MSCI flags Indonesia for possible index downgrade

MSCI has proposed reclassifying the MSCI Indonesia Indexes from Emerging Market to Standalone Market status after raising concerns about the investability of the country’s equity market. The index provider has said it regards Indonesia’s current emerging-market classification as no longer appropriate. A consultation process has been launched to gather feedback from market participants before a final decision is taken.

MSCI indicated that, barring clear evidence of material improvements in market governance and functioning, it expects to proceed with the proposed reclassification. The decision under review would affect Indonesia’s position within widely followed global benchmark indexes, which are used by many institutional investors to allocate capital.

Market participants have raised significant concerns about the structure and behavior of Indonesia’s equity market. Issues highlighted include persistent opacity in shareholding structures, which can make it harder for investors to identify ultimate ownership and assess corporate governance. Suspected coordinated trading behavior has also been cited as a factor undermining confidence in market integrity.

Feedback to MSCI suggested that a move to frontier-market status would not adequately capture the severity of these problems. This view led MSCI to consider placing Indonesia in a separate Standalone Market category rather than within the standard emerging or frontier groupings.

MSCI has kept in place an existing freeze on several index-related changes for Indonesian securities. The measures include not increasing foreign inclusion factors, which determine how much of a company’s market value is counted in MSCI indexes for international investors.

The freeze also covers a halt on adding new Indonesian securities to the MSCI Indonesia Investable Market Index and on implementing upward migrations of existing constituents across size-segment indexes. These restrictions are set to remain until further notice while the consultation and assessment of Indonesia’s market continue.

Analysts have warned that the potential downgrade could add pressure to Indonesia’s stock market and may contribute to further foreign outflows. Indonesian equities have already fallen by more than 30% year-to-date, leaving the country among the weakest-performing equity markets this year.

In response to MSCI’s move, the Indonesia Stock Exchange stated that it has taken concrete steps together with the Financial Services Authority to improve market transparency, integrity and quality. These measures are intended to address concerns raised about market governance as the consultation process proceeds and ahead of MSCI’s planned final decision timeline.