Indonesian stocks get MSCI reprieve but clock ticks on market reforms

Indonesia's benchmark index fell 1.5% after MSCI pushed its review to November, giving regulators a temporary reprieve to demonstrate reform progress and avert a downgrade to frontier status.

Indonesia clung to emerging market status after MSCI pushed its review to November, deferring rather than eliminating the threat of a downgrade, with the clock ticking for regulators to demonstrate reform progress or risk billions in outflows.

Indonesia's benchmark index swung ‌between gains and losses and was last down 1.5% as investors assessed the outlook. Indonesian assets have been hammered since January, when MSCI froze the country's stocks in its indexes and raised the prospect of a downgrade to frontier status, leading to a flurry of reforms, including moves to raise free-float levels.

The index is down about 30% ‌so far this year, making it the world's worst-performing major stock market, while foreign investors net sold about $3.9 billion worth of shares. The reprieve buys Jakarta some ‌breathing room but with fiscal worries dragging the rupiah to record lows and foreign outflows unrelenting, the window of opportunity remains narrow for a market that has turned from darling to deadweight.

Tan Altundag, investment manager for emerging equities at Pictet Asset Management, said staying in the investable universe for a broader investor audience is meaningful, but "it does not automatically restore confidence or reverse outflows." "This is not a clear-cut ⁠recovery narrative, ​and the bar for re-engagement remains high," said ⁠Altundag, who is underweight Indonesia.

STEP IN THE RIGHT DIRECTION The index provider late on Tuesday called measures from Jakarta a "step in the right direction", but warned it would consider options such as a consultation ⁠on a downgrade to frontier status if sufficient progress was not evident by its November review.

Gary Tan, portfolio manager at Allspring Global Investments, said the outcome was in line with market expectations, ​with the tone of MSCI’s statement more cautionary than outright negative. "What stood out is the clear shift toward implementation and measurable outcomes, signalling that announced ⁠reforms alone are not sufficient," Tan said. "The extension of the review to November keeps pressure on regulators and effectively kicks the decision down the road."

Indonesia's financial regulator said on Wednesday the MSCI announcement would ⁠serve ​as momentum to strengthen and accelerate the capital market reform agendas initiated since January. MSCI in April had extended its review of Indonesian markets to June, and in May cut several companies - most of which were tied to tycoons - from its indexes.

A downgrade would be devastating to Indonesia and could trigger as much as $13 billion in ⁠outflows from Indonesian equities, Goldman Sachs has estimated, at a time when the combined market value of Indonesian equities has already shrunk to $601 billion from more than $900 ⁠billion in January. Investor unease has been growing ⁠over President Prabowo Subianto's spending agenda, which has supported initiatives such as free meals to millions of people but has also contributed to the rupiah sliding to record lows, leaving the broader investment backdrop looking fragile.

Credit-rating firms Moody's and Fitch cut their ‌debt rating outlooks for Indonesia ‌to negative earlier this year, citing reduced policymaking credibility.