Indonesia stocks dive 11pc after MSCI reclassification

Indonesian stocks saw a sharp decline of over 11% on Friday after MSCI, an index compiler, decided to no longer maintain the country's emerging-market status. This move raised fears of foreign investment withdrawal. Earlier this year, MSCI received concerns from investors about the country's opaque shareholding structures and coordinated trading behavior affecting price information.

Despite Jakarta's completion of reforms in April, MSCI stated that sufficient progress was not consistently observed across the Indonesian equity market. Concerns linger around market dysfunction, such as continued suspected coordinated trading behavior and the absence of evidence for meaningful enforcement. Consequently, MSCI believes that Indonesia's continued classification as an Emerging Market is no longer appropriate and has initiated a consultation for a proposal to reclassify the country as a Standalone Market.

A reclassification to Frontier Markets would not adequately recognize the depth of the market issues, the company noted. Currently, only Argentina, Lebanon, and Palestine share the Standalone Market designation, with none located in Asia. The Jakarta Composite Index fell by 8% at market open, triggering an immediate trading halt.

Subsequently, it dropped by 11.1%, its steepest decline since early 1998 and the lowest point since 2020. MSCI, based in New York, creates international indexes that serve as benchmarks for investors to manage their portfolios. Its flagship emerging market index includes 1,200 companies with a market capitalization exceeding US$10 trillion.

Global fund managers closely monitor MSCI's classifications, as changes can prompt adjustments in their investment strategies.