MSCI: "Possible Exit from Emerging Market"... Indonesian Stocks Plunge 10%

"Could Be Reclassified from Emerging to Standalone Market"
Market opacity and concentrated ownership cited as concerns
Rupiah falls 0.8%... government bond yields rise

Indonesian stocks plunged more than 10% after global index provider Morgan Stanley Capital International (MSCI) warned that it could remove the country from its emerging-market classification. The drop was the steepest in 18 years. If Indonesia is actually downgraded, billions of dollars in foreign investment could flow out, analysts say.

Employees walk past an electronic board at the Indonesia Stock Exchange (IDX) in Jakarta on the 16th. Reuters-Yonhap News.

According to The Wall Street Journal (WSJ) and the Financial Times (FT) on Oct. 16, Indonesian stocks fell more than 10% early in the session, prompting a temporary trading halt. It was the biggest single-day decline since the 2008 global financial crisis.

Indonesian stocks tumbled after MSCI announced that it was considering reclassifying Indonesia from an “emerging market” to a “standalone market.” In a statement the previous day, MSCI said, “Market participants have assessed that there has not been sustained, meaningful improvement across Indonesia’s equity market,” adding that it had “concluded that maintaining its emerging market status is no longer appropriate.”

MSCI had previously warned that it could downgrade Indonesia from an emerging market to a frontier market, citing a lack of market transparency, concentrated share ownership among certain shareholders, and concerns about insider trading. It has now said it is also considering classifying Indonesia as a standalone market, a category below frontier markets. MSCI explained, “Some have argued that reclassifying Indonesia as a frontier market alone would not adequately reflect the severity of the market’s issues.”

MSCI classifies major stock markets around the world into four broad groups each year: developed, emerging, frontier, and standalone markets. If the downgrade goes ahead, Indonesia will become the first market in the Asia-Pacific region to be classified as a standalone market. Argentina, Lebanon, and Palestine are currently classified as standalone markets.

The shock also spread across Indonesia’s financial markets. The rupiah fell 0.8% against the U.S. dollar to 18,060 rupiah per dollar. The yield on 10-year government bonds also rose 0.1 percentage point to 7.32% per year. A rise in bond yields means bond prices have fallen.

Indonesia is considered the world’s worst-performing stock market this year. Investor concerns have mounted over the prospect that President Prabowo Subianto’s sweeping welfare policies will increase the fiscal burden, as well as over growing government intervention in the market.

Indonesian authorities have pursued reforms to restore market confidence, but MSCI concluded that progress was insufficient. The country’s financial regulators said they would carefully review the assessment, while the stock exchange also decided to ask MSCI for the specific grounds for its decision.

This content was produced with the assistance of AI translation services.