Indonesia’s benchmark stock index fell more than 5% on Monday to its lowest point in six years, as fears of a possible downgrade by MSCI fueled fears of a further exodus of foreign investors.
The Jakarta Composite Index fell to its lowest level since early October 2020, extending the steep decline in Indonesian stocks. Index provider MSCI proposed on Friday to reclassify Indonesia directly from emerging market to independent status, raising the possibility of the country being excluded from major global equity benchmarks.
MSCI is expected to make a final decision by June, and any potential reclassification will depend on whether Indonesian authorities can demonstrate meaningful improvements in market governance and transparency.
Goldman Sachs warned in a note on Sunday that complete removal from MSCI’s emerging markets index could cause passive outflows of about $5.6 billion, equivalent to 18 days of average daily trading volume of MSCI Indonesia Investable Market Index constituents.
An additional $2.7 billion could be at risk if FTSE Russell subsequently takes similar action, although the bank stressed that such action is a separate scenario.
Goldman estimates that active funds benchmarked to the MSCI and FTSE indexes hold more than $8 billion in Indonesian stocks, but selling by these investors will be discretionary rather than automatically triggered by a downgrade.
The bank maintained its underweight rating on Indonesian stocks, citing persistent index uncertainty, weak corporate earnings and macroeconomic headwinds.
“Valuations have declined significantly but are still above historic lows. Index, earnings, and macro risks constrain reratings,” Goldman strategists led by Alvin So wrote in a note.
The MSCI Indonesia index was down 47% year-to-date as of Friday, with foreign investors withdrawing a net $5.1 billion from Indonesian stocks during the period, according to data provided by the bank.
According to the bank, foreign ownership of Indonesian stocks fell to 25% in October from 27% in January, and the amount held by foreigners almost halved from $250 billion to about $130 billion.
Goldman warned that despite the sharp decline, Indonesian stocks may not have hit bottom yet. The MSCI Indonesia index’s 12-month forward price-to-earnings ratio (P/E) has fallen to 7.3 times, the lowest level since the global financial crisis, but still above its historic low.
Strategists also expect Bank Indonesia to raise interest rates two more times by 25 basis points each in the fourth quarter of 2026 and the first quarter of 2027, potentially putting further pressure on economic growth and stock valuations.
