Indonesia overhauls stock index to fight MSCI downgrade threat

The Indonesia Stock Exchange announced plans to exclude approximately 80 companies with highly concentrated share ownership from the Jakarta Composite Index to address concerns raised by MSCI. The affected stocks represent about 18% of the index, though they will remain available for trading. This move follows MSCI’s October 15 announcement that it is consulting on reclassifying Indonesia from an emerging market to a standalone market due to issues with ownership opacity and market regulation enforcement.

The potential reclassification has triggered significant market volatility, with Indonesian equities falling 14.8% over Friday and Monday before recovering 5.3% on Tuesday. The market has lost around 40% of its value this year. UBS estimates that if Indonesia is excluded from emerging-market benchmarks, it could trigger approximately $4 billion in passive investment outflows from European ETFs tracking those indices.

MSCI has invited feedback on the proposed reclassification until April 30, 2027, with a final decision expected by the end of June 2027. While dedicated Indonesia funds may not be forced to close, broad emerging-market ETFs would be required to remove Indonesian holdings if the country is excluded from their benchmarks. Analysts note that the exchange's intervention aims to stabilize sentiment, but MSCI seeks evidence of meaningful governance reform rather than just index adjustments.

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