MSCI downgrade alert triggers “panic” sell-off! The Indonesian stock market plummeted for two consecutive days and hit a six-year low

The Zhitong Finance App learned that after the statement by the index compiling agency MSCI (MSCI) to consider downgrading the Indonesian stock market rating and removing it from the global index raised concerns about capital outflows, the Indonesian stock market experienced a “panic” sell-off and was hit hard for two consecutive days. According to the data, Indonesia's Jakarta Composite Index plummeted by more than 11% last Friday, the biggest one-day decline in nearly 30 years, then fell more than 5% on Monday to a new low in six years.

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.

MSCI now 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 last 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.

Indonesia Stock Exchange said on Monday: “The MSCI announcement came as a surprise to us and caused market panic.” The exchange halved the stoppage limit from 14% to 7% on Monday in an attempt to slow the sell-off. Additionally, the exchange's leadership will meet with MSCI executives later on Monday.

The tension surrounding the “threat” of MSCI also spread to the Indonesian rupiah and bond markets. The Indonesian rupiah once fell to IDR 18,040 per US dollar, which is not far from the historical low of IDR 18,190 per US dollar set in June last year. Meanwhile, Indonesian treasury bonds were sold off, and the 10-year treasury yield rose to 7.4%, up from 7.169% last Friday.

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 President Prabowo Subiyendo is expected to meet with key financial officials on Monday afternoon to discuss “the current state of the economy,” according to two government sources familiar with it. People familiar with the matter said that the meeting will include the sovereign wealth fund Danantara and the Indonesian Financial System Stability Board. The committee consists of the Minister of Finance, the Governor of the Bank of Indonesia, the head of the Financial Services Authority (OJK), and the head of the Indonesian Deposit Insurance Company.

Rain Lin, a sovereign analyst at S&P Global Ratings, said that MSCI's latest warning may lead to more capital outflows, but the scale of capital outflows is not expected to be large enough to have a substantial impact on financing costs. “What is even more worrying is that it may damage investor confidence, and there is a risk that market sentiment will spread further into the government bond market and foreign direct investment sector,” he said.

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 address these concerns. In response, Angus Mackintosh, an ASEAN market expert at Singapore's Aletheia Capital, said: “The fine is a positive step, but concerted action is needed to establish OJK's regulatory authority and directly act against some well-known market participants involved in market abuse.”