Indonesian authorities are trying to calm concerns after an $80 billion market loss

By Stefanno Sulaiman and Ankur Banerjee

JAKARTA/SINGAPORE, Jan 29 (Reuters) – Indonesian authorities scrambled on Thursday to stem a capital flight from the stock market, rolling out measures to counter the risk of a downgrade to frontier market status that prompted a sell-off of more than 8 percent in just two days.

The rollout, which wiped about $80 billion off market value, came after index provider MSCI flagged concerns about the ownership and trading transparency of Indonesian stocks, the latest setback for a market struggling to maintain investor confidence.

Foreign capital has flowed out of Indonesia amid concerns over how President Prabowo Subianto is widening the fiscal deficit and increasing state involvement in financial markets.

The appointment of his nephew, Thomas Djiwandono, to the central bank this month, following last year’s abrupt dismissal of respected Finance Minister Sri Mulyani Indrawati, has shaken confidence in his fiscal administration and pushed the rupiah to record lows.

MODEST RECOVERY AFTER REGULATORY RESPONSE

Indonesian stocks rebounded modestly late Thursday after the country’s regulators unveiled several measures, including doubling the free-float requirement for listed firms to 15 percent, as part of their response to MSCI.

The benchmark Jakarta Composite Index closed up just 1 percent after an earlier 8 percent drop – which triggered a trading halt – after Wednesday’s 7.4 percent drop.

The rupee was 0.27 percent softer at 16,745 against the dollar, just below last week’s record low of 16,985.

“The two-day sell-off looks less like a reaction to fundamentals and more like a reassessment of market access risk,” said Josua Pardede, chief economist at PermataBank.

“In the near term, the market is likely to remain headline-led until there is tangible evidence of improved transparency and a firmer policy mix to reassure investors about institutional strength and fiscal discipline.”

Speaking at a press conference, Mahendra Siregar, head of the Financial Services Authority, said communication with MSCI had been positive and he was awaiting a response to the proposed measures, which he hoped would be implemented soon, with issues resolved by March.

“We will exclude investors from the corporate and other categories from the free float calculation and then publish the holdings above and below 5% for each property category,” Mahendra said.

MSCI said in a statement late Thursday in Indonesia that it would “continue to monitor developments in the Indonesian market and engage with market participants and authorities, including Otoritas ‌Jasa Keuangan and the Indonesian Stock Exchange, and will communicate further actions as warranted.”

OJK is Indonesia’s financial regulator.

The measures appear to ease some investor concerns, although sentiment is likely to remain fragile in the short term.

“This is an ongoing process, not a single announcement,” said Mohit Mirpuri, portfolio manager at SGMC Capital in Singapore. “What investors needed to see was alignment and intent, and that was clearly delivered.”

“Policy clarity usually comes after volatility, not before it. The last two days of selling have been pretty indiscriminate, and historically, you don’t wait for everything to look perfect before you jump in.”

DOWNGRADE AFTER WARNING

Investment banks Goldman Sachs and UBS cut their recommendations on Indonesian shares on Thursday, a day after MSCI warned of a possible downgrade.

A downgrade by MSCI, one of the biggest providers of market indices – which are tracked by billions of dollars in passive investments – would force tracker funds to sell.

Active managers, whose performance is measured against benchmarks, should also probably sell.

“MSCI’s warning came at a bad time,” said Gary Tan, portfolio manager at Allspring Global Investments, pointing to a slew of negative macro stocks and a weakening rupee.

“This triggered a typical sell first, ask questions later answer from passive and benchmark investors, resulting in a sharp short-term correction,” Tan said.

Brokerage sources described MSCI’s warnings as a “slap in the face” for market authorities, adding that foreign capital inflows would dry up if MSCI flagged Indonesia as “uninvestable” or non-transparent.

Goldman Sachs warned that outflows of up to $7.8 billion were possible in the event of an MSCI downgrade, although strategists said that prospect was unlikely. UBS cut its rating to “neutral”.

A downgrade to frontier market status, which analysts so far believe is unlikely, would put Indonesia on par with Bangladesh, Pakistan, Sri Lanka and Vietnam.

Overseas investors sold 13.96 trillion rupiah ($834 million) worth of Indonesian stocks in 2025, the worst year for outflows since 2020, with sales continuing in January, LSEG data showed.

(Reporting by Rae Wee We, Gregor Stuart Hunter and Ankur Baner in Singapore, Ananda Teresia and Stefaanno Sulaiman in Jakarta, Sameer ‌Manekar ‌Manekar in Bengaru; Writing by Ankur Banerjee, Editing by Thomas Derpinghaus, Clarence Ferndez and Ros Russell)

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