Politics
Indonesian stocks benefit from MSCI reprieve, but time is running out for market reforms
Indonesia clung to emerging market status after MSCI pushed back its review to November, postponing rather than eliminating the threat of a downgrade, with time running out for regulators to demonstrate progress on reforms or risk billions in capital outflows.
Indonesia’s benchmark index swung between gains and losses and was last down 1.5% as investors weighed the outlook. Indonesian assets have been under strain since January, when MSCI froze the country’s stocks in its indexes and raised the prospect of a downgrade to frontier status, leading to a wave of reforms, including moves to raise free-float levels.
The index is down about 30% since the start of the year, making it the world’s worst-performing major stock market, while foreign investors net sold about $3.9 billion worth of shares. The reprieve gives Jakarta some breathing space, but with fiscal concerns driving the rupiah to record highs and relentless foreign capital outflows, the window of opportunity remains narrow for a market that has gone from frontrunner to deadweight.
Tan Altundag, investment manager for emerging equities at Pictet Asset Management, said remaining in the investment universe for a broader investor audience is meaningful, but “it does not automatically restore confidence or reverse capital outflows.” “This is not a clear speech on recovery, and the bar for re-engagement remains high,” said Altundag, who is underweight Indonesia.
A STEP IN THE RIGHT DIRECTION The index provider on Tuesday called the steps taken in Jakarta “a step in the right direction” but warned it would consider options such as a consultation on downgrading to border status if sufficient progress was not evident at its November review.
Gary Tan, portfolio manager at Allspring Global Investments, said the result was in line with market expectations, with the tone of MSCI’s statement more cautious than outright negative. “What stands out is the clear movement towards implementation and measurable results, signaling that the announced reforms alone are not enough,” Tan said. “Extending the review until November keeps pressure on regulators and effectively pushes the decision until later.”
Indonesia’s financial regulator said on Wednesday that MSCI’s announcement would serve as momentum to strengthen and accelerate capital market reform programs launched since January. MSCI in April extended its review of Indonesian markets until June and, in May, removed several companies – most of which were linked to tycoons – from its indexes.
A rating downgrade would be devastating for Indonesia and could trigger up to $13 billion in capital outflows from Indonesian stocks, Goldman Sachs estimated, at a time when the combined market value of Indonesian stocks has already shrunk to $601 billion from more than $900 billion in January. Investor concern has grown over President Prabowo Subianto’s spending program, which has supported initiatives such as free meals for millions but also helped send the rupee tumbling to record lows, leaving the broader investment backdrop fragile.
Ratings firms Moody’s and Fitch lowered their “Indonesia debt rating outlook” to negative earlier this year, citing reduced policy credibility.
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)
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