In the architecture of the global economy, power does not always lie\nwith states, central banks or multilateral institutions. It also\noperates through standards, methodologies and indices that influence the\ndirection of international capital flows. Ironically, a private company\nwithout a sovereign mandate can influence asset prices, access to\nfinancing and perceptions of risk towards a country.<\/p>\n
This paradox is reflected in the decision by Morgan Stanley Capital\nInternational (MSCI). On 15 October 2026, MSCI announced a consultation\non reclassifying Indonesia from Emerging Market to Standalone Market,\nwith a final decision due no later than 30 June 2027. Although it\nremains a proposal, the announcement has raised concerns about capital\nflows, market liquidity and the sustainability of national economic\nfinancing.<\/p>\n
In an earlier article, \u201cMSCI & the Paradox of Capital Market\nSovereignty: Who Oversees Global Standards?\u201d (CNBC Indonesia, 23 October\n2026), I argued that the fundamental issue is not MSCI\u2019s right to set\nindex classifications, but how the financial power inherent in such\ndecisions is held to account.<\/p>\n
If MSCI has the power to downgrade a country\u2019s market status, then,\nwho has the authority to assess and question MSCI\u2019s credibility when its\nown assessment standards are challenged?<\/p>\n
Since MSCI announced its consultation on Indonesia\u2019s reclassification\non 15 October 2026, foreign investors have recorded net share sales of\naround Rp11.98 trillion up to 27 October 2026. This figure reflects\ntransactions on the Indonesia Stock Exchange (IDX).<\/p>\n
However, foreign net sales during this period cannot simply be\nattributed in full to MSCI\u2019s announcement, let alone equated with\ncapital flight. This is where discipline in economic analysis matters:\nrealised transactions are not capital-flow forecasts, and temporal\ncorrelation does not automatically establish cause and effect.<\/p>\n
Assessments of the impact of MSCI\u2019s decision must therefore\ndistinguish between realised sales, potential outflows and the factors\nbehind investors\u2019 decisions. Without that distinction, the scale of\nfinancial risk may be exaggerated, while more fundamental questions\u2014the\nobjectivity of the methodology, independence of the assessment and\naccountability of MSCI\u2014are overlooked.<\/p>\n
When Private Standards Become Global Power<\/p>\n
The IMF, the World Bank and MSCI all produce classifications that\nshape perceptions of the global economy. But treating them as equivalent\nis a conceptual error, both in terms of methodology and institutional\nlegitimacy.<\/p>\n
The IMF classifies economies by considering development\ncharacteristics, export diversification and integration into global\nfinance. The World Bank uses gross national income per capita to group\ncountries by income level. MSCI, meanwhile, assesses the size, liquidity\nand accessibility of equity markets for international investors.<\/p>\n
The fundamental difference lies not merely in the indicators used,\nbut in the source of each institution\u2019s authority. The IMF and World\nBank are multilateral institutions with mandates from their member\nstates. MSCI, by contrast, is a commercial company whose influence comes\nfrom global investment managers\u2019 use of its indices.<\/p>\n
MSCI therefore has no mandate to determine whether Indonesia is a\ndeveloped or developing country from a macroeconomic perspective. Yet\nits classification of the equity market can affect international\ncapital-allocation decisions, with consequences for national economic\nfinancing.<\/p>\n
This is where the paradox of global financial power arises. MSCI has\nno institutional mandate comparable to that of the IMF and World Bank,\nyet its commercial decisions may have systemic consequences for a\ncountry\u2019s economy.<\/p>\n
In a market economy, private companies have the right to develop\ntheir own standards and assessment methodologies. But when those\nstandards become a dominant reference point for international capital\nallocation, commercial influence extends beyond the company\u2019s business\ninterests and directly intersects with national economic interests.<\/p>\n
The absence of a government mandate does not, in itself, make such\ncommercial power illegitimate. The fundamental question is whether\nMSCI\u2019s considerable financial influence is matched by commensurate\ntransparency, independence, methodological consistency and\naccountability.<\/p>\n
The legitimacy of a global standard cannot rest solely on compliance\nwith internal procedures. It also depends on whether the body setting it\ncan account for the basis and consequences of its assessments.<\/p>\n
MSCI Is Not the Only School of Thought<\/p>\n
MSCI is not the only index provider used by international investors\nin the global financial system. FTSE Russell, S&P Dow Jones Indices\nand other providers each have their own methodologies, products and\ninvestor bases. MSCI\u2019s assessment, therefore, cannot automatically be\ntreated as the sole objective representation of a country\u2019s\ncapital-market quality.<\/p>\n
