SINGAPORE: Index provider MSCI is due to announce a decision on Indonesia’s emerging markets status on Tuesday in a highly anticipated report that could provide a lift to an under-pressure market or deal yet another blow to Southeast Asia’s biggest economy.
MSCI in January flagged transparency concerns and warned of a potential downgrade to frontier status – a risk that sent equities tumbling. In a review late on Thursday, MSCI raised further concerns about Indonesia’s investability.
Here’s what to watch in Tuesday’s report:
What happens if Indonesia is downgraded?
Investors see a downgrade as unlikely, but if it happens it would force selling from passive funds that track MSCI’s popular benchmark indexes, as well as any funds where mandates restrict them from owning frontier market stocks.
It would also likely push active managers to reduce Indonesia exposure to reflect the benchmark index.
In all, outflows could amount to as much as US$13 billion, Goldman Sachs estimates. An MSCI downgrade would also spur other index providers including FTSE Russell to act. FTSE kept Indonesia’s emerging markets status in April but a review is due in June.
What else is at stake?
Attention will also be on whether MSCI retains a freeze on Indonesian stocks in its products.
The freeze, announced in January, means no new Indonesian stocks were added to MSCI’s indexes, and six were removed in May – driving passive money out of Indonesian equities.
Most analysts expect MSCI to extend its freeze while it reviews Indonesia’s responses to its concerns.
Are Indonesia’s troubles over after next week?
Not necessarily. An affirmation of emerging market status would likely only provide relief if the risk of a downgrade is also taken off the table.
That is viewed as unlikely with the one-time market darling still facing several headwinds.
The core issue of opacity in stock ownership data and concerns over global investors’ ability to assess the true free float of companies in Indonesia is unresolved, and unpredictable policymaking has investors and credit rating agencies nervous.
Indonesian shares are down 29% in 2026, making them the world’s worst performing stock market, while bonds have come under pressure from foreign selling following credit outlook downgrades by Moody’s and Fitch.
