SINGAPORE: Indonesian stocks on Thursday were plunging toward their largest two-day fall on record as the risk of a downgrade to frontier market status triggered a headlong rush for the exits.
US investment bank Goldman Sachs cut its recommendation for Indonesian equities to “underweight” a day after index provider MSCI flagged problems with market transparency and warned a downgrade to frontier from emerging status was possible.
The benchmark Jakarta Composite Index sank 8% in early trading on Thursday, triggering a trading halt, after tumbling 7.4% on Wednesday.
Indonesia’s financial regulator and the country’s stock exchange will address the media at 0600 GMT on Thursday on recent developments in the stock market, the exchange said in an invitation to reporters.
MSCI is one of the biggest providers of market indexes – tracked by billions of dollars in passive investments – and a downgrade would force tracking funds to sell. Active managers, whose performance is rated against the benchmarks, would likely need to sell as well.
MSCI’s warning is the latest setback for Southeast Asia’s largest economy as foreign capital flows out due to concerns about how President Prabowo Subianto is widening the fiscal deficit and ramping up the state’s involvement in financial markets.
His appointment of his nephew, Thomas Djiwandono, to the central bank this month, on the heels of his abrupt sacking of respected Finance Minister Sri Mulyani Indrawati last year has shaken confidence in his fiscal stewardship and pushed the rupiah to record lows.
“The warning by MSCI and any future action could have a broader negative impact on the economy if it makes capital raising more difficult or just more costly,” said Rahul Ghosh, a portfolio specialist at T. Rowe Price in Singapore.
“Thus raising the risk of a negative feedback loop – hence some market participants may de-risk in advance.”
Downgrade
Goldman Sachs on Thursday cut its rating on Indonesian equities and said outflows of between US$2.2 billion and US$7.8 billion were possible in the event of an MSCI downgrade, something the strategists said was unlikely.
A downgrade to frontier market status, which analysts so far think is unlikely, would bring Indonesia on par with Bangladesh, Pakistan, Sri Lanka and Vietnam.
MSCI said it has frozen updates to Indonesian entries in its products while it engages with authorities to resolve what it called “investability risks” over a lack of clarity on stock ownership, trading and price formation in the market.
“We expect the market to remain under pressure and do not view this as an entry point,” the Goldman strategists said.
“Indonesia is facing macro challenges including soft private consumption, slowing credit growth, and a rising fiscal deficit that is close to the legal 3% of GDP limit.”
Overseas investors sold 13.96 trillion rupiah (US$834 million) worth of Indonesian shares in 2025, the worst year for outflows since 2020, with the selloff continuing in January, data compiled by LSEG showed.
