By Stefano Suleman and Ankur Banerjee
JAKARTA/SINGAPORE, Jan 29 (Reuters) – Indonesian authorities scrambled on Thursday to stem capital flight from the stock market, rolling out measures to curb the risk of a downgrade in frontier-market status that prompted a sell-off of more than 8% in two days.
The rout, which wiped about $80 billion off market value, came after index provider MSCI raised concerns about ownership and trading transparency in Indonesian stocks, the latest setback for a market struggling to maintain investor confidence.
Concerns about how President Prabowo Subanto is widening fiscal deficits and increasing state involvement in financial markets have led to foreign capital outflows from Indonesia.
After the sudden sacking of Honorable Finance Minister Mr Mulyani Indrawati last year, the appointment of his nephew, Thomas Ziwandono, to the central bank this month has shaken confidence in his financial reserves and pushed the rupiah to record lows.
Modest recovery after regulatory response
Indonesian stocks made a modest recovery late on Thursday after the country’s regulators unveiled several measures, including doubling the free-float requirement for listed firms to 15% as part of their response to MSCI.
The benchmark Jakarta Composite Index closed down just 1% after an earlier slide of 8% – which triggered the trading halt – following Wednesday’s 7.4% decline.
The rupee was 0.27% softer against the dollar at 16,745, below last week’s record low of 16,985.
“The two-day sell-off appears to be a reaction to fundamentals and a repricing of market access risk,” said Joshua Pardede, chief economist at PermataBank.
“The market will likely remain headline-driven in the near term unless there is concrete evidence of transparency reforms and a strong policy mix to reassure investors on institutional strength and fiscal discipline.”
Speaking at a press conference, Financial Services Authority chief Mahendra Siregar said that the talks with MSCI were positive and he was waiting for the response of the proposed measures and hoped that the issue would be resolved by March and implemented soon.
“We will exclude investors in corporate and other categories from the free float calculation and then publish shareholding above and below 5% for each ownership category,” Mahendra said.
MSCI said in a statement on Thursday evening in Indonesia that it would “continue to monitor developments in the Indonesian market and engage with market participants and authorities, including Autoritas Jasa Keuangan and the Indonesia Stock Exchange, and communicate further actions as warranted.”
OJK is Indonesia’s financial regulator.
The measures appeared to ease some investor concerns, although sentiment is likely to remain subdued in the near term.
“This is an ongoing process, not a single announcement,” said Mohit Mirpuri, portfolio manager at SGMC Capital in Singapore. “What investors needed to see was alignment and intent, and that was clearly delivered.”
“Policy clarity usually comes after volatility, not before it. The last couple of days of selling are very blind and historically you don’t wait for everything to look right before making a move.”
Downgrade after warning
Investment banks Goldman Sachs and UBS cut their recommendations for Indonesian stocks on Thursday, a day after MSCI warned of a possible downgrade.
The downgrade by MSCI, one of the largest providers of market indices — which are tracked by billions of dollars in passive investments — forced the sale of tracking funds.
Active managers, whose performance is evaluated against benchmarks, may need to sell.
“The MSCI warning came at an inopportune time,” said Gary Tan, Singapore-based portfolio manager at Allspring Global Investments, pointing to a series of negative macro headlines and a weaker rupiah.
“This triggered general selling first, ask questions later from passive and benchmark-driven investors, resulting in a sharp near-term correction,” Tan said.
Brokerage sources described MSCI’s warnings as a “slap in the face” for market officials, adding that foreign capital flows would dry up if MSCI flagged Indonesia as “uninvestable” or non-transparent.
Goldman Sachs warned that an outflow of as much as $7.8 billion was possible in the event of an MSCI downgrade, although strategists said the prospect was unlikely. UBS lowered its rating to “neutral”.
A downgrade to frontier market status, which analysts do not yet believe, would put Indonesia on par with Bangladesh, Pakistan, Sri Lanka and Vietnam.
Foreign investors sold 13.96 trillion rupiah ($834 million) worth of Indonesian shares in 2025, the worst year for outflows since 2020, as sales continued in January, LSEG data showed.
(Reporting by Ray Wee, Gregor Stuart Hunter and Ankur Banner in Singapore, Ananda Teresia and Stefano Suleman in Jakarta, Sameer Manekar Manekar in Bengaru; Writing by Ankur Banerjee, Editing by Thomas Derpinghaus, Rosell Ferens and Clarence Ferens)
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