Investors see outflow and FX risks as MSCI moves to downgrade Indonesia

Oct 16 (Reuters) - Indonesia's stock market is no longer worthy of "emerging market" status, MSCI said, and the index provider proposed to cut it from a suite of products tracked by global investors.

The move is a major setback likely to send money fleeing. Here is what market participants are saying:

ANGUS MACKINTOSH, ASEAN SPECIALIST, ALETHIA CAPITAL, SINGAPORE:

"The move seems heavy-handed given the moves that Indonesia has made to address issues around market visibility and free float. The problem for Indonesia is a lack of evidence of implementation and a failure to sanction those obviously involved in stock manipulation. The only way for Indonesia to remedy this situation would be to impose severe sanctions and fines on those involved in concerted share manipulation.

"This move does not reflect the health of the vast majority of listed companies or indeed the Indonesian economy, and grouping Indonesia with Lebanon, Palestine, and Argentina does not make sense."

RADHIKA RAO, SENIOR ECONOMIST, DBS BANK, SINGAPORE:

"This potential development could prove more unfavourable than a tier reclassification, as passive investors bound by mandate may also reduce exposure. Any ensuing risk-off move in the currency would likely prompt greater central bank vigilance and intervention."

GARY TAN, PORTFOLIO MANAGER, ALLSPRING GLOBAL INVESTMENTS, SINGAPORE:

"The consultation is a surprise given the steps Indonesia has already taken to improve market accessibility, including removing the minimum share price limit. The prospect of standalone status could encourage index-linked investors to further de-risk, but for Indonesia in our view the bigger concern is less the direct impact on equities and more the potential pressure on the currency from foreign outflows."

IRMAN FAIZ, ECONOMIST, BANK DANAMON INDONESIA:

"MSCI's unusually strong assessment increases the incentive for institutional investors to reduce exposure ahead of the final decision, potentially extending equity volatility and weakening foreign risk appetite.

"The larger risk is structural from a reduced institutional participation, thinner liquidity, to higher equity financing costs. Large-cap banks are particularly exposed, while spillovers into sovereign bonds would depend on broader investor risk appetite rather than automatic index-related selling."

JAYDEN VANTARAKIS, HEAD OF ASEAN EQUITY RESEARCH, MACQUARIE CAPITAL, SINGAPORE:

"The working assumption for most equity investors we’d spoken with recently had been that steps taken on free-floats and shareholder concentration disclosure would be sufficient to avert a downgrade."

"The extension of the review from November 2026 to June 2027 also prolongs the period of uncertainty for investors."