TL;DR
MSCI’s quarterly review resulted in the removal of six Indonesian stocks from its global indices, causing a nearly 2% decline in the Jakarta Composite Index and a record low for the rupiah. Experts warn of significant capital outflows amid ongoing currency weakness.
Indonesian stocks declined sharply on Wednesday after MSCI removed six local companies from its global indices, and the rupiah hit an all-time low of 17,535 against the dollar. The move is expected to trigger significant capital outflows and impact the country’s market stability, making it a key development for investors and policymakers.
The Jakarta Composite Index closed 1.98% lower at 6,723.32, with 428 stocks weakening. The MSCI index provider announced the removal of six Indonesian stocks from its Global Standard Index and 13 from the Small Cap Index, including major firms such as Amman Mineral Internasional and Sumber Alfaria Trijaya. Despite these changes, MSCI maintained Indonesia’s status as an emerging market, but the country’s weight within the MSCI Emerging Asia index will decline from 0.9% to 0.8%, according to Harry Su, managing director of research at Samuel Sekuritas Indonesia.
Su estimates that this adjustment could lead to US$1-1.7 billion in capital outflows from foreign funds tracking the index. The weakening of the rupiah beyond 17,500 against the dollar has further amplified investor concerns, potentially accelerating exit flows. A research report by Mirae Asset Sekuritas Indonesia estimates total outflows could reach US$2.8 billion when considering the impact on other index constituents.
Why It Matters
This development is significant because it signals a reassessment of Indonesia’s market quality and prospects by a major international index provider. The potential for large capital outflows could affect the country’s currency stability, foreign investment levels, and overall market confidence, especially amid ongoing geopolitical and economic uncertainties.
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Background
MSCI’s quarterly index reviews are closely watched by global investors, as inclusion or exclusion from its indices can influence foreign investment flows. Indonesia’s market has experienced volatility recently due to currency depreciation, geopolitical tensions, and fluctuating commodity prices. The last significant MSCI review resulted in adjustments to Indonesia’s index weightings, but the recent removal of six stocks marks a notable shift in investor sentiment.
Previously, Indonesia’s inclusion in MSCI’s indices helped attract foreign capital, but recent market conditions and the review’s outcomes suggest a reassessment of its market risk profile. The rupiah has depreciated sharply over the past month, adding to the pressure on the local stock market.
“Even though the major exclusions hit energy and materials tickers, the country weight of Indonesia within MSCI Emerging Asia index would decline to 0.8% from 0.9%, which is calculated to cause US$1-1.7bn capital outflows from foreign funds who track the index.”
— Harry Su, Samuel Sekuritas Indonesia
“The market reaction was still considered reasonable. Not a single stock experienced a lower auto-rejection. Transaction frequency, volume and value are also still normal.”
— Hasan Fawzi, OJK
“This is a short-term consequence of the reforms we have implemented. The market has been in a state of very high uncertainty, with numerous sources including geopolitical turmoil and fluctuations in commodity and currency prices.”
— Jeffrey Hendrik, Indonesia Stock Exchange
Investment Guide 2014 to Indonesia stock market
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What Remains Unclear
It remains unclear how long the market will take to stabilize after the MSCI rebalancing and whether the currency will recover from its record low. The full extent of capital outflows and their impact on Indonesia’s economy is still developing, with ongoing geopolitical and economic factors influencing the situation.
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What’s Next
Investors will monitor upcoming MSCI reviews and market data for signs of stabilization. Policymakers and regulators are likely to assess measures to support the rupiah and market confidence. The next MSCI quarterly review scheduled for September 2024 will be closely watched for further adjustments.
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Key Questions
Why did MSCI remove Indonesian stocks from its indices?
MSCI’s quarterly review resulted in the removal of six Indonesian stocks from its Global Standard and Small Cap Indices, citing factors such as market liquidity, size, and overall market quality.
How will this affect foreign investment in Indonesia?
The removal is estimated to cause US$1-1.7 billion in capital outflows, potentially more if other index weights are affected, which could reduce foreign investment and exert downward pressure on the rupiah.
What is the significance of the rupiah hitting a record low?
The rupiah’s decline signals increased currency risk and can lead to higher import costs and inflation, affecting both consumers and businesses in Indonesia.
Are these developments temporary or likely to persist?
Market analysts suggest these are short-term reactions to index rebalancing and external uncertainties, but ongoing geopolitical and economic factors could prolong volatility.
