Indonesian stocks tank as downgrade risk sets off rush for exits

• MSCI froze updates to Indonesian entries citing 'investability risks' over lack of clarity on stock ownership, trading, and price formation, with any downgrade forcing billions in passive fund outflows
• Foreign investors have already sold $834 million worth of Indonesian stocks amid concerns over President Prabowo's fiscal policies, including appointing his nephew to the central bank and dismissing the finance minister
• Indonesia faces broader economic challenges including weak private consumption, slowing credit growth, and a fiscal deficit approaching the legal 3% of GDP limit

Summary: Indonesian Stocks Plunge on Downgrade Risk

Key Developments:

Indonesian stocks experienced their largest two-day decline on record, with the Jakarta Composite Index plunging 8% on Thursday after falling 7.4% Wednesday. The sell-off triggered a trading halt and was sparked by MSCI's warning of a potential downgrade from emerging to frontier market status due to concerns over market transparency, ownership clarity, and price formation.

Market Impact:

Goldman Sachs downgraded Indonesian equities to "underweight" and estimates potential outflows of $2.2 billion to $7.8 billion if MSCI executes the downgrade. Foreign investors have already sold 13.96 trillion rupiah ($834 million) worth of Indonesian stocks. A downgrade would force passive tracking funds managing billions in assets to sell their holdings, with active managers likely following suit.

Economic Context:

The crisis reflects broader concerns about President Prabowo Subianto's economic policies, including:

• Widening fiscal deficit approaching the legal 3% of GDP limit
• Increased state involvement in financial markets
• Appointment of his nephew Thomas Djiwandono to the central bank
• Dismissal of respected Finance Minister Sri Mulyani Indrawati
• The rupiah hitting record lows
• Soft private consumption and slowing credit growth

Status:

A downgrade to frontier status would place Indonesia alongside Bangladesh, Pakistan, Sri Lanka, and Vietnam. While analysts currently consider the downgrade unlikely, MSCI has frozen updates to Indonesian entries pending resolution with authorities. Indonesia's financial regulator and stock exchange scheduled a media briefing to address the developments. Goldman strategists advised against viewing current prices as an entry point.