Indonesian Market Faces MSCI Downgrade Risk Amid Capital Flight

Indonesian authorities announced measures to prevent an 8% capital flight from the stock market, sparked by MSCI's downgrade threat. Concerns arise from President Prabowo's financial policies, including the appointment of his nephew to the central bank, and the removal of Finance Minister Sri Mulyani Indrawati, leading to diminished investor confidence.

On Thursday, Indonesian authorities scrambled to counter a rapid capital flight from the stock market. The market had seen a selloff of more than 8% within two days, triggered by MSCI's concerns over ownership and trading transparency in the country's stocks, further putting the market's status at risk.

The departure of foreign capital from Indonesia is further exacerbated by worries over President Prabowo Subianto's fiscal management. His moves to expand the fiscal deficit and increase state intervention, coupled with the controversial appointment of his nephew Thomas Djiwandono to the central bank, have shaken trust. The abrupt dismissal of respected Finance Minister Sri Mulyani Indrawati last year has only added to investors' unease.

To restore confidence, Indonesian regulators announced reforms such as increasing the free-float requirement for firms to 15%. These measures helped the benchmark Jakarta Composite Index regain ground, closing down just 1% after plummeting 8% earlier. Despite efforts, investor sentiment remains cautious, with ongoing scrutiny of policy transparency and institutional robustness.

(With inputs from agencies.)