Indonesia’s emerging-market status under threat

The Indonesian stock market is facing a reckoning: Index provider MSCI warns of a potential downgrade to the ASEAN country’s status unless reforms are made by May, the Financial Times reports. The move comes amid growing alarm over the country’s “deep-fried stocks” — where concentrated ownership and opaque shareholding structures fuel extreme volatility and raise concerns about coordinated trading that distorts price formation.

The MSCI announcement triggered an immediate crisis in Jakarta, wiping more than USD 80 bn off the Jakarta Composite Index last week, followed by an additional 4.5% drop on Monday. The sell-off has alarmed regulators, who fear a downgrade could trigger bns of USD in capital outflows. Indonesia’s financial regulator and stock exchange chiefs have since resigned.

Just a blip, says the FinMin: Finance Minister Purbaya Yudhi Sadewa characterized the sell-off as a “temporary shock,” maintaining that the country’s economic fundamentals remain strong despite the market volatility.

Why it matters

The “emerging-market” classification, used by MSCI and FTSE Russell, ranks countries between frontier and developed markets, signaling investability while acknowledging some volatility. Indonesia’s status as an emerging market has attracted steady foreign investment, building Southeast Asia’s largest equity market. A downgrade to frontier could trigger up to USD 13 bn in forced outflows, weaken the IDR, raise borrowing costs, and slow growth and job creation, Goldman Sachs told Bloomberg.

Indonesia’s pain points-

The “deep-fried” problem: Investors have long flagged a disconnect between Indonesia’s blue-chip stocks and a group of closely-held companies owned by powerful tycoons. These “deep-fried” stocks often have restricted free floats — the portion of shares available to the public — allowing prices to be easily manipulated or driven to surges on thin trading. Last year, the MSCI Indonesia index fell 3.6%, while the Jakarta Composite rose 20.7%, the widest gap on record.

IN CONTEXT- MSCI’s warning also lands amid broader investor unease over President Prabowo Subianto’s fiscal stance and institutional independence. Steps seen as weakening central bank autonomy and loosening long-standing fiscal discipline have raised concerns over inflation, currency stability, and governance standards.

Don’t hold your breath: A total downgrade to frontier status is unlikely given the sheer size of the Indonesian economy, James Johnstone, co-head of emerging and frontier markets at investment manager Redwheel, told the salmon-colored paper. Still, the MSCI threat is seen as a “bold and dramatic” catalyst for reform, piling pressure on regulators to address long-standing governance issues and boost transparency and liquidity ahead of the May deadline to avoid a major outflow of international capital, he added.

It seems to be working

Regulators have moved to contain the fallout, announcing plans to double the minimum free-float requirement to 15% to improve liquidity and curb volatility, though this is still well below the 25% standard seen in regional peers like India and Hong Kong. MSCI said it will continue engaging with Indonesian authorities and market participants before deciding on next steps.

MARKETS THIS MORNING-

Asia-Pacific markets are mixed this morning in early trading as investors react to the tech-led selloff on Wall Street. Markets are also closely following the results of Japan’s Lower House election, which are also expected to significantly impact the JPY.

THE CLOSING BELL-

The EGX30 rose 2.9% at yesterday’s close on turnover of EGP 9.6 bn (70.5% above the 90-day average). International investors were the sole net sellers. The index is up 17.1% YTD.

In the green: Fawry (+8.0%), Raya Holding (+7.0%), and Telecom Egypt (+6.2%).

In the red: Orascom Investment Holding (-0.8%) and Heliopolis Housing (-0.6%).