Indonesian stocks fall to lowest since 2020; MSCI warning heightens concerns over foreign capital outflows

MSCI warns Indonesia may lose emerging market status, deepening concerns over further foreign capital outflows. The recent brutal sell-off in Indonesian stocks has intensified. On Monday, the benchmark Jakarta Composite Index fell as much as 5%, hitting its lowest level since 2020. The latest decline further cements Indonesia's position as the world's worst-performing market, with a year-to-date cumulative drop of 43%. MSCI said last Friday that it is considering a two-step downgrade of Indonesia's market classification, potentially moving it from emerging market to standalone market. This goes far beyond the potential adjustment MSCI first proposed in January this year due to investability concerns, when it was considering downgrading Indonesia to frontier market. With billions of dollars in global funds tracking MSCI indexes, the stakes are high. If Indonesia is ultimately removed from major global benchmark indexes, the Indonesian stock market could face further capital outflows. Indonesian authorities are trying to contain the shock. The Indonesia Stock Exchange on Monday tightened individual stock trading limits, reducing the daily maximum decline from 15% to 7%, with the measures to remain in effect until the end of this year. The Financial Services Authority also held a meeting on Sunday with analysts, economists and financial opinion leaders to discuss recent market reforms and developments. Goldman Sachs Group estimates that a full removal of Indonesian stocks could trigger approximately $5.6 billion in passive fund outflows; if FTSE Russell follows suit, another $2.7 billion could be at risk of outflow. Mirae Asset Sekuritas Indonesia expects passive outflows of about $3 billion, while Citigroup estimates the relevant amount would be in the mid-single-digit billions of dollars.