A warning from MSCI that it may exclude Indonesia from its stock market indexes — benchmarks used by global financial investors — risks cutting the nation off from international capital and relegating it to an investment backwater.
MSCI stunned investors by proposing that it remove Indonesia from its global stock indexes altogether, months after floating a less severe downgrade from emerging market to frontier over opaque ownership and securities trading practices.
A cut to standalone status would be unusually harsh and rare: Argentina was dropped in 2021 for imposing capital controls, and Russia in 2022 after Western sanctions cut it off from global finance over its invasion of Ukraine. Indonesia would find itself in a small group of standalone markets that includes Lebanon and Zimbabwe.
Indonesia has been an MSCI emerging market since 1989, and a downgrade of the proposed magnitude would be a huge reversal for a market that until recently was a foreign investor favourite.
Removing the country from major global benchmarks that steer billions of dollars in foreign investment could hurt far more than just its stock market.
“The proposal … goes well beyond what we had considered our worst-case scenario,” said Rully Arya Wisnubroto, head of research at Mirae Asset Sekuritas in Jakarta.
The MSCI announcement wiped about $65 billion off the value of Indonesian equities, with an 11.6% drop on the Jakarta Composite Index (.JKSE), — its biggest one-day fall since the Asian financial crisis in 1998.
The shock spread beyond equities, with the rupiah falling as much as 0.8% and some analysts raising the possibility of a central bank interest rate hike on Tuesday, when rates had been expected to stay on hold.
“The purpose (of a rate hike) would be pre-emptive, i.e. in order to prevent the expected equity foreign outflows from widening to the fixed income side as well as being exacerbated by resident capital outflows,” Citi wrote in a note to clients.
Unlike a downgrade to frontier status, a move to standalone would provide no offsetting demand from frontier-index funds, leaving passive emerging-market money heading for the exits.
Banks estimate the move could trigger $3 billion to $6 billion in passive outflows, with JPMorgan putting the figure at $4.8 billion and UBS warning active investors could pull another $15 billion.
More than $1.8 trillion in assets are benchmarked to MSCI’s emerging-market indexes, according to the index provider’s website.
INDONESIA INDEX WEIGHT AMPLIFIES IMPACT
Indonesia, Southeast Asia’s biggest economy, is the world’s top exporter of thermal coal, palm oil and nickel and a major supplier of copper and coffee. While the country has benefited from rising prices of some of its top commodity exports this year, as a net oil importer, its import bills have also soared.
The fallout from the stock index exclusion could also spread to Indonesia’s public finances should state-linked companies find it harder or more expensive to raise money, potentially forcing the government to take spending back onto its own books or scale back investment, Citi analysts added.
“We expect the broader economic impact to be predominantly indirect, with external financing representing the most immediate transmission channel,” said Irman Faiz, economist at Bank Danamon Indonesia in Jakarta.
Indonesia’s removal would involve significantly more index-linked money than previous cases, despite its weight shrinking from 1.2% at the end of 2025 to 0.46% now, according to JPMorgan. When Argentina was removed, its weighting stood at 0.12%.
