Analysts have mapped out potential outcomes for Indonesia, ranging from a relief rally to a complete market exit
[SINGAPORE] The Indonesian stock market has been sent into a tailspin, with investors rushing for the exits following an announcement from MSCI on Jan 28 regarding a potential reclassification of Indonesia from “emerging market” to “frontier market” status.
The Jakarta Composite Index (JCI) fell as much as 16 per cent over two days upon the warning, paring some of its losses slightly on Jan 30 before continuing to decline into February.
On Monday (Feb 2), JCI closed at 7922.73, declining 406.88 points or 4.9 per cent.
The Business Times examines why the MSCI announcement made such an impact, and what the potential outcomes are for Indonesia.
What is MSCI, and why does it move markets?
MSCI, previously known as Morgan Stanley Capital International, acts as a global financial referee, with its indices acting as a vital reference for the global asset management industry.
For instance, MSCI’s benchmark Emerging Markets Index tracks around US$10 trillion in stocks and exerts massive influence on investor behaviour. Similarly, the company’s classification of a country’s market status – as developing, emerging or frontier – can have a significant impact on foreign investors’ capital inflows.
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MSCI’s competitors such as FTSE Russell have already confirmed they are monitoring Indonesia’s situation closely, suggesting that the company’s move could trigger a domino effect across other major indices.
What did MSCI say about Indonesia?
Following its consultation on the free-float assessment of Indonesian securities, MSCI highlighted on Jan 28 that global clients are struggling with “persistent opacity” in shareholding data, and called for improved transparency and more reliable shareholder data.
Key concerns cited by the index provider include opaque ownership, with confusion over the proportion of shares that are truly available for public trading, also known as the “free float”.
Alarms have also been raised regarding “coordinated trading behaviour” that undermines proper price formation in the market.
As a direct consequence, MSCI has frozen all upward adjustments for Indonesian securities in its February 2026 review, effectively halting any new stock additions or weight increases.
The MSCI’s decision means that there will be no increase in the foreign inclusion factor or number of shares for Indonesian stocks in its indices, no additions to the MSCI Investable Market Indexes, and no upward migration between index segments, including from small-cap to standard indices.
If data transparency improvements remain insufficient by May, MSCI may reassess Indonesia’s accessibility potentially leading to:
a weighting reduction in the MSCI Emerging Markets Index from the current weight of around 1.5 per cent; ora reclassification from emerging market to frontier market.
The MSCI Emerging Markets Index has a market capitalisation of US$28 trillion. In contrast, the Frontier Markets Index has a market capitalisation of US$1 trillion.
What could happen to Indonesia?
Market analysts from Nomura, UOB Kay Hian and Maybank Securities have mapped out several potential outcomes for the May deadline, ranging from a relief rally to a complete market exit.
In a best-case scenario described by UOB Kay Hian, regulators deliver strong transparency data that MSCI accepts, leading to a positive market reaction and a relief rally as methodology risk is removed.
Maybank analyst Jeffrosenberg Chenlim is also positive on Indonesian equities in the long term.
“We see the current JCI correction as temporary and a buying opportunity, as it is driven more by sentiment and technical pressure than fundamentals,” he said in a note on Monday.
He expects MSCI to eventually obtain the required ownership transparency. He maintains Maybank’s end-2026 target for JCI at 9,250, supported by the policy shift that is seen as pro-growth and 2026 earnings growth of around 10 per cent.
However, Nomura outlined more granular risks if transparency remains a concern. The most benign of these is the adoption of a new free-float calculation methodology, which would still result in an estimated US$1.9 billion in net outflows.
A more sombre middle-ground outcome involves Indonesia retaining its emerging-market status but seeing its weighting reduced.
UOB Kay Hian noted that this would force passive exchange-traded funds to sell large-cap constituents regardless of fundamentals. Nomura quantified this specific risk at US$4 billion in outflows, assuming MSCI applies a 0.5x adjustment factor to all Indonesian securities to reduce their index weight.
The absolute worst-case scenario is a formal reclassification to “frontier market”. UOB Kay Hian warned that this would be “extremely negative”, as global emerging-market funds would be forced to exit entirely. Nomura projects that this would trigger a massive US$8 billion exit from the market.
“While a downgrade to frontier market is not our base case, the non-zero probability of such an outcome introduces significant risk that we believe most institutional investors cannot ignore, which thus becomes an overhang on the market,” analysts from Nomura said.
Nomura downgraded Indonesian equities to “neutral”, noting that “investability concerns can supersede attractive valuations”.
What is Indonesia doing?
Indonesian financial authorities said on Jan 29 that it accepted MSCI’s views as “good input”.
The Indonesia Stock Exchange (IDX) and capital market authorities met MSCI on Monday to discuss the methodology used to calculate public shareholding, or free float.
The Indonesian authorities on Jan 31 pledged a fast-track crackdown on manipulation and tougher disclosure rules, including a 15 per cent minimum free float.
To support liquidity, Indonesia sovereign wealth fund Danantara will also be mobilised, and the equity investment ceiling for pension funds and insurers will be raised from 8 per cent to 20 per cent of assets.
“So far, Indonesian authorities and some corporates have moved quickly to stabilise the sentiment, and we view several of these steps as directionally positive, even if their effectiveness will ultimately depend on execution and follow-through,” said Nomura.
Maybank analyst Chenlim noted that the resignation of IDX CEO Iman Rachman and chair of the Financial Services Authority Mahendra Siregar, alongside three other senior officials at the regulator, could act as a short-term negative catalyst for the market.
However, these developments are likely to be viewed as part of the necessary structural reforms towards building a more credible equity market, he added.
Maybank expects the Indonesian government to appoint acting chiefs by early next week.
“The speed at which market optimism returns will depend on the government’s ability to appoint credible leadership and to outline a clear, comprehensive reform road map for a healthier capital market,” said Maybank analyst Chenlim.
Maybank recommends thematic plays. These include stocks experiencing recovery across the consumer sector such as Indofood CBP, Kalbe Farma, as well as Japfa Comfeed Indonesia, which supports the government’s free nutritious meal programme.
Indonesian banks such as Bank Negara Indonesia and Bank Central Asia also stand to gain from a policy pivot towards growth, alongside a bottoming credit cycle.
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