Translated with AI assistance
Indonesia is accelerating its stock market reform after international index provider MSCI launched consultations on the possible reclassification of the country from the Emerging Markets category to the Standalone Market category, which would effectively exclude the country from the main global emerging and frontier market indices. No final decision has been made yet: the consultations will continue until April 30, 2027, and MSCI’s decision is expected to be announced no later than June 30.
The reason was neither Indonesia’s macroeconomic indicators nor the financial condition of public companies, but rather the structure of the market itself. MSCI points to a lack of transparency in share ownership structures, suspicions of coordinated trading, and insufficiently convincing enforcement. According to the provider, these issues prevent investors from accurately determining the true free float – the proportion of shares available for free trading – and from trusting market pricing.
Indonesian Economy Minister Airlangga Hartarto emphasized in a statement on October 23 that MSCI’s concerns relate specifically to market quality, not to the economy’s fundamental indicators. «The main issue is not related to economic indicators or the fundamentals of the companies themselves, but to trade management in the market, particularly regarding the free float,» he stated.
The government, the OJK financial regulator, and the Indonesia Stock Exchange have already prepared a package of reforms. The key measure is the gradual increase of the minimum free float share to 15%.
In addition, the authorities are strengthening ownership structure disclosure: companies must publish data on shareholders holding more than 1%, and the classification of investor types is being expanded from nine to 39 categories. Special reporting is also being introduced for companies with a high concentration of shares among a small number of owners – High Shareholding Concentration.
The OJK states that the reforms should enhance liquidity, transparency, and the quality of corporate governance. The regulator also promises to strengthen oversight and enforcement — it is precisely the lack of noticeable results in this area that MSCI cites as one of the reasons for a possible review of the country’s status.
However, Jakarta has little time. MSCI explicitly warned that it expects to proceed with reclassification if it does not see «clear evidence of material improvement» in market governance and functioning during the consultations.
The investors’ reaction showed the scale of the risk. Following the MSCI announcement, the Jakarta Composite index plunged by 11.6% in a single day – the steepest drop since 1998 (the time of the Asian financial crisis).
If Indonesia is granted standalone status, the consequences could be far more severe than a typical downgrade to Frontier Market. Indonesian securities would have to be sold by emerging market index-tracking funds, but no offsetting demand from frontier market funds would emerge. Banks estimate potential passive outflows at approximately $3–6 billion, while UBS suggests that active funds could sell an additional up to $15 billion.
Indonesia has been classified as an MSCI Emerging Market since 1989. A potential reclassification could increase the cost of external financing for local companies, including state-owned enterprises, and put additional pressure on the currency. Analysts surveyed by Reuters note that in such a scenario, some investments by state-owned companies could be postponed or require greater budget support.
Among the foreign investors in the Indonesian market are the world’s largest asset managers — BlackRock, Vanguard, JPMorgan Asset Management, abrdn, Invesco, and Fidelity — as well as pension funds and Asian institutional investors. In October alone, BlackRock’s specialized iShares MSCI Indonesia ETF managed approximately $350 million in assets. Therefore, a potential exclusion of Indonesia from the MSCI indices does not represent an abstract reputational risk: index funds that are required to follow the structure of their benchmarks could indeed be forced to sell Indonesian securities.
For other BRICS countries, the Indonesian case is an illustrative example of the influence of global index infrastructure: concerns about the quality of a financial market can trigger a multi-billion-dollar capital outflow even without any deterioration in macroeconomic indicators.
