Black swan attack! Indonesian stock market collapse triggers circuit breaker MSCI temporarily suspends index adjustments and warns about the feasibility of investments.

The Indonesian stock market suddenly encountered a "black swan". After the index compilation company MSCI expressed concerns about the feasibility of investing in the Indonesian stock market and warned that the weight of all Indonesian companies in the MSCI Emerging Markets Index may be downgraded to frontier market status, the Indonesian stock market plummeted and triggered a trading halt. As of the time of writing, the Jakarta Composite Index in Indonesia fell by 8.67%, marking the largest single-day decline in over nine months, leading to a 30-minute trading halt. The stocks with the largest decline include several companies that are widely expected to be included in the MSCI index evaluation next month, such as PT Bumi Resources, PT Petrosea, and PT Pantai Indah Kapuk Dua, all of which fell by about 15%. MSCI stated that it would suspend some index adjustments for Indonesia until the country's regulatory authorities address concerns about the high concentration of equity ownership in listed companies. The institution stated in a statement that due to the "fundamental investment feasibility issues" in the Indonesian market, and concerns about coordinated price manipulation by investors, it would immediately suspend the addition of all Indonesian companies to relevant indices and freeze adjustments to the number of freely tradable shares. If Indonesia does not make sufficient progress in enhancing transparency by May, MSCI will reevaluate the country's market accessibility level, which could potentially lead to a downgrade in the weight of all Indonesian companies in the MSCI Emerging Markets Index, or even a downgrade to frontier market status. The Indonesia Stock Exchange stated that it would continue to discuss data transparency with local regulatory authorities and MSCI to reach a consensus. The exchange added that it has taken steps to increase transparency by disclosing free float data on its exchange website. Tareck Horchani, Head of Brokerage Trading at the Singapore branch of Malayan Bank, stated: "MSCI's suspension of Indonesia index adjustments is a warning, not a final judgment. The market has already begun to price in the possibility of negative outcomes, which explains the pressure faced by Indonesian weighted stocks that we are seeing." According to institutional data, as MSCI is about to adjust its index compilation method causing a decrease in market risk appetite, foreign investors sold a net worth of $192 million worth of Indonesian stocks in the week ending January 23, the first outflow of funds since October last year. So far this week, foreign investors continue to be net sellers of Indonesian stocks. This decision by MSCI is based on its earlier proposal to tighten the definition of freely tradable shares in Indonesia, which is a crucial factor in determining the weight of stocks in benchmark indices. The proposed new rules by MSCI would calculate the freely tradable shares based on lower figures reported in public documents or new datasets. If MSCI finds that the actual number of tradable shares of Indonesian companies is lower than the reported data, passive investors will be forced to sell their existing holdings. It is estimated that this will reduce the market capitalization of 15 constituents of the Jakarta Composite Index in Indonesia, leading to a capital outflow. Several brokerages predict that if the new rules are implemented, the outflow of foreign passive funds could reach about $2 billion. In its consultation document in September last year, MSCI pointed out that Indonesia's opaque and complex web of business relationships makes it difficult to identify strategic shareholders. Currently, the Indonesian Stock Exchange only requires companies to disclose shareholders with more than 5% ownership, while new data providers can identify the types of shareholders holding less than 5% ownership in electronically traded stocks, providing a clearer picture of the actual freely tradable shares. The Indonesian stock market faces the issue of the lowest average free float ratio in the Asia-Pacific region, with over 200 stocks in the Jakarta Composite Index having a free float ratio of less than 15%. Many of the weighted stocks in this benchmark index are controlled by a few wealthy individuals, leading to thin trading. This concentration often results in significant price fluctuations, masking true market performance and increasing the risk of market manipulation. Indonesian regulatory authorities have attempted to address concerns by planning to increase the minimum free float ratio from the current 7.5% to 10%-15%, with a long-term target of 25%, but a timetable has not yet been set. This disconnect is most evident in the widening gap between the Jakarta Composite Index and the MSCI Indonesia Index, with the former outperforming the latter to a record extent last year. Before the sharp drop on Wednesday, the Indonesian stock market lagged behind its Southeast Asian counterparts in the early part of this year, with the local stock index rising by 2.7%, while the MSCI ASEAN Index surged by 5.3%. Yiping Liao, Portfolio Manager of Franklin Templeton Global Investments, stated that if Indonesian companies are downgraded, the impact on passive fund flows will be significant. "Due to concerns about the macro economy and policies, foreign investment in the Indonesian market has significantly decreased. Without assuming any other changes, this is definitely not a positive signal." The latest measures may also deepen concerns about the trajectory of the Indonesian economy. Investor confidence has been fragile in Indonesia since President Joko Widodo's efforts to steer fiscal and monetary policies towards its growth target. Earlier concerns arose due to the dismissal last year of Sri Mulyani Indrawati, who had long served as finance minister, and Jokowi's increasing influence on the central bank.