While MSCI has proposed reclassifying Indonesia as a Standalone\nMarket, FTSE Russell has kept Indonesia in the Secondary Emerging Market\ncategory and has not placed it on a watch list, according to the IDX on\n26 October 2026.<\/p>\n
This divergence does not, in itself, prove that MSCI is wrong or that\nFTSE Russell is right. But when assessments of the same subject produce\ndifferent conclusions, the central questions become the consistency of\nthe methodologies and the quality of the evidence supporting each\ndecision.<\/p>\n
Do the differences stem from the quality and completeness of the\nevidence, differing risk tolerances, investors\u2019 experience, or different\nassessments of the effectiveness of Indonesia\u2019s capital-market\nreforms?<\/p>\n
From an economic perspective, differing assessments do not\nnecessarily mean that one model is wrong. Each model is built on\nassumptions, variables and analytical objectives that may differ. But\nthe greater the economic consequences of a decision, the greater the\nneed to explain its assumptions, methodology and evidential basis.<\/p>\n
Global standards do not have to produce uniform conclusions. But\ndifferences must be explainable through consistent methodologies,\nverifiable evidence and arguments that can be tested. Without such\naccountability, market classifications risk being perceived not as an\nobjective reflection of capital-market quality, but as the manifestation\nof each index provider\u2019s preferences and subjective judgements.<\/p>\n
What Is an MSCI Decision Worth?<\/p>\n
MSCI\u2019s influence on Indonesia\u2019s capital market is no longer just a\nmatter of perception; it is a financial risk that can be quantified. In\nits 16 October 2026 article \u201cIndonesia gets a \u2018wake-up call\u2019 as MSCI\nprepares to expel it from global indexes\u201d, Reuters cited UBS\u2019s estimate\nthat passive funds could sell US$4 billion, or Rp72.47 trillion, if\nIndonesia were removed from the Emerging Market index group (Sulaiman\n& Banerjee, 2026).<\/p>\n
In a 20 October 2026 article, \u201cIndonesia battles to stabilise market\nafter MSCI expulsion threat\u201d, Reuters cited a higher estimate from\nGoldman Sachs: US$5.6 billion, or about Rp101.45 trillion (Banerjee\n& Sulaiman, 2026). The rupiah values are calculated using Bank\nIndonesia\u2019s middle transaction rate of Rp18,116 per US dollar on 27\nOctober 2026.<\/p>\n
UBS also estimated that active investors could generate an additional\nUS$15 billion, or around Rp271.74 trillion, in potential selling\npressure. However, this estimate cannot be treated as a certain capital\noutflow.<\/p>\n
Unlike passive investors, who are bound by the composition of their\nbenchmark indices, active investors can maintain, reduce or increase\ntheir exposure according to company fundamentals, market valuations and\nIndonesia\u2019s economic outlook.<\/p>\n
This is where discipline is needed in understanding how global\nfinancial risks are transmitted. Portfolio sales resulting from an MSCI\nreclassification are not automatically equivalent to capital flight from\nIndonesia. MSCI is not the only global index provider. FTSE Russell,\nS&P Dow Jones Indices and other providers have their own\nmethodologies.<\/p>\n
When Investor Perceptions Outpace Verification<\/p>\n
MSCI has highlighted several fundamental issues in the governance of\nIndonesia\u2019s capital market, particularly share-ownership transparency,\nthe reliability of free-float calculations, alleged coordinated trading\nand the effectiveness of reforms already undertaken.<\/p>\n
These issues cannot be ignored. Capital-market integrity requires\ntransparent ownership, fair price formation and credible law\nenforcement. Without all three, investor confidence is difficult to\nbuild sustainably.<\/p>\n
The issue becomes more complex, however, when MSCI\u2019s assessment also\ntakes into account the experiences and feedback of international\ninvestors. The fundamental question is to what extent investor\nperceptions have been verified before being used to assess the quality\nof a country\u2019s capital market.<\/p>\n
Global investors are not a homogeneous group. They have different\ninvestment mandates, portfolio exposures, strategies, interests and risk\ntolerances. The views of some investors therefore cannot automatically\nbe generalised as an objective representation of the market as a\nwhole.<\/p>\n
If the input of certain investor groups carries dominant weight\nwithout adequate verification, there is a risk of confirmation bias: a\ntendency to reinforce an initial assessment by favouring supporting\ninformation while giving less consideration to contrary evidence.<\/p>\n
This risk cannot, of course, be used to conclude that MSCI is under\nthe influence or control of particular investors. But independence of\njudgement cannot be established merely by pointing to an institutional\nstructure and internal methodology.<\/p>\n
Independence must be demonstrated through the quality of information\nverification, management of conflicts of interest and consistent\napplication of evidential standards. Investor feedback should inform the\nevidence; it should not replace it.<\/p>\n
In financial markets, perceptions can influence investor behaviour\nand asset prices. Expectations of falling prices can even prompt selling\nthat, in turn, reinforces the decline. But the ability of a perception\nto produce market consequences does not, in itself, prove that the\nperception is correct.<\/p>\n
