Indonesian stocks pare losses after 10% plunge as authorities attempt to allay investor fears

JAKARTA – Indonesian stocks staged a modest recovery on Jan 29 as the country’s regulators unveiled several measures to allay investor fears, after a deep rout triggered by the risk of a downgrade to frontier market status that sapped already fragile sentiment.

The authorities sought to address concerns raised by index provider MSCI, with Indonesia’s financial regulator indicating that it would double the free-float requirement for listed firms to 15 per cent as part of its response.

The benchmark Jakarta Composite Index cut losses to close down 1.1 per cent after plunging as much as 10 per cent – which triggered a trading halt – and following a 7.4 per cent tumble the previous day.

The rupiah was 0.4 per cent softer at 16,770 against the US dollar, just below last week’s record low of 16,985.

Speaking at a press conference, Mr Mahendra Siregar, head of the Financial Services Authority, said communication with MSCI had been positive, and it was awaiting a response to its proposed measures, which he hoped could be implemented soon with the issues resolved by March.

“This is an ongoing process, not a single announcement,” said Mr Mohit Mirpuri, a portfolio manager at SGMC Capital in Singapore. “What investors needed to see was alignment and intent, and that was clearly delivered,” he added.

“Policy clarity usually comes after volatility, not before it. The last two days of selling have been fairly indiscriminate, and historically, you don’t wait for everything to look perfect before stepping in.”

Analyst downgrades after MSCI warning

Investment banks Goldman Sachs and UBS lowered their recommendations for Indonesian stocks a day after MSCI flagged problems with transparency and warned that a downgrade to frontier from emerging status was possible.

Such a downgrade by MSCI, one of the biggest providers of market indexes – which are tracked by billions of dollars in passive investments – would force tracking funds to sell.

Active managers, whose performance is rated against the benchmarks, would also probably need to sell.

MSCI’s warning comes as foreign capital has flowed out because of concerns about how Indonesian President Prabowo Subianto is widening the fiscal deficit and ramping up the state’s involvement in financial markets.

The appointment of his nephew Thomas Djiwandono to the central bank in January, after the abrupt sacking of respected finance minister Sri Mulyani Indrawati in 2025, has shaken confidence in his fiscal stewardship and pushed the rupiah to record lows.

“The MSCI warning came at an inopportune time,” said Mr Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments, pointing to a series of negative macro headlines and a weakening rupiah.

“This triggered a typical sell first, ask questions later response from passive and benchmark-driven investors, resulting in a sharp near-term correction,” he said.

Mr Tan said he was encouraged that regulators have signalled a willingness to engage constructively with MSCI and improve market transparency.

Brokerage sources described MSCI’s warnings as a “slap in the face” for the market authorities, adding that inflows of foreign capital would dry up if MSCI flagged Indonesia as “uninvestable” or non-transparent.

Goldman Sachs cut its rating on Indonesian equities to “underweight”, warning that outflows of between US$2.2 billion (S$2.8 billion) and US$7.8 billion were possible in the event of an MSCI downgrade, although the strategists said that was unlikely. UBS lowered its rating to “neutral”.

A downgrade to frontier market status, which analysts so far believe is unlikely, would bring Indonesia on a par with Bangladesh, Pakistan, Sri Lanka and Vietnam.

MSCI said it had frozen updates to Indonesian entries in its products while engaging with the authorities to resolve “investability risks” over a lack of clarity on stock ownership, trading and price formation in the market.

“We expect the market to remain under pressure and do not view this as an entry point,” the Goldman Sachs strategists said.

“Indonesia is facing macro challenges, including soft private consumption, slowing credit growth and a rising fiscal deficit that is close to the legal 3 per cent of GDP (gross domestic product) limit.”

Overseas investors sold 13.96 trillion rupiah (S$1.05 billion) worth of Indonesian shares in 2025, the worst year for outflows since 2020, with the sell-off continuing in January, LSEG data showed. REUTERS