JAKARTA: MSCI’s warning about Indonesia’s stock market has sparked immediate capital outflows from the bond market as well but has had only a limited impact on the rupiah exchange rate, according to the central bank.
Bank Indonesia (BI) executive Erwin Gunawan Hutapea revealed last Friday that inflows had been “rather good” from the end-September to mid-October, until MSCI announced a possible reclassification of the Indonesian equity market on Oct 16.
BI recorded outflows from both government bonds and BI’s short-term bonds called Bank Indonesia Rupiah Securities.
While Erwin refused to provide the exact number of funds pulled out of the bond market on the day, his presentation slide showed a total outflow of five trillion rupiah (US$276.5mil) from equities and bonds combined.
The Indonesia Stock Exchange (IDX) recorded a total outflow of 3.4 trillion rupiah on the day MSCI made the announcement, meaning the bond market recorded an estimated 1.6 trillion rupiah in outflows that day.
Erwin did not reveal how the bond market has fared since the announcement but said the outflow had been “manageable” and did not affect the rupiah exchange rate “excessively”, adding that “we can still manage it well and hopefully the shock can slowly be digested by market participants”.
MSCI on Oct 16 shocked the country by announcing the possibility of reclassifying Indonesia into what it calls a “standalone market”, which is the bottom tier of the index compiler’s system filled with countries at war like Ukraine and Palestine alongside markets with strict capital controls like Argentina, Lebanon and Nigeria.
The index provider’s statement suggests MSCI is unconvinced about the implementation of reforms to counter coordinated trading behaviour.
A “standalone market” classification would render the Indonesian stock market uninvestable for many global fund managers. Indonesia holds the emerging-market status.
MSCI had threatened to downgrade the country to frontier market status following a review scheduled for November, before the index compiler suddenly announced the possible extreme reclassification two weeks ahead of November despite ongoing reforms including enhanced disclosure of shareholders holding more than 1% of a company, more granular investor classification disclosure, high shareholder concentration reporting and a road map toward a minimum free float of 15%.
The IDX Composite index dropped by 11.57% the day MSCI made the announcement and the rupiah likewise was hit and got dragged below the psychological threshold of 18,000 per US dollar.
Erwin said the spillover effect from the capital outflows on the exchange rate was limited, but should it hit the rupiah harder “beyond our volatility tolerance”, the central bank would respond with market intervention to prevent a slide in the currency.
BI governor Destry Damayanti said the monetary authority would shell out incentives to support the rupiah’s exchange value that she labelled “a more targeted policy”, suggesting raising interest rates was not the only tool in the box. — The Jakarta Post/ANN
