MSCI warned of transparency and investability concerns, prompting Goldman Sachs and UBS to downgrade their outlook on Indonesian stocks. The selloff intensified foreign outflows amid worries over fiscal expansion, political interference, and weakening macro conditions.
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Reuters
SINGAPORE/JAKARTA Indonesian stocks
headed on Thursday for their steepest two-day slump since 1998
during the Asian financial crisis, as the risk of a downgrade to
frontier market status rattled already fragile investor
confidence and triggered a rush for the exits.
Authorities in Southeast Asia’s largest economy sought to
stem the slide, which Finance Minister Purbaya Yudhi Sadewa
called a temporary shock, saying there was no problem with
economic fundamentals.
The benchmark Jakarta Composite Index was down about
6%, off an earlier drop of 8%, hit by what brokerage sources
called “panic selling”, which triggered a trading halt,
following Wednesday’s tumble of 7.4%.
The rupiah also weakened 0.5% to 16,780 against the dollar,
just below last week’s record low of 16,985.
Officials of the financial regulator and stock exchange are
set to speak to media at 0600 GMT.
Investment banks Goldman Sachs and UBS lowered their
recommendations for Indonesian stocks a day after index provider
MSCI flagged problems with transparency and warned a downgrade
to frontier from emerging status was possible.
Such a downgrade by MSCI, one of the biggest providers of
market indexes, tracked by billions of dollars in passive
investments, would force tracking funds to sell.
Active managers, whose performance is rated against the
benchmarks, would also probably need to sell.
MSCI’s warning comes as foreign capital flows out because of
concerns about how President Prabowo Subianto is widening the
fiscal deficit and ramping up the state’s involvement in
financial markets.
The appointment of his nephew, Thomas Djiwandono, to the
central bank this month, after last year’s abrupt sacking of
respected Finance Minister Sri Mulyani Indrawati, has shaken
confidence in his fiscal stewardship and pushed the rupiah
to record lows.
“The MSCI warning came at an inopportune time,” said Gary
Tan, Singapore-based portfolio manager at Allspring global
investments, pointing to a series of negative macro headlines
and a weakening rupiah.
“This triggered a typical sell-first, ask-questions-later
response from passive and benchmark-driven investors, resulting
in a sharp near-term correction,” Tan said.
He added that he was encouraged that regulators have
signalled a willingness to engage constructively with MSCI and
improve market transparency.
Brokerage sources described MSCI’s warnings as a “slap in
the face” for market authorities, adding that inflows of foreign
capital would dry up if MSCI flagged Indonesia as “uninvestable”
or non-transparent.
DOWNGRADE AFTER WARNING
Goldman Sachs cut its rating on Indonesian equities to
“underweight”, warning that outflows between $2.2 billion and
$7.8 billion were possible in the event of an MSCI downgrade,
though the strategists said that was unlikely. UBS lowered its
rating to “neutral”.
A downgrade to frontier market status, which analysts so far
think is unlikely, would bring Indonesia on par with Bangladesh,
Pakistan, Sri Lanka and Vietnam.
MSCI said it had frozen updates to Indonesian entries in its
products while engaging with authorities to resolve
“investability risks” over a lack of clarity on stock ownership,
trading and price formation in the market.
“We expect the market to remain under pressure and do not
view this as an entry point,” the Goldman strategists said.
“Indonesia is facing macro challenges, including soft
private consumption, slowing credit growth, and a rising fiscal
deficit that is close to the legal 3% of GDP limit.”
Overseas investors sold 13.96 trillion rupiah ($834 million)
worth of Indonesian shares in 2025, the worst year for outflows
since 2020, with the selloff continuing in January, LSEG data
showed.
Published on January 29, 2026
