SINGAPORE - Indonesian regulators have been given more time to carry out reforms after the index provider MSCI announced a five-month extension of its review of the country’s troubled stock market.
However, the reprieve will not immediately lure long-term capital back to the battered market, investors said on Wednesday.
The benchmark index fell 1.6% after MSCI pushed its review to November, deferring rather than eliminating the threat to downgrade Indonesia from an emerging market to a “frontier market”.
A downgrade could trigger as much as $13 billion in outflows from Indonesian equities, the US investment bank Goldman Sachs has estimated, at a time when the Jakarta market capitalisation has already shrunk to $600 billion from above $900 billion in January.
Indonesian assets have been hammered since January, when MSCI froze the country’s stocks in its indices 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 30% so far this year, making it the world’s worst-performing major stock market, as overseas investors net sold around $3.9 billion worth of shares.
Tan Altundag, investment manager for emerging equities at Pictet Asset Management, said that remaining open to a broader range of funds is meaningful for the Jakarta bourse, 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,” he said.
The index provider called measures from Jakarta a “step in the right direction”, but warned it would consider options such as a consultation on a downgrade if sufficient progress was not evident by November.
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.”
Momentum for reforms
Indonesia’s financial regulator said on Wednesday that the MSCI announcement would serve as momentum to strengthen and accelerate the capital market reform agendas initiated since January.
For passive emerging market funds and exchange-traded funds (ETFs), the impact is likely to be limited, said Kunhee Park, investment strategist for ETF equities at State Street Investment Management, noting Indonesia’s weight in the MSCI emerging markets index has already more than halved this year to less than 0.5%.
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.
The credit-rating firms Moody’s and Fitch cut their debt rating outlooks for Indonesia to negative earlier this year, citing reduced policymaking credibility.
Mohit Mirpuri, a Singapore-based fund manager at SGMC Capital, said the MSCI extension is a better outcome than many had feared, but stressed that the onus is now on Indonesian regulators.
“The next few months will be about execution, credibility and evidence rather than further policy announcements,” he said.
