Indonesian equities plunged further into turmoil on Thursday after a warning from MSCI Inc. over a possible market downgrade triggered the worst two-day selloff in almost three decades, rattling investor confidence across equities and currency markets.
The benchmark Jakarta Composite Index tumbled as much as 10%, after earlier triggering a 30-minute trading halt.
At the time of writing, the index was trading down 5.91%.
The move extended losses sparked by MSCI’s caution around market transparency and the limited amount of stock available for trading among listed companies.
Analysts downgraded their views in response, accelerating the decline.
MSCI warning fuels market rout
MSCI’s concerns center on Indonesia’s low free float, with many of the market’s largest companies tightly controlled by a small number of wealthy shareholders.
Investors argue that this structure distorts index representation and raises the risk of manipulation.
Following the warning, Goldman Sachs Group Inc. and UBS AG both cut their recommendations on Indonesian equities.
Goldman warned that more than $13 billion in outflows could be triggered in an extreme scenario if MSCI were to downgrade the market.
“The market needs a clearer plan from the regulators on what they’re going to do to reach a consensus with MSCI, and the plan must be communicated regularly so investors can keep track of it,” said Aldo Perkasa, head of research at PT Trimegah Sekuritas Indonesia in a Bloomberg report, adding the selloff showed that official explanations so far had failed to reassure investors.
Currency pressure and policy concerns
The turmoil spilled into foreign exchange markets, with the rupiah weakening as much as 0.5% against the dollar, its steepest fall since October and underperforming regional peers.
Exchange rules state that a further 30-minute trading halt would be triggered at a 15% decline.
If losses are sustained, Indonesian equities could enter a technical bear market.
The selloff has intensified scrutiny of Indonesia’s financial markets, once viewed as a flagship of the country’s economic rise.
Confidence has been shaken by an ambitious school lunch program that risks straining public finances, the abrupt departure of former finance minister Sri Mulyani Indrawati last year, and a widening fiscal deficit.
Foreign investors had already turned cautious before this week’s rout.
Net foreign selling totaled $192 million in the week ended Jan. 23, the first outflow in 16 weeks.
On Wednesday alone, overseas investors sold a net 6.2 trillion rupiah ($371 million) of shares, the most since April.
Free-float reforms under scrutiny
Regulators have pledged to improve transparency ahead of MSCI’s next review in May, when the index provider will reassess Indonesia’s market accessibility.
Failure to show progress could lead to a reduced weighting or even a downgrade from emerging market status.
Indonesia currently has the lowest free float among major Asia-Pacific markets at 7.5%.
Authorities aim to raise that to 10–15%, with a longer-term target of 25%, though no timeline has been set.
That compares with 25% thresholds in Hong Kong and India, and 15% in Thailand.
The latest selloff follows months of consultation after MSCI proposed tightening its definition of free float last year.
The firm considered using data from Indonesia Central Securities Depository, but said investors raised “significant concerns” about relying on that dataset.
“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 Sufianti, a strategist at Bloomberg Intelligence.
“So for now, it’s very much a wait-and-see in terms of what actions might follow.”
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