MSCI unnecessarily throws Indonesia into a panic

MSCI

16/10/2026 09:31

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.
By Hudson Lockett
HONG KONG, Oct 16 (Reuters Breakingviews) - Indonesia was already struggling to see through the toxic bushfire haze choking much of the country this week when it was blindsided by MSCI. In a terse announcement released on Friday in Asia, the index provider proposed ejecting the $570 billion equity market from its global benchmarks next year. Yet the move may end up chiefly throwing the spotlight on a lack of transparency and accountability among powerful index providers.
That's counterproductive because MSCI’s frustration over Indonesia's lack of progress with its market reforms is entirely justified. Earlier this year the New York-based firm froze Indonesia’s weightings and threatened to downgrade it from Emerging to Frontier Market status due to opaque trading and ownership practices. So Friday's announcement that it had kicked off consultation over whether to reclassify Indonesia as a “standalone” market was an unnecessary shock.
Not because MSCI's assessment is necessarily wrong. The company, run by Henry Fernandez for the past three decades, made clear the move came after feedback from market participants suggested even frontier status “would not properly recognize the depth of the market problems”. MSCI will go ahead with the expulsion unless its consultation over the next nine months “identifies clear evidence of material improvements in market governance and functioning to warrant reconsideration”.
But it appears to have kept Indonesian institutions completely in the dark, a practice which ought to be verboten. It would be the first time, note analysts at Citi, that a country's stock market would be expelled primarily for perceived market integrity failures. This makes it all the more astounding that senior economic minister Airlangga Hartarto said MSCI had not mentioned any potential downgrade to standalone status during a meeting this week. Bourse head Jeffrey Hendrik also said he would seek further clarification on the basis for the announcement.
The threat, which came a month ahead of a scheduled review, sent the Jakarta Composite Index .JKSE tumbling about 11%. That's the sharpest one-day fall since the 1998 Asian financial crisis and brought losses this year to about 40%. It could get worse: if Indonesia ends up joining the uninvestable likes of Argentina and Pakistan, passive investors tracking the MSCI Emerging Markets Index .dMIEF00000PUS, followed by funds worth some $1.4 trillion, would have to fully exit Indonesian stocks.
Friday’s panicked selloff illustrates how badly flagged moves not only wrong-foot officials and exchanges whose cooperation is vital to reform; they can set off market shockwaves that reverberate far beyond the passive investors central to benchmark firms’ business.
The move itself raises uncomfortable questions about how much power has been concentrated in the hands of index committee members at MSCI and peers like S&P Global and FTSE Russell. If Friday's move was meant to light a fire under Jakarta, perhaps it succeeded. Who exactly ends up getting unnecessarily burned as a result may be more of an open question than index firms expect.
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CONTEXT NEWS
MSCI announced on October 16 that it had proposed reclassifying Indonesia to “standalone” market status, with a final decision to be reached by the end of June 2027 after a consultation period. The downgrade would fully remove the Asian stock market from the index provider’s global equity benchmarks.
The announcement, which comes a month ahead of a scheduled review, escalates a previous warning that Indonesia could be moved from Emerging to Frontier Market status if it did not make sufficient progress addressing concerns over market dysfunction and enforcement. Funds worth about $1.4 trillion follow MSCI’s Emerging Markets Index, according to the company.
The Jakarta Composite Index fell about 11% following the announcement, taking year-to-date losses for the country's equity market to more than 40%.

(Editing by Antony Currie; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))