Indonesia stocks slide as MSCI downgrade fears deepen market pressure

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Indonesia stocks MSCI downgrade fears

Highlights

Jakarta Composite Index drops over 5% Monday to lowest since October 2020 after MSCI proposes reclassifying Indonesia from emerging market to stand-alone status.
A full MSCI removal could trigger $5.6 billion in passive outflows and another $2.7 billion if FTSE Russell follows; final decision expected by June.
Foreign holdings in Indonesian equities drop from $250 billion to $130 billion year-to-date, with the MSCI Indonesia Index down 47% and foreign ownership at 25% in October.

MSCI review heightens sell-off risks

As reported by CNBC, citing Goldman Sachs, Indonesia’s benchmark stock index falls more than 5% on Monday, extending a steep decline after MSCI proposes on Friday to reclassify the country from emerging-market status to stand-alone status.

The Jakarta Composite Index drops to its lowest level since early October 2020, while the proposed change raises the possibility that Indonesia could be removed from major global equity benchmarks. MSCI is expected to make a final decision by June, with the outcome depending on whether Indonesian authorities can show meaningful improvements in market governance and transparency.

In a Sunday note, Goldman says a full removal from MSCI’s emerging-market indexes could trigger about $5.6 billion in passive fund outflows, equal to 18 days of average daily trading volume for constituents of the MSCI Indonesia Investable Market Index. The bank adds that another $2.7 billion could be at risk if FTSE Russell later takes similar action, although it says that would be a separate scenario.

Foreign ownership and valuations remain under pressure

Goldman says active funds benchmarked to MSCI and FTSE indexes hold more than $8 billion in Indonesian equities, though any selling by those investors would be discretionary rather than automatic. The bank keeps its underweight view on Indonesian equities, citing continued index uncertainty, weak corporate earnings and broader macroeconomic headwinds.

Strategists led by Alvin So say valuations have compressed sharply but still remain above historical troughs, limiting the case for a market re-rating. Data cited by the bank show the MSCI Indonesia Index is down 47% this year as of Friday, while foreign investors have pulled a net $5.1 billion from Indonesian equities over the same period.

Foreign ownership of Indonesian stocks declines to 25% in October from 27% in January, and the value of foreign holdings nearly halves to about $130 billion from $250 billion, Goldman says. The bank also cautions that equities may not yet have bottomed, even with the MSCI Indonesia Index’s 12-month forward price-to-earnings ratio falling to 7.3 times, its lowest level since the global financial crisis.

Goldman also expects Indonesia’s central bank to raise interest rates twice more, by 25 basis points each in the fourth quarter of 2026 and the first quarter of 2027, a path that could add further pressure to growth and equity valuations.

In our earlier article, we covered how geopolitical tensions and elevated fiscal spending are testing sovereign resilience as global funding costs stay high, with emerging and frontier markets facing the sharpest pressure due to heavier debt-service burdens and narrower revenue bases. We also noted that persistent shocks—such as energy and food price spikes linked to major conflicts—can worsen inflation, strain public finances, and weigh on credit outlooks, setting the stage for risk-off moves across vulnerable markets.

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