in the week ended Jan. 23, which was the first outflow in 16 weeks. Overseas investors offloaded a net 6.2 trillion rupiah ($371 million) of local shares Wednesday, the most since April 16, according to exchange data. –BLOOMBERG
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