ANALYSIS-Indonesia, faced with state meddling, 'stock frying,' left behind in rush to emerging markets

A stock market collapse is only the latest sign of trouble for Indonesia's capital markets, which are being excluded from a rush to emerging economies, as investors cool on Southeast Asia's biggest country and President Prabowo Subianto's economic agenda. Indonesia's ‌equity bourse has lost 12%, or more than $80 billion in value, since index provider MSCI warned last week that the country risked a downgrade to frontier status due to problems with ownership and trading transparency.

A stock market collapse is only the latest sign of trouble for Indonesia's capital markets, which are being excluded from a rush to emerging economies, as investors cool on Southeast Asia's biggest country and President Prabowo Subianto's economic agenda.

Indonesia's ‌equity bourse has lost 12%, or more than $80 billion in value, since index provider MSCI warned last week that the country risked a downgrade to frontier status due to problems with ownership and trading transparency. Vows to make changes and the resignations of five top officials from the financial regulator and stock exchange have failed to stabilise the market - and a struggling currency points to a ⁠deeper malaise.

Investors have been avoiding Indonesia and worry Prabowo's spending and cosy governance are slowly undoing hard-won progress made since the Asian Financial Crisis, when the rupiah collapsed and Prabowo's former father-in-law, Suharto, was forced from office. Foreigners own barely more than 13% of the bond market, down from nearly 40% as recently as 2019, according to government data.

They have left gradually, but the latest hit to confidence is particularly ill-timed because - as U.S. rates fall - global money is pouring into emerging markets at a record clip and sending stocks and currencies in Latin America soaring. Prabowo, ​meanwhile, has been re-making the country in ways that are reminiscent of the strongman era when he cut his teeth. He has expanded military spending and its involvement in the government.

On the economic front, he appointed his nephew to the central bank's board ‍last month and in September, he fired Sri Mulyani Indrawati, his respected finance minister. The rupiah hit a record low of 16,985 against the dollar in January and its decline stands out against surging markets in Peru and Brazil, as well as a broader enthusiasm for emerging markets.

"The music is definitely darkening," said Alan Siow, co-head of emerging markets corporate debt at fund manager Ninety One. "The issue is the steps to purgatory," he said. "The first few will always seem innocent. And then suddenly you're there, and then you're like 'Oh, how did we get here?' Sri's departure was the first signal," he said.

Foreign investors net sold almost 14 trillion rupiah ($832 million) worth of ⁠Indonesian stocks in ‌2025, the heaviest year for outflows since 2020, and offloaded another $783 million ⁠in January, according to LSEG data. Foreigners net sold about $6.4 billion in Indonesian bonds last year. Copley Fund Research, a firm tracking the positioning of 356 active global emerging market funds, found the number of funds that opted to invest in Indonesian stocks fell 7.6% last year and the number of funds that were "overweight" fell more ‍than 17% - the largest single negative country change on both counts.

'STOCK FRYING' At issue in the equity market is a practice brokers have dubbed "goreng-goreng saham" or stock frying - where trading between related parties pumps up a stock's price.

To address it, authorities have proposed expanding disclosure requirements for big shareholders, while doubling ​the "free float" or tradable shares of listed companies to 15%. But that requires companies to shake out their share registries to get more stock into the market.

Investors have welcomed the gestures, but they worry that it might not satisfy MSCI, ⁠which has frozen Indonesian securities in its products and has not responded to the proposals publicly. "If the companies are not going to do it, then we're back to square one," said William Yuen, a Hong Kong-based investment director at Invesco, which manages nearly $2.2 trillion.

"I think we really need to see a little bit more on the actual execution ⁠and implementation. Otherwise, I think the overhang (for markets) will remain." WEAKENING COMMITMENT

For the bond market, popular spending programmes on school lunches and defence are putting pressure on debt limits that have held firm since the financial crisis, which is troubling to investors. Indonesia's budget deficit is low in global terms, but at 2.92% last year it is uncomfortably close to the statutory cap of 3% and investors would like to see that held.

"A lot depends on how policy is conducted in the next few months," said Johnny Chen, portfolio manager at ⁠William Blair. "We need to see policy being conducted in a very credible manner that suggests that fiscal discipline and central bank credibility that we've been so accustomed to will continue."

To be sure, Indonesia is running large trade surpluses and has an ample $156.5 ⁠billion in foreign exchange reserves. Wholesale capital flight or a sudden downgrade ‌to frontier status are prospects that are regarded as unlikely. Still, momentum can be a dangerous thing in markets.

"That orthodoxy that Indonesia has followed since the Asian Financial Crisis is something which is positive ... I think emerging market equities and bonds investors appreciated that," said Rajeev De Mello, Singapore-based chief investment officer at GAMA Asset Management, who is underweight on the currency, stocks and bonds. "There is a perception ⁠that it's weakened, that commitment to it is weakening."

($1 = 16,780.0000 rupiah)

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