The Semanggi overpass in Jakarta, Indonesia.
Fadil Aziz | The Image Bank | Getty Images
Indonesia’s benchmark stock index plunged over 5% on Monday to its lowest level in six years, as concerns over a potential downgrade by MSCI intensified fears of further foreign investor outflows.
The Jakarta Composite Index tumbled to its lowest level since early October 2020, extending a bruising sell-off in Indonesian equities. MSCI, the index provider, on Friday proposed reclassifying Indonesia directly from an emerging market to stand-alone status, raising the prospect of the country’s removal from major global equity benchmarks.
MSCI is expected to make a final decision by June, with the potential reclassification hinging on whether Indonesian authorities can demonstrate meaningful improvements in market governance and transparency.
Goldman Sachs warned in a Sunday note that a full removal from MSCI’s emerging-market indexes could trigger approximately $5.6 billion in passive fund outflows, equivalent to 18 days of average daily trading volume for constituents of the MSCI Indonesia Investable Market Index.
An additional $2.7 billion could be at risk if FTSE Russell subsequently takes similar action, although the bank stressed that such a move would be a separate scenario.
Goldman estimated that active funds benchmarked to MSCI and FTSE indexes hold more than $8 billion in Indonesian equities, although any selling by these investors would be discretionary rather than automatically triggered by a downgrade.
The bank maintained its underweight rating on Indonesian equities, citing persistent index uncertainty, weak corporate earnings and macroeconomic headwinds.
“Valuations have compressed significantly, but remain above historical troughs; index, earnings, and macro risks constrain a re-rating,” Goldman strategists led by Alvin So wrote.
The MSCI Indonesia Index has fallen 47% this year as of Friday, data provided by the bank showed, with foreign investors withdrawing a net $5.1 billion from Indonesian equities over the period.
Foreign ownership of Indonesian stocks has declined to 25% in October from 27% in January, while the value of foreign holdings has nearly halved to approximately $130 billion from $250 billion, the bank said.
Despite the steep declines, Goldman cautioned that Indonesian equities may not have bottomed. The MSCI Indonesia Index’s 12-month forward price-to-earnings ratio has fallen to 7.3 times, its lowest level since the global financial crisis, but remains above historical troughs.
The strategists also expect Indonesia’s central bank to raise interest rates twice more, by 25 basis points each in the fourth quarter of 2026 and first quarter of 2027, potentially adding further pressure to economic growth and equity valuations.