Indonesia's Market Response to MSCI Warning
Indonesia is taking action to address the recent market turmoil by proposing to exclude approximately 80 stocks, representing around 18% of its market capitalization, from its benchmark indices. This move comes after a sharp decline of nearly 15% over two days, resulting in an evaporation of $820 billion in market value. Despite a strong rebound of over 5.65% on the 20th, concerns remain about potential outflows of $56 billion if completely delisted from MSCI's key indices.
According to reports by Reuters and local Indonesian media on the 21st, the Indonesia Stock Exchange (IDX) plans to remove around 80 highly concentrated stocks from the calculation of the Jakarta Composite Index (JCI). These stocks, which account for approximately 18% of the index's market capitalization, are targeted to reduce the impact of concentrated holdings by major shareholders and affiliates on overall market pricing.
The late-session selling pressure and margin call liquidations have erased intraday gains, highlighting the need for swift action. With the Indonesian rupiah continuing its downward trend, the market is facing significant challenges. The proposed commercialization of these stocks aims to address the concentration issue and potentially attract new investment, stabilizing the market. However, the success of this strategy remains to be seen, as yield rates and investor confidence play a crucial role in the recovery process.
Indonesia's Market Downgrade Sparks Concerns
MSCI has announced its consideration of reclassifying Indonesia from an emerging market to a standalone market, a lower category than frontier markets. If this reclassification is confirmed, Indonesian stocks will be excluded from major global emerging market indices.
MSCI cited issues such as opaque share structures, trading practices, and a lack of effective market oversight among some listed companies. Despite the Indonesian authorities' announcement of plans to increase the free-float ratio and strengthen share disclosure, MSCI believes there is insufficient evidence of an improved trading environment.
$820 Billion Evaporates in Two Days; Authorities Tighten Trading Restrictions
The Jakarta Composite Index suffered a sharp decline, plummeting by 11.6% on June 16th, followed by a further drop of 3.64% on June 19th. This two-day plunge resulted in a cumulative decline of 14.8%. Foreign investors have also been net sellers of Indonesian stocks, with their total sales for the year reaching approximately $49 billion.
In an effort to curb the intense selling pressure, the stock exchange has reduced the daily maximum decline for individual stocks from 15% to 7%. Additionally, stocks with prices below 14 rupiah per share will have a daily decline limit of 1 rupiah.
These measures aim to stabilize the market and prevent further late-session selling pressure, which has led to margin call liquidations and erased intraday gains. The Indonesian authorities are taking proactive steps to address the situation and restore investor confidence.
Indonesian Market Rebound: Index Changes and Enhanced Disclosure
Following a meeting with MSCI representatives on September 19th, the authorities announced plans for an index overhaul and enhanced disclosure of shareholdings. The new policy will require shareholders with a 1% or higher stake in listed companies to disclose any special relationships with those firms.
The exclusion of approximately 80 stocks from the main index does not equate to delisting. These stocks will continue to trade, but their performance will not be factored into the index calculation. The implementation date for this measure is yet to be confirmed.
Jeffrey Hendrik, CEO of the Indonesia Stock Exchange, stated that excluding stocks with high concentration of ownership from the index calculation will provide a more accurate reflection of market movements.
The Indonesian market saw a significant rebound following the authorities' actions. On September 20th, the Jakarta Composite Index closed at 5,278.89 points, a surge of 282.28 points (5.65%) from the previous trading day. The LQ45 index, which tracks large-cap stocks, also rose by 8.58%. However, this recovery was not enough to offset the 14.8% decline recorded over the previous two days.
*Note: Late-session selling pressure and margin call liquidations had erased intraday gains, prompting the authorities to take action and stabilize the market.*
$5.6 Billion Exodus Warning... Impact on Rupiah and Bond Markets
Goldman Sachs estimates that a potential full removal of Indonesia from the MSCI major indices could result in an outflow of approximately $5.6 billion from passive investment funds. Additionally, active funds that benchmark against these indices hold over $8 billion, which could also be at risk.
Passive funds, which are mandated to align with index compositions, may need to adjust their investment allocations, leading to potential sell-offs if the downgrade is confirmed. Active funds, too, may reduce their holdings if concerns over liquidity and trading transparency persist.
Indonesia's weight in the MSCI Emerging Markets Index has shrunk from 1.16% at the start of the year to 0.43% as of late September. During the same period, the number of Indonesian stocks included in the MSCI Indonesia Index has halved, from 18 to just 9.
The rupiah, trading around 18,000 per dollar, has also weakened against the won, dropping by 10.77% in the last three months, to a level of 7.37 won per 100 rupiah as of yesterday.
Global Market Concerns Over Indonesia's Financial Outlook
Gary Tan, portfolio manager at global asset management firm Allspring Global Investment, expressed greater concern over the potential shockwaves to the rupiah and domestic bond yields rather than the index-related selling itself.
International credit rating agencies Moody's and Fitch have downgraded Indonesia's sovereign credit outlook from 'stable' to 'negative' this year. While the rating itself was maintained, the move reflects concerns over the Prabowo Subianto administration's fiscal management and policy credibility.
George Xu, Fitch's sovereign credit rating director, stated that while the MSCI announcement may not have an immediate and significant impact on the country's creditworthiness, external pressures could increase the government's borrowing costs and weaken its external buffer capacity.
Indonesia's major banks boast return on equity (ROE) ratios of 18-20%. Financial firms' profitability remains intact, but low free-float ratios and governance issues are undermining market-wide confidence.
MSCI's Review and Final Decision
MSCI plans to review the market improvements until the end of April 2027 and make its final determination by the end of June of the same year. The actual implementation of the index restructuring and enhanced disclosure measures announced by the Indonesian government is expected to impact the country's status as an emerging market.
As the country strives to maintain its position, late-session selling pressure and margin call liquidations could erase intraday gains, impacting the overall market sentiment. The yield rates and commercialization efforts will be closely watched by investors, especially in early trade, as they gauge the effectiveness of the government's initiatives.
