JAKARTA: Analysts say last Friday’s stock market rout was driven by panic-selling and investors’ risk-off response to MSCI’s proposal to reclassify Indonesian equities in its global indexes, even though a final decision will not happen until the end of June 2027.
Nafan Aji Gusta, senior technical analyst at Mirae Asset Sekuritas told The Jakarta Post last Sunday that the downgrade risk could intensify sell-off pressure and market volatility due to a potential decline in foreign capital allocations, particularly from passive funds benchmarking to the MSCI index.
He added that the sharp correction also reflected “trust issues” among investors over transparency, liquidity and governance credibility in the capital market.
The Indonesia Stock Exchange (IDX) suffered a massive foreign sell-off as investors were spooked by MSCI’s proposal to categorise Indonesia as a “standalone market”.
Records show net foreign sell orders of 3.34 trillion rupiah (US$185.2mil) last Friday, pushing the cumulative foreign outflows since the start of the year to a historical high of 88.19 trillion rupiah.
Last Friday’s net foreign sell surpassed the worst levels seen during the coronavirus pandemic in 2020 and the 2008 global financial crisis, which stood at 53.84 trillion rupiah and 50.17 trillion rupiah for the full calendar year, respectively.
MSCI announced last Thursday that it was considering a downgrade of Indonesia’s status from emerging market currently to standalone market, as it remains unconvinced about the effectiveness of the country’s capital market reforms.
MSCI classifies markets based on its evaluations of a country’s economic development, size and liquidity requirements and market accessibility.
A standalone market is a separate category from the main global benchmark categories, including developed markets, emerging-markets and frontier markets.
According to MSCI, a reclassification to a standalone status “may occur in the case of severe deterioration in market accessibility or size and liquidity”.
In response to MSCI’s proposal, the Financial Services Authority or OJK held a meeting last Sunday with market players “to gather input from capital market stakeholders as part of an effort to further strengthen integrity and maintain public trust”, according to a statement.
OJK chief capital market supervisor Hasan Fawzi expressed his commitment to continuing the reforms, including by improving market transparency through discussions with global index providers.
He stressed that the authorities had implemented “measured enforcement” to strengthen market integrity, citing administrative fines totalling 2.1 trillion rupiah imposed by the OJK on parties involved in illicit operations in the capital market.
The IDX said last Friday that, considering progress and various reform measures introduced by authorities, it would seek further clarification from the index provider regarding the basis for its assessment.
Indonesia’s capital market reform plan includes enhanced disclosure of shareholders holding more than 1% of a company, more granular investor classification disclosure, high shareholding concentration reporting and a road map toward a minimum free float of 15%.
However, MSCI noted that institutional investors still needed to see consistent implementation of these measures and evidence of sustained, material impact.
The index provider’s announcement rattled investors again, triggering a 30-minute trading halt, with the IDX Composite index tumbling 8% at the open on Friday and falling further after trading resumed to close 11.57% lower at 5,185.11 points.
The benchmark stock index is now one of the world’s worst performers, having declined by 40% so far this year.
Last Friday’s market rout also marked the third trading halt this year alone. The previous circuit breakers triggered earlier this year occurred after MSCI issued its first transparency warnings and decided to start implementing a temporary freeze on index changes for Indonesian equities. — The Jakarta Post/ANN
