Indonesian exchange seeks to calm market after record two-day rout

SINGAPORE/JAKARTA – Indonesian stocks have suffered the deepest two-day sell-off recorded, while the authorities in Jakarta demanded an explanation from MSCI, whose warning last week that it could strip the country of “emerging market” status in 2027 prompted the rout.

Jakarta’s benchmark stocks closed down 3.6% on Oct 19 after plunging 11.6% on Oct 16, a combined two-session fall steeper than any during the 1998 Asian financial crisis. The index also hit a six-year low during the session.

A shift to stand-alone status would risk cutting South-east Asia’s biggest economy off from international capital, relegate it to an investment backwater and club it with a group of markets that includes Lebanon and Zimbabwe.

The nervous selling flowed through to the Indonesian currency and bond markets. The rupiah weakened to 18,030 to the US dollar, not far from the record low of 18,190 in June, and a slide in Indonesian government bonds pushed the 10-year yield to 7.4%, according to traders, from 7.169% on Oct 16.

“The MSCI announcement was unexpected to us, causing a market panic,” Indonesia Stock Exchange (IDX) chief executive Jeffrey Hendrik said ahead of a meeting between exchange leaders and MSCI executives seeking explanation.

After the online meeting, he said Indonesia remained committed to the ongoing capital market reforms it had launched after an initial warning from MSCI in January, adding that he could not disclose details of the meeting.

He also announced two policies to improve market transparency and price discovery. They include the exclusion of stocks with a high concentration of ownership by the same person or entity from the benchmark Jakarta Composite Index “to provide a more accurate picture of the main index’s movements”.

To try to reduce volatility, the IDX on Oct 19 also reduced the daily down limit on stock prices to 7% from 15%, meaning the exchange will automatically reject any sell orders at lower prices to prevent further falls.

The more-severe-than-expected move by MSCI, which first raised concern in January over ownership transparency, has intensified pressure on Indonesia’s regulators and finance officials as investors re-evaluate their exposure to Indonesian assets more broadly.

Indonesian President Prabowo Subianto was meeting top financial officials in the afternoon on Oct 19 to discuss the “current economic condition”, according to two government sources with knowledge of the matter.

The meeting will include sovereign wealth fund Danantara and Indonesia’s Financial System Stability Committee, made up of the Finance Minister, the governor of Bank Indonesia, and the heads of the Financial Services Authority (OJK) and Indonesia Deposit Insurance Corp, the sources said.

S&P Global Ratings sovereign analyst Rain Yin said MSCI’s latest warning was likely to result in additional capital outflows, but she does not anticipate them to be of a magnitude that would materially increase financing costs.

“More concerning is the potential damage to investor confidence and the risk that sentiment weakens more broadly across government bond markets and foreign direct investment,” she said.

Wider risks from MSCI’s warning

MSCI’s warning on Oct 16 marked the latest in a string of setbacks for Prabowo’s government in 2026, after Moody’s and Fitch cut their sovereign rating outlooks to negative.

The market’s nosedive came ahead of a policy decision from Bank Indonesia this week. While it is widely expected to stand pat, some analysts have raised the possibility of a rate hike to stem the sell-off in the bond market.

MSCI had threatened a downgrade to “frontier” status in January, but said on Oct 16 that the lack of progress in remedying its concerns about opacity in ownership and trading behaviour meant even a drop to that status would not reflect the severity of the issues.

Goldman Sachs strategists said: “The burden of proof has shifted: Avoiding reclassification will require clear evidence that the announced reforms have been consistently implemented and materially improved market functioning.”

Indonesia’s financial regulator on Oct 16 also unveiled sanctions against those linked to alleged trading manipulation in shares of three firms, with the fines totalling 2.1 trillion rupiah (S$149 million).

Angus Mackintosh, an ASEAN specialist at Aletheia Capital in Singapore, said: “The fines are a positive move, but there needs to be concerted action to stamp the authority of the OJK (Financial Services Authority) and take direct action against certain well-known players who have been involved in market abuse.”

Goldman Sachs analysts estimate a full MSCI removal could trigger US$5.6 billion (S$7 billion) in passive outflows.

Active funds benchmarked to these indexes hold more than US$8 billion, although any selling would be discretionary rather than benchmark-driven, they wrote.

Foreign investors have net sold US$4.88 billion (S$6.2 billion) worth of Indonesian stocks so far in 2026, on track for the biggest annual outflow in at least 16 years. REUTERS