Indonesian stocks plunge 7.4% after MSCI warning on investability

JAKARTA – Indonesian stocks sank on Jan 28 after MSCI raised concerns about their investability and warned of a potential downgrade to frontier-market status.

The benchmark Jakarta Composite Index slumped as much as 8.8 per cent on after the MSCI announcement, triggering a 30-minute trading halt at around 1.48pm Indonesian time. When trading resumed, some losses were regained and stocks closed down 7.4 per cent, the steepest decline in nine months.

Among the biggest decliners were stocks widely expected to enter MSCI’s gauges in February’s review, including Bumi Resources, Petrosea and Pantai Indah Kapuk Dua, all of which plunged nearly 15 per cent. 

The sell-off comes after the index compiler said it would immediately pause certain index changes, including additions, until regulators address concerns over tightly held ownership of listed firms.

The move is due to “fundamental investability issues” and investor worries over coordinated efforts to distort prices, MSCI said in a statement. 

If Indonesia fails to make sufficient progress on transparency by May, MSCI will reassess the country’s market accessibility status – a move that could lead to a reduction in weighting for all Indonesian companies in the MSCI Emerging Markets Index and even a potential downgrade to frontier-market status.

Indonesia’s exchange operator said that it will continue discussions with MSCI, along with local regulators, on data transparency to reach a consensus. It had already taken steps to boost transparency by publishing free float data on the bourse’s website, it added. 

“MSCI’s freeze is a warning shot, not a verdict,” said Mr Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.

“Markets have already started pricing some probability of a negative outcome, which explains the pressure we’ve seen on index-heavy Indonesian names.”

Global investors sold a net US$192 million (S$242 million) worth of local stocks in the week ended Jan 23, marking their first outflow in 16 weeks. They remain net sellers so far this week. 

The decision follows MSCI’s earlier proposal to tighten the definition of free float – the number of shares available for trading and a key determinant of a stock’s weighting in benchmarks – for Indonesian securities.

The firm said it was considering an alternative data source to assess actual free float, and if companies are found to have even smaller figures than reported, passive funds would be forced to cut existing positions.

Free float concerns have emerged as a flashpoint in Indonesia’s US$976 billion stock market in recent years, as investors lament that the nation’s largest companies are thinly traded and controlled by a handful of wealthy individuals. Such concentrated ownership often leads to sharp price swings, masks market performance and heightens the risk of manipulation. 

Regulators have sought to ease concerns with plans to raise minimum float levels between 10 per cent and 15 per cent from the current 7.5 per cent level. The longer-term goal is 25 per cent, though no timeline has been set. That compares with Hong Kong and India’s 25 per cent rule and Thailand’s 15 per cent.

If Indonesia is downgraded, the impact on passive flows would be significant, according to Ms Liao Yiping, portfolio manager at Franklin Templeton Global Investments.

“Foreign participation in the Indonesian market has reduced significantly because of concerns about macropolicy. Not assuming any other sort of changes around it, it’s certainly not positive.”

The latest move may also deepen worries about Indonesia’s economic trajectory, with investor confidence already fragile following President Prabowo Subianto’s efforts to steer fiscal and monetary policies towards his growth goals.

Markets were rattled earlier by the dismissal of long-serving finance minister Sri Mulyani Indrawati in 2025 and Mr Prabowo’s growing sway over the central bank. BLOOMBERG