MSCI Becomes a Spectre for Indonesia: 3 Extreme Scenarios Causing IHSG to Collapse in May

Jakarta, CNBC Indonesia - Indonesia’s capital market dynamics are confronted with structural challenges ahead of the upcoming MSCI global index review period (Semi-Annual Index Review) in May.

Market participants’ focus is on the probability of foreign portfolio weight adjustments, following the Indonesia Stock Exchange (BEI)’s release of a list of stocks with high shareholding concentration (High Shareholding Concentration/HSC).

The exchange’s data transparency confirms that the real public ownership in PT Barito Renewables Energy Tbk (BREN) and PT Dian Swastatika Sentosa Tbk (DSSA) is below the institutional liquidity threshold.

This demands adjustments to quantitative valuation models to measure the risk of capital outflows (outflow) on the Composite Stock Price Index (IHSG).

The following analysis dissects three comprehensive mathematical scenarios calibrated with the latest empirical market structure data, based on proxies for total passive MSCI Emerging Market funds under management.

Empirical Calibration and Basic Model Assumptions

Based on the latest MSCI factsheet, the MSCI Indonesia market capitalisation is recorded at USD 38.7 billion (equivalent to Rp659.4 trillion at an exchange rate of Rp17,037/USD). This index operates with very high concentration, consisting of only 17 constituents, with the financial sector dominating at 54.14% weight.

On the other hand, empirical data from the BEI index calculation engine proves that the factual weights of BREN and DSSA on the IHSG in aggregate are as follows:

• DSSA: A 9.34% price decline disrupts the index by -23.20 points. (Every 1% decline in DSSA burdens the IHSG by 2.48 points).

• BREN: A 9.17% price decline disrupts the index by -16.23 points. (Every 1% decline in BREN burdens the IHSG by 1.77 points).

Based on the initial IHSG base at 7,000, the factual weights of these two issuers in aggregate reach 5.91% (DSSA 3.45% and BREN 2.46%).

Other constant parameters used include:

• Initial Reference Index (IHSG0) = 7,000

• IHSG Free-Float Market Capitalisation (MC) = Rp3,117 trillion

• Total MSCI EM Passive Funds AUM (AUMtotal) = US$1.4 trillion

• Market Elasticity Constant (M) = 4.5 (based on the Inelastic Market Hypothesis).

• Aggregate MSCI Weight within IHSG = 21.15% (Rp659.4 trillion/Rp3,117 trillion).

• Factual Weight of BREN & DSSA in IHSG = 5.91% (Calibrated from real lagged data: DSSA 3.45% and BREN 2.46%).

• Remaining Constituent Recipient Bucket Weight = 15.24% (21.15% minus 5.91%).

Scenario 1: Specific Deletion (Targeted Deletion)

This base scenario assumes MSCI deems the BEI’s transparency measures sufficient. MSCI executes a specific sanction by shortening BREN and DSSA without punishing the overall market.

Based on Indonesia’s base weight in MSCI EM at 1.5%, the total allocation of funds for domestic issuers is around US$21 billion. Within that basket, BREN has an estimated weight of 2.90% and DSSA 4.23%. The forced sell outflow (forced sell outflow/Q) for Scenario 1 is calculated as follows:

QBREN = 2.90% x US$21 billion x Rp17,037 = Rp10.37 trillion

QDSSA = 4.23% x US$21 billion x Rp17,037 = Rp15.13 trillion

Qtotal = Rp25.5 trillion

The absence of standby buyers in the negotiated market will force extreme price depreciation on the regular board to absorb Rp25.5 trillion in liquidity.

If it is assumed that the prices of both stocks correct to find equilibrium at -50%, the empirical impact on the IHSG (Index Drag) is calculated based on the latest factual weights (5.91%):

Drag = 5.91% x (-50%) = -2.955%

The Qtotal volume of Rp25.5 trillion does not leave the exchange but is reallocated centrally to the remaining 15 stocks in the Recipient Bucket (15.24%), dominated by major banks. The intensive buying pressure from this liquidity injection on the total IHSG free float generates an appreciation point boost of:

Boost = Rp25.5 trillion / Rp3,117 trillion = +0.818%

Thus, the net impact on the IHSG is as follows:

ΔIHSG% = (-2.955%) + (+0.818%) = -2.137%

IHSG Target = 7,000 x (1 - 0.02137) = 6,850

Although BREN and DSSA experience price disruptions, the reallocation of liquidity to 15 other large-cap stocks provides a measurable buffer. The IHSG is projected to correct towards the equilibrium area at 6,850, avoiding a deeper fall thanks to capital flow rotation.

Scenario 2: Accessibility Penalty (Aggregate Weight Cut)

The second scenario maps a situation where MSCI deems Indonesia’s market structure problematic in aggregate and cuts the Foreign Inclusion Factor (FIF) for Indonesia from 1.50% to 1.00% (a 0.50% reduction). This scenario triggers pure foreign capital flight (pure capital outflow).

The liquidity withdrawal calculation is based on the percentage cut relative to total global AUM:

Q = 0.50% x US$1.4 trillion x Rp17,037 = Rp119.26 trillion

Since this pressure affects all large-cap stocks without any domestic rotation effect, the model uses the full Macro Market Elasticity Theory as follows:

ΔIHSG% = -M x (Q/MC)

ΔIHSG% = -4.5 x (119.26 / 3.117) = -17.21%

IHSG Target = 7,000 x (1 - 0.1721) = 5,795

The loss of liquidity worth Rp119.26 trillion will strike the index backbone directly. The IHSG is projected to correct sharply to the 5,795 level.

Scenario 3: Tail Risk / Total Liquidation (Stress Test)

This extreme condition models the suspension of the entire Indonesia portfolio, meaning a downgrade to Frontier Market status. The entire 1.50% weight is forcibly liquidated from Emerging Market passive fund portfolios.

The calculation if totally liquidated without any inflow from the Index Frontier Market is as follows:

Qtotal = 1.50% x US$1.4 trillion x Rp17,037 = Rp357.7 trillion

ΔIHSG% = -4.5 x (357.7 / 3.117) = -51.60%

IHSG Target = 7,000 x (1 - 0.5160) = 3,388

As a quantitative stress test instrument, this scenario maps the risk of systemic collapse on the exchange if the connection is severed.