Indonesian stocks fell sharply to their lowest point in six years, driven by fears surrounding a potential downgrade by MSCI. The Jakarta Composite Index dropped more than 5% on Monday, extending a sell-off that has affected Indonesian equities since MSCI proposed on Friday to reclassify the country from an emerging market to standalone status. This shift could see Indonesia removed from major global equity benchmarks, pending a final decision expected by June 2027. The decision hinges on whether Indonesian authorities can improve market governance and transparency sufficiently.

Goldman Sachs highlighted that a full MSCI removal could lead to around $5.6 billion in passive fund withdrawals, equivalent to roughly 18 days of average trading volume for MSCI Indonesia Index constituents. Furthermore, an additional $2.7 billion could be at risk if FTSE Russell follows suit with a similar downgrade. The bank noted that active funds with exposure to Indonesian stocks, holding over $8 billion combined, would have more discretion in their response compared to the passive funds.

The MSCI Indonesia Index has experienced a 47% drop this year with foreign investors pulling out $5.1 billion in net terms. Foreign ownership of the market has declined from 27% in January to 25% by October, and the value of foreign holdings has nearly halved to about $130 billion from $250 billion. Despite the price falls, Goldman Sachs cautioned that Indonesian stocks may not have fully bottomed out, as valuations, while significantly compressed, still remain above historical lows.

Macroeconomic challenges also weigh on sentiment, with Goldman expecting Indonesia’s central bank to implement two more 25 basis point rate hikes before early 2027, potentially further slowing economic growth and placing additional pressure on equity valuations. Persistent uncertainty around index inclusion and ongoing weak corporate earnings contribute to the bank maintaining its underweight stance on Indonesian equities.