Published by Global Banking & Finance Review®
Posted on January 29, 2026
4 min readLast updated: March 1, 2026
Add as preferred source on GoogleIndonesian stocks face a significant decline as fears of a market downgrade lead to panic selling, impacting investor confidence and economic stability.
By Stefanno Sulaiman and Ankur Banerjee
JAKARTA/SINGAPORE, Jan 29 (Reuters) - Indonesian authorities scrambled on Thursday to arrest a flight of capital from its stock market with measures to counter the risk of a downgrade to frontier market status that prompted a selloff of more than 8% in just two days.
The rout, which knocked off about $80 billion in overall market value, came after index provider MSCI flagged concerns about ownership and trading transparency in Indonesian stocks, the latest setback for a market that is struggling to maintain investor confidence.
Foreign capital has flowed out of Indonesia because of concerns about how President Prabowo Subianto is widening the fiscal deficit and ramping up the state's involvement in financial markets.
The appointment of his nephew, Thomas Djiwandono, to the central bank this month, after last year's abrupt sacking of respected Finance Minister Sri Mulyani Indrawati, has shaken confidence in his fiscal stewardship and pushed the rupiah to record lows.
MODEST RECOVERY AFTER REGULATORY RESPONSE
Indonesian stocks staged a modest recovery late on Thursday after the country's regulators unveiled several measures, including doubling the free-float requirement for listed firms to 15%, as part of their response to MSCI.
The benchmark Jakarta Composite Index cut losses to close down just 1% from an earlier slide of 8% - which triggered a trading halt - following Wednesday's 7.4% tumble.
The rupiah was 0.27% softer at 16,745 against the dollar, just below last week's record low of 16,985.
"The two-day sell-off looks less like a reaction to fundamentals and more like a repricing of market access risk," said Josua Pardede, chief economist at PermataBank.
"In the near-term market will likely remain headline-driven until there is tangible evidence of