Indonesian stocks fell sharply on Monday, October 19, reaching a six-year low after MSCI warned of a possible downgrade from its "emerging market" status. The benchmark index dropped over 5% after an 11.6% decline on Friday. This marked the steepest two-day sell-off in the country's history. The drop wiped out about $65 billion in market value, according to exchange data.
MSCI Downgrade Concerns
The MSCI announcement said that Indonesia could be reclassified to "standalone" status. This change is due to ongoing issues with market transparency and trading practices. A downgrade would remove Indonesian stocks from global indices, limiting foreign investment. Jeffrey Hendrik, chief executive of the Indonesia Stock Exchange, expressed surprise at the announcement. He said, "We did not expect there would be such an announcement from MSCI. Such an unexpected statement caused the market to react in panic."
In response to the market turmoil, the Indonesia Stock Exchange cut its daily down limit on stock prices to 7% to reduce volatility. The rupiah also weakened, trading at 18,048 per dollar, close to its record low of 18,190 hit in June. Additionally, the yield on 10-year government bonds rose to 7.4%, up from 7.169% on Friday.
Regulatory Actions
The Indonesian Financial Services Authority announced sanctions totaling 2.1 trillion rupiah ($116.4 million) against companies involved in alleged trading manipulation. This move shows ongoing efforts to address concerns raised by MSCI since January about ownership transparency. Analysts believe these actions may help restore some investor confidence, but the immediate outlook remains uncertain.
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The sharp decline in Indonesian stocks and the potential downgrade from MSCI could lead to less foreign investment and increased capital flight. This may impact the broader Southeast Asian markets. Investors are likely to reassess their exposure to Indonesian assets in light of these developments.
Watch for the outcome of the meeting between Indonesia's stock exchange and MSCI, as officials seek clarification on the downgrade warning.
Based on reporting by: businesstimes.com.sg