MSCI Highlights Transparency Concerns Over Indonesia

MSCI on Thursday raised further concerns about Indonesia’s investability, citing limited visibility in share ownership and coordinated trading behaviour, in a fresh blow to the world’s worst-performing major stock market. The warning comes ahead of MSCI’s decision next week on whether to downgrade Indonesia’s market classification from emerging to frontier status, a move that could trigger fund outflows of up to $13 billion. Indonesia’s capital market has slumped since MSCI in January flagged transparency issues and warned of a potential downgrade to frontier status. In a market accessibility review released on Thursday, MSCI downgraded Indonesia’s information flow criterion to negative, reflecting opacity in ownership data and market activity that undermines proper price formation and limits global investors’ ability to assess companies’ true free float. Mohit Mirpuri, senior fund manager at SGMC Capital in Singapore, said the review was more balanced than the headline concerns suggested, noting only one accessibility measure worsened while Indonesia continued to score well against countries including South Korea, China, and India on several key criteria. “The market may be trying to read between the lines, but the key point is that this is not a broad deterioration in Indonesia’s accessibility framework,” he said. “Our base case remains that Indonesia retains its Emerging Market status.” The Indonesia Stock Exchange and the financial services regulator did not immediately respond to requests for comment from Reuters. The January warning triggered a flurry of reform steps from authorities, including doubling the minimum free float for listed companies to 15% as top exchange and regulatory executives resigned in one afternoon in January. In April, MSCI extended its review of the Indonesian market and in May deleted six companies, mostly linked to tycoons, from its indices, causing another sharp drop in stocks. A downgrade by MSCI, one of the largest index providers tracked by billions of dollars in passive investments, would force tracker funds to sell and pressure active managers benchmarked to MSCI indices to reduce exposure. MSCI’s scrutiny has exposed deeper anxieties about Indonesia under President Prabowo Subianto as his populist measures and concerns over fiscal health have driven the rupiah to an all-time low, prompting the central bank to raise interest rates in recent weeks to support the currency. MSCI noted that Indonesia lacks an efficient offshore currency market while there are constraints in the domestic market.