Indonesia’s financial markets suffered another sharp sell-off on Monday, October 19, as concerns over a possible downgrade by global index provider MSCI intensified investor uncertainty and raised fears of further capital outflows.
The Jakarta Composite Index fell 3.6% on Monday after plunging 11.6% on Friday, marking its steepest two-session decline since the 1998 Asian financial crisis. The latest losses pushed the market to a six-year low and extended its decline to around 40% this year.
The sell-off followed MSCI’s warning that it was considering reclassifying Indonesia from an emerging market to a standalone market, citing concerns over opaque shareholding structures, suspected coordinated trading and inadequate enforcement of market rules.
A downgrade could remove Indonesian shares from major global investment indexes, potentially prompting billions of dollars in withdrawals by funds tracking those benchmarks. Goldman Sachs estimates that passive investment outflows could reach $5.6bn if the change proceeds.
Pressure also spread to other assets, with the rupiah weakening towards record lows and the yield on Indonesia’s 10-year government bonds climbing to 7.4%.
In response, the Indonesia Stock Exchange cut the daily limit on share-price declines from 15% to 7% to curb volatility. Exchange officials also planned talks with MSCI to seek clarification and address its concerns.
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Foreign investors have already withdrawn nearly $4.9bn from Indonesian stocks this year, increasing pressure on authorities to demonstrate that market reforms are improving transparency and investor confidence.
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