Orchestrating Downstreaming and the MSCI Warning

After the ban on exports of unprocessed ore was introduced, the value of nickel and derivative-product exports surged from around US$3.3 billion in 2017 to more than US$40 billion in 2025. The Ministry of Energy and Mineral Resources has set a target of at least US$45 billion for 2026. Investment in downstreaming has also climbed: from January to September 2026, it reached Rp480 trillion, up 11.3% and accounting for 31.2% of total national investment.

The first phase of downstreaming — building capacity — has proved successful. The next challenge is much harder: building capability. To what extent has the surge in production been accompanied by mastery of technology, stronger local companies and value added that stays in the country?

In my view, the answer depends on three things working in tandem: sharp strategic choices, excellent business-process fundamentals, and regulatory certainty and market integrity that investors can trust. That is what orchestration means. The test has become more immediate since 15 October 2026, when MSCI opened a consultation on a proposal to reclassify Indonesia’s equity market from Emerging Market to Standalone Market.

Data-based optimism and the challenge of complexity

There are strong grounds for optimism. In 2025, manufacturing grew by 5.30%, exceeding national economic growth of 5.11% for the first time since 2011, according to Statistics Indonesia (BPS) and the Ministry of Industry. Manufacturing’s share of GDP rose to 19.07%.

Harvard Growth Lab’s Atlas of Economic Complexity also rates Indonesia’s economic complexity as slightly higher than expected for its income level. It therefore projects annual growth of 4.26% through 2034, ranking Indonesia 14th among 145 countries.

But optimism must be accompanied by honesty. In the same report, Indonesia ranked 69th out of 145 countries on the Economic Complexity Index (ECI), falling 11 places from 2019 to 2024 and six places over the past decade, while Vietnam rose 10 places to 45th. The report attributes this to a lack of export diversification: the commodity boom has not automatically produced more complex goods.

The measure of success therefore needs to shift from export volumes to domestic value added, because gross export figures include imported components, energy costs and capital payments.

Meanwhile, a 2025 C4ADS report, using 2023 capacity data, found that Chinese companies controlled 61% of Indonesia’s nickel refining capacity at the second level of ownership, compared with 13% for Indonesian companies. Tracing ownership through to the ultimate beneficial owners puts China’s control at more than 75%.

These findings show how attractive downstreaming is to global investors, while also underscoring the need to deepen partnerships with national companies and state-owned enterprises (SOEs), so that control over value added does not remain entirely overseas.

The DAI framework and business-process discipline

In my 2025 book Indonesia Naik Kelas, I proposed the DAI framework — Distinctive, Adaptive, Inclusive — as a strategic guide.

Distinctive means choosing areas of advantage selectively. Drawing on the concept of product space (Hidalgo et al., 2007), countries progress faster when they focus on products whose required capabilities overlap with those they already possess. Select two or three priority value chains — for example, moving from nickel into high-grade stainless steel, battery feedstocks and advanced materials — and concentrate incentives, research and financing there.

Adaptive means being prepared for a changing global market. The Indonesia–European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) will be a major test: the European Union is scheduled to remove import duties on 98.5% of Indonesian product tariff lines, some through a phased scheme, with initial implementation targeted for 2027 once ratification is complete. Market access means little if quality, environmental and technical standards are not met.

Inclusive means ensuring that benefits reach farmers, small and medium-sized enterprises (SMEs), workers and local suppliers. Vietnam offers a warning: in the first nine months of 2026, domestic companies accounted for only about 19.3% of its exports, while foreign-invested firms contributed 80.7%. Local-supplier policies should be assessed by the durability of contracts and improvements in SME productivity, not merely by administrative compliance.

Strategic choices will only have value if they are executed with discipline on the factory floor. In capital-intensive industries, margins are determined by operational performance: capacity utilisation, metal recovery rates, energy intensity and logistics waiting times.

National logistics costs still stand at 14.29% of GDP, based on 2022 data. Presidential Regulation No. 41/2026 sets targets of 12.5% by 2029 and 8% by 2045. Customs says the National Logistics Ecosystem (NLE) has reduced average costs by about 17% and service times by around 73% at locations where it operates. These are claims by the implementing agency and cover certain service processes; they require independent verification and should not be equated with a reduction in overall national logistics costs.

Meanwhile, the IMD World Competitiveness Ranking 2026 placed Indonesia 48th out of 70 countries, down eight places from the previous year, highlighting the need to accelerate implementation.

Business-process performance should therefore be audited like financial statements, using the same scorecard for industry players and policymakers: smelter utilisation, metal recovery rates, energy intensity, logistics waiting times, compliance with industry standards and the share of domestic procurement.

