Indonesian stocks hit six-year low as MSCI expulsion threat sparks panic selling

SINGAPORE/JAKARTA — Indonesian stocks fell more than 5% Monday to a six-year low, extending a record two-day rout as MSCI's threat to demote the market to "standalone" status triggered panic selling and sharpened pressure on Jakarta to answer the index provider's long-standing concerns.

The slide followed Friday's 11.6% plunge, leaving Indonesia's market the world's worst performer this year. MSCI, which currently classifies Indonesia as an emerging market, said it was considering shifting the country to standalone status — a move that would cut Southeast Asia's biggest economy off from international capital and place it in a category alongside Lebanon and Zimbabwe.

"The MSCI announcement was unexpected to us, causing a market panic," Indonesia Stock Exchange chief executive Jeffrey Hendrik said, according to wkzo.com, ahead of a meeting between exchange leaders and MSCI executives later Monday.

The exchange moved to slow the selling, cutting its lower auto-rejection limit to 7% from 15% to give investors "an opportunity to evaluate and digest available information, helping them make better investment decisions based on Indonesia's economic fundamentals." The measure followed a weekend meeting between the financial regulator and capital market participants, including analysts and economists.

Regulators had already acted Friday, unveiling sanctions against those linked to alleged trading manipulation in shares of three firms, with fines totalling 2.1 trillion rupiah ($116.4 million).

"The fines are a positive move, but there needs to be concerted action to stamp the authority of the OJK and take direct action against certain well-known players who have been involved in market abuse," said Angus Mackintosh, an ASEAN specialist at Aletheia Capital in Singapore.

MSCI first flagged its concerns in January, threatening a downgrade to "frontier" status over opacity in ownership and trading behaviour. On Friday it said a lack of progress meant even a drop to frontier status would not reflect the severity of the issues.

"The burden of proof has shifted: avoiding reclassification will require clear evidence that the announced reforms have been consistently implemented and materially improved market functioning," strategists at Goldman Sachs said in a note.

Jitters spread beyond equities. The rupiah weakened to 18,040 per dollar, not far from the record low of 18,190 hit in June, while the 10-year government bond yield rose to 7.4% from 7.169% on Friday, according to wkzo.com. The nosedive comes ahead of a Bank Indonesia policy decision this week; while the central bank is widely expected to hold rates, some analysts have raised the possibility of a hike to stem the bond-market selloff, wkzo.com reported.

Foreign investors have net sold $4.88 billion worth of Indonesian stocks so far this year, on track for the biggest annual outflow in at least 16 years. Goldman Sachs estimates a full MSCI removal could trigger $5.6 billion of passive outflows, while active funds benchmarked to the indexes hold more than $8 billion — although any selling there would be discretionary rather than benchmark-driven.

Investors are also fretting over ramifications beyond the $500 billion stock market. The MSCI warning is the latest in a string of setbacks for the government of President Prabowo Subianto, after Moody's and Fitch cut their sovereign rating outlooks to negative this year. Prabowo was expected to meet top financial officials in the afternoon to discuss the "current economic condition," according to wkzo.com, citing two government sources. The meeting was expected to include sovereign wealth fund Danantara and Indonesia's Financial System Stability Committee, which comprises the finance minister, the central bank governor, and the heads of the financial services and deposit insurance authorities.

S&P Global Ratings sovereign analyst Rain Lin said the MSCI warning was likely to result in additional capital outflows, but did not anticipate them to be of a magnitude that would materially increase financing costs, wkzo.com reported. "More concerning is the potential damage to investor confidence and the risk that sentiment weakens more broadly across government bond markets and foreign direct investment."

Aninda Mitra, head of Asia macro and investment strategy at BNY Investments, said foreign equity exposure to Indonesia has shrunk to the point where "there may not be much more downside from here." "But at the same time, even if there are some interesting and fundamentally sound companies and banks, attracting sufficiently large amounts of capital will be tougher in this environment," he said.

"Our bigger concern is not index-related selling itself," said Gary Tan, portfolio manager at Allspring Global Investments in Singapore, "but the potential near-term spillover into the rupiah and domestic bond yields, where market dislocation could translate into tighter financial conditions and a more meaningful impact on the real economy."