MSCI downgrade warning triggers "panic" selling! Indonesian stock market plunges for two consecutive days, hitting a six-year low

According to Zhitong Finance APP, after the index compiler MSCI announced that it was considering downgrading the Indonesian stock market and removing it from its global indexes, triggering concerns about capital outflows, Indonesia’s stock market experienced “panic selling” and suffered heavy losses for two consecutive days. Data shows that after the Jakarta Composite Index in Indonesia plummeted by more than 11% last Friday—the largest single-day drop in nearly 30 years—it dropped another 5% on Monday to reach a six-year low.

As early as January this year, MSCI warned that it might downgrade Indonesia’s stock market from the “Emerging Markets” category to the “Frontier Markets” category. For several months, the organization has been urging Indonesian officials through public and private channels to address investor concerns about market manipulation and insufficient information disclosure.

Now, MSCI’s patience appears to be exhausted, and it is considering taking more drastic measures. Currently, MSCI is seeking public feedback on a proposal to reclassify Indonesia as a “Standalone Market.” MSCI stated that downgrading to a frontier market would not sufficiently reflect the severity of the country's market problems. Unless there is clear evidence of substantial improvement in market governance and operation, MSCI expects to proceed with this change. The consultation will last until April 30, 2027, and the final decision is expected by June 30, 2027.

Since MSCI launched its Emerging Markets Index in 1989, Indonesia has maintained its status as an emerging market. As its economy and capital markets expanded, inclusion in the index helped cement Indonesia’s position in global investment portfolios.

Once classified as a standalone market, Indonesia will be completely removed from all the major global MSCI indexes—passive funds tracking the MSCI Emerging Markets Index may be forced to sell Indonesian stock holdings, while active fund managers who use these indexes as benchmarks might also reduce their exposure. Losing the opportunity to be included in both emerging market and frontier market benchmarks could further weaken demand from foreign investors, putting additional pressure on stock prices and liquidity.

MSCI stated in last Thursday’s announcement that despite a series of announced reforms by Indonesian regulators, market malfunction issues still raise significant concerns. Investors reported that there are suspicions of continued concerted trading behavior locally, and there is a lack of strong evidence as to whether related violations are being substantively enforced.

On Monday, the Indonesia Stock Exchange said, “The MSCI announcement came as a surprise to us and triggered market panic.” The exchange halved its daily limit from the previous 14% to 7% on Monday in an attempt to slow the sell-off. In addition, the exchange’s leadership is scheduled to meet with MSCI executives later on Monday.

Tensions arising from this “threat” by MSCI have also spread to the Indonesian rupiah and bond markets. The rupiah once fell to 18,040 against the dollar, not far from the historical low of 18,190 recorded in June last year. At the same time, Indonesian government bonds were hit by sell-offs, with the yield on the 10-year government bond rising to 7.4%, up from 7.169% last Friday.

From January to mid-October, international funds have withdrawn nearly $5 billion from Indonesia’s stock market. At this rate, total outflows for the year may mark a historical record, making Indonesia the world’s worst-performing stock market in 2026. If MSCI reclassifies Indonesia as a standalone market, capital outflows may further accelerate and exacerbate the already poor performance of Indonesia’s stocks.

Even a downgrade to frontier market status alone could trigger substantial foreign capital outflows. Goldman Sachs analysts estimate that in the extreme scenario, outflows from passive funds alone could reach up to $13 billion. This is because many global funds strictly track benchmark indexes when allocating capital—meaning, if Indonesia is removed from the Emerging Markets Index, some funds will be forced to reduce or completely liquidate their Indonesian assets.

According to Citi analysts, if Indonesia is downgraded to standalone market status—meaning its complete removal from major MSCI global indexes—the impact will be “even more severe.” Such large-scale capital outflows could pressure the rupiah to depreciate, increase financing costs, and make Indonesia more reliant on domestic savings and government-backed funds. The impact will be greatest on large cap stocks with high foreign ownership and good liquidity, especially banks and other companies with significant weighting in benchmark indexes. Continued foreign outflows could also dampen bank lending, infrastructure investment spending, and corporate investment, ultimately slowing economic growth and curbing job creation.

According to two government sources, Indonesian President Prabowo Subianto is expected to meet with major financial officials on Monday afternoon to discuss the “current economic situation.” The meeting is expected to include the sovereign wealth fund Danantara and Indonesia’s Financial System Stability Committee. This committee is composed of the Finance Minister, the Governor of Bank Indonesia, the head of the Financial Services Authority (OJK), and the head of the Indonesia Deposit Insurance Corporation.

S&P Global Ratings’ sovereign analyst Rain Lin said MSCI’s latest warning could lead to more capital outflows but expects the scale of outflows to not be large enough to have a material impact on financing costs. He stated, “What is more concerning is that this could damage investor confidence, with the risk that market sentiment could further spill over into the government bond market and the foreign direct investment sector.”

Last Friday, Indonesia’s market regulator took the lead by issuing a total fine of approximately $117 million for market manipulation involving three companies, in an attempt to respond to the concerns mentioned above. In this regard, Singapore-based ASEAN market expert Angus Mackintosh at Aletheia Capital said: “Fines are a positive move, but there needs to be coordinated action to establish OJK’s regulatory authority and directly target some well-known market participants involved in market abuse.”