The MSCI warning and lessons from the Turkish stock exchange

Smelter and battery-ecosystem projects are worth billions of dollars and have payback periods of more than a decade. Investors look for one key signal: are regulations clear, consistent and enforced fairly? Uncertainty only increases the cost of capital and delays follow-on investment.

This is where the toughest test arises. On 15 October, MSCI proposed reclassifying Indonesia’s equity market directly from Emerging Market to Standalone Market, bypassing the Frontier category. The consultation runs until 30 April 2027, with a final decision due by 30 June 2027 at the latest. MSCI said it would proceed with the proposal unless there was clear evidence of material improvements in governance and market functioning.

The reasons for the move are not simply company performance, but opaque share-ownership structures, suspected coordinated trading and a lack of evidence of meaningful law enforcement. MSCI acknowledged reforms announced by the authorities — disclosure of shareholders holding more than 1%, reporting of high ownership concentration and a roadmap for a 15% minimum free float — but investors want evidence of consistent implementation.

The market reacted sharply: the Jakarta Composite Index (JCI) plunged 11.57% to 5,185 on 16 October, and the rupiah fell past Rp18,000 to the US dollar.

Estimates of foreign fund outflows vary and remain scenarios. Goldman Sachs estimated that around US$5.6 billion in passive funds could leave if Indonesia were removed entirely from MSCI indices; active funds benchmarked against the index hold more than US$8 billion, but their selling decisions are discretionary. UBS estimated around US$4 billion in passive outflows, plus up to US$15 billion in active funds, or about US$19 billion in total.

Recent experience in Turkey offers a crucial lesson. In September 2026, its capital markets regulator ordered the liquidation of 131 investment funds worth more than US$18 billion after several fund managers failed to meet redemption requests. The funds were suspected of buying up low-free-float shares, driving up prices and making returns appear high.

The response was firm: liquidation of the troubled funds, asset freezes and criminal proceedings. But the lesson does not end there. On 15 October, MSCI still froze some index changes for Turkish shares because of concerns over the reliability of free-float data. In other words, swift enforcement is necessary but not sufficient; trust will only return when ownership and free-float data are demonstrably reliable over time.

Domestically, market participants welcomed fines of around Rp2.1 trillion over alleged manipulation of shares in three companies, but said direct action against major players was still needed. The message is clear: market manipulation is a crime requiring swift, consistent and transparent enforcement, alongside verifiable data.

The close link between capital markets and the real economy

Capital markets and the real economy — particularly manufacturing — do not operate in separate worlds. They are connected as vital channels for long-term financing. When confidence in financial-market credibility is shaken, the effects could spread through the cost of capital via three mechanisms.

First, higher borrowing costs: foreign outflows can increase the country-risk premium, leading international banks to charge higher interest rates for financing new smelter projects. The scale of this effect is disputed — analysts at S&P Global Ratings estimate that additional outflows would not be large enough to materially increase financing costs — but the risk is real, as Moody’s and Fitch have revised Indonesia’s debt-rating outlooks to negative.

Second, pressure on stock-market valuations makes it much more expensive to raise funds through corporate actions such as rights issues or initial public offerings, hindering efforts to strengthen domestic equity financing.

Third, a higher cost of capital lowers the internal rate of return (IRR) on downstreaming projects, encouraging investors and SOEs to wait — a move that threatens domestic value-added targets.

Co-ordinating regulation for sustainable downstreaming

The government’s efforts to manage nickel governance — including annual mining work plans and budgets (RKAB), with the 2026 ore quota initially set at 260–270 million tonnes and later revised to around 290 million tonnes, compared with 379 million tonnes in the 2025 RKAB, and the ending of tax holidays for new nickel pig iron smelters announced in March 2024 — are intended to preserve reserves, control prices and encourage higher-value products. Businesses, including SOEs, support this direction.

For the impact to be maximised, regulatory co-ordination and financial-market reform should rest on four main principles.

First, policies should have clear timetables and pathways, announced well in advance across relevant ministries and authorities. Second, there should be a reasonable transition period and respect for existing investment commitments.

Third, there should be comprehensive data transparency, disclosure of ultimate ownership and enforcement of market integrity to eliminate manipulation. Fourth, public consultation should involve thorough dialogue before regulations are formally issued.

The same principles apply to capital-market reform. The period until 30 April 2027 should be used to announce an implementation timetable for ownership disclosure and minimum free-float requirements, and to demonstrate enforcement that is measurable and auditable by third parties.

Fiscal incentives should also be designed around performance to strengthen technological capabilities and local suppliers. Ultimately, downstreaming will move Indonesia up the value chain only when value added genuinely remains in the country — in the form of knowledge, higher productivity, quality jobs and prosperity for all — under the protection of legal certainty and trusted markets.