Indonesia battles to stabilise market after MSCI expulsion threat

Indonesian stocks rose on Tuesday as authorities in Jakarta introduced measures ‌to restrict ​selling after a record two-day $82 billion rout sparked by index provider MSCI's warning of possible removal from its global indexes. Jakarta's benchmark index advanced 5.3%, after hitting a six-year low in the previous session as the world's worst-performing stock market this year dropped 14.8% over Friday and Monday. The index is down about 40% this year.

The selloff ‌was sparked by MSCI's warning on Friday that Indonesia could be reclassified as a "standalone" market from "emerging markets", a harsher-than-expected downgrade that stunned investors and policymakers and raised fears of large-scale passive fund outflows. The index provider cited Indonesia's failure to improve ownership transparency and curb coordinated trading, turning what had been a downgrade risk to "frontier" market status into a full-blown crisis of investor confidence.

Relegation to "standalone" status would mark a major setback for Southeast Asia's biggest economy as investors grow increasingly uneasy ‌about the country's fiscal health and the autonomy of its central bank under President Prabowo Subianto. Foreign investors have already pulled nearly $5 billion from Indonesian equities this year, with Goldman Sachs estimating a removal by MSCI could ‌spur $5.6 billion of passive outflows.

After an online meeting with MSCI on Monday, the Indonesia Stock Exchange said it would exclude from its benchmark index any stocks with a high concentration of ownership by any person or entity. "We are doing what is best for our market," IDX President Director Jeffrey Hendrik said, adding the exclusion would provide a more accurate picture of the index's movements. He said the affected stocks account for roughly 18% of the total index weight.

Gary Tan, portfolio manager at Allspring Global Investments, said excluding tightly held stocks should help address some investability ⁠concerns, but implementation ​would be key, given the potential for domestic pushback. "From here, ⁠we think the bigger incremental risk to flows is likely to come from active rather than passive funds," he said.

EYES ON CENTRAL BANK MSCI's warning has weighed on the rupiah, which strengthened slightly to 17,980 per US dollar on Tuesday but remained close to the record ⁠low of 18,190 hit in June ahead of a policy decision from Indonesia's central bank.

Bank Indonesia is expected to hold rates steady on Wednesday, although some economists have raised the prospect of a rate hike to defend the currency, which is down ​7% this year. George Xu, a director in Fitch Ratings' sovereigns team, said the latest concerns and substantial market selloff reinforced the risks the rating agency identified when it revised the outlook on Indonesia to negative ⁠in March.

"From sovereign rating perspective, we do not anticipate the consultation announcement itself to have material immediate credit implications," he said, but added that external pressure could raise the government’s borrowing costs and erode external buffers. "PLEASE PRAY," WATCHDOG URGES AMID INVESTOR UNEASE

To stem the rout, the stock exchange ⁠this ​week halved the daily down limit on stock prices to 7% from 15%, while setting a 1 rupiah down limit on shares priced at 14 rupiah or less. Market watchers said the move to remove stocks with highly concentrated ownership from the benchmark index was a constructive step, but noted investors would still have some exposure to those firms through direct ownership and investment products such as mutual funds.

"We must ensure that even if a ⁠stock is delisted from the Jakarta Composite Index, concentration risk does not continue to accumulate within products purchased by the public," said Liza Camelia Suryanata, head of research at stockbroker Kiwoom Sekuritas Indonesia. Also on Monday, Prabowo held talks ⁠with finance chiefs, including the head of the Financial Services ⁠Authority (OJK), the finance minister and the BI governor.

After the meeting, OJK chief Friderica Widyasari Dewi said the regulator would continue to advance Indonesia's capital market reforms, particularly regarding transparency, liquidity, and law enforcement against various forms of violations. "The stock market has started to rebound today; the important thing is to keep building confidence," said OJK's Friderica in a ‌separate event.

"I haven't had a moment's ‌rest since Friday. Please pray that we can get through this successfully."