Indonesian stocks slide to six-year low as MSCI warning weighs

Indonesian stocks dropped to a six-year low on Monday, Oct 19, due to a warning from MSCI about possible expulsion from its global indexes next year, causing concern among investors. The benchmark stocks declined over 5% in early trading, following a 11.6% plunge on Friday, as the world's worst performers grappled with MSCI's proposal to reclassify Indonesia from its "emerging markets" status to a standalone category.

This shift would sever Indonesia's connection to international capital, relegating it to an investment backwater alongside countries like Lebanon and Zimbabwe. The severe move has put pressure on Indonesia's regulators and finance officials to address MSCI's concerns. On Monday, the Indonesia Stock Exchange lowered its auto-rejection limit for stock price declines to 7% from 15%, providing investors an opportunity to assess the situation and make informed decisions based on the country's economic fundamentals.

The move followed a weekend meeting between the financial regulator and market participants, including analysts and economists. A sanctions announcement by the Indonesian regulator against those involved in alleged trading manipulation also contributed to the market turmoil. While the fines are a positive development, sustained action is needed to address market abuse.

Analysts estimate a full MSCI downgrade could result in US$5.6 billion of passive outflows, with active funds holding over US$8 billion in Indonesian stocks. The warning heightens the stakes for the government of President Prabowo Subianto, who has faced setbacks this year, including sovereign ratings downgrades by Moody's and Fitch.

The rupiah weakened to 18,040 per dollar, nearing a record low, and foreign equity exposure to Indonesia has declined, making it challenging to attract significant capital.