That is why objectivity in assessment is crucial. When perceptions\ncan move markets, global standards must distinguish between perceptions\nthat affect prices and evidence that determines market quality.<\/p>\n
Indonesia and T\u00fcrkiye: Testing Consistency<\/p>\n
A comparison between Indonesia and T\u00fcrkiye highlights the importance\nof transparency in MSCI\u2019s methodology. In the June 2026 MSCI Global\nMarket Accessibility Review, four of Indonesia\u2019s 18 accessibility\nindicators received negative assessments, compared with six for\nT\u00fcrkiye.<\/p>\n
Yet in October 2026, MSCI proposed moving Indonesia directly to\nStandalone Market, while T\u00fcrkiye was subject to a freeze on certain\nindex changes, with a possible reclassification review to follow.<\/p>\n
This difference does not automatically prove discrimination. The\nnumber of negative indicators is not a weighted score, and the severity\nof each issue may vary. The scope of the problems, liquidity,\ntransparency and effectiveness of reforms also need to be considered.\nBut precisely because MSCI\u2019s assessment is not entirely mechanical, the\nbasis for different decisions should be explained in more measurable\nterms.<\/p>\n
Why were Indonesia\u2019s issues considered serious enough to warrant a\nproposal for Standalone Market? What materially distinguishes it from\nT\u00fcrkiye? How extensively do ownership issues and alleged coordinated\ntrading affect the market as a whole?<\/p>\n
Consistency does not mean making the same decision for every country.\nIt means applying the same evidential standards to explain different\ndecisions. Indonesia does not need an exemption. It needs an assessment\nthat can be tested.<\/p>\n
Who Oversees the Assessor?<\/p>\n
MSCI is not a company operating without oversight. Related entities\nfall within benchmark-regulation frameworks, including oversight by the\nUK\u2019s Financial Conduct Authority (FCA) and Germany\u2019s BaFin. MSCI also\nhas internal governance, risk-control and compliance mechanisms.<\/p>\n
It is therefore incorrect to claim that MSCI is wholly unsupervised.\nHowever, formal oversight of an index provider does not automatically\nensure accountability for the systemic consequences of a\ncountry-classification decision.<\/p>\n
The issue has three dimensions. First, methodological accountability:\nconsistency in applying indicators, verifying evidence and conducting\nassessments. Second, institutional accountability, particularly the\neffective management of conflicts of interest and potential investor\ninfluence. Third, systemic accountability: the extent to which the\nconsequences of a decision for financial markets have been considered\nand explained proportionately.<\/p>\n
This is where the accountability paradox arises. MSCI has the\nauthority to downgrade a country\u2019s market classification, but the\ncontinued influence of its indices depends on investors\u2019 confidence in\ntheir credibility. If that confidence weakens, investors can turn to\nalternatives such as FTSE Russell, S&P Dow Jones Indices and other\nproviders.<\/p>\n
But switching is not straightforward. Investment mandates, licensing\ncontracts, financial products and performance-measurement systems\nintegrated with MSCI indices create costs and barriers to switching.\nThis produces an imbalance in market discipline: MSCI can influence\ncapital allocation with a single classification decision, while\ninvestors need time and money to counter its influence through\ncompetition.<\/p>\n
Therefore, if MSCI has the right to question Indonesia\u2019s eligibility\nfor Emerging Market status, investors and regulators also have the right\nto question MSCI\u2019s suitability as a leading global capital-market\nreference. Credibility is not a privilege belonging to the assessor; it\nis legitimacy that must continually be earned through independence,\nconsistency and evidence that can be scrutinised.<\/p>\n
Conclusion: The Assessor Must Also Meet Standards<\/p>\n
MSCI has the right to determine its index classifications. Indonesia\nhas an obligation to improve the integrity of its capital market. The\ntwo need not be set against each other. But when a private company\u2019s\ndecision can affect capital flows and a country\u2019s financing costs, the\nindependence of its assessment cannot simply be asserted. It must be\ndemonstrated through methodological transparency, consistent\napplication, information verification and the management of conflicts of\ninterest.<\/p>\n
The issue is not how to restrict MSCI\u2019s freedom to set indices, but\nhow to ensure that its financial power does not become an authority that\nis difficult to challenge.<\/p>\n
If Indonesia can lose its status for failing to meet MSCI\u2019s\nstandards, then MSCI must also be prepared to lose confidence when it\nfails to prove that its assessments meet standards of independence,\nconsistency and accountability.<\/p>\n
For, in the governance of global finance<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/msci-and-power-without-a-mandate-1793155878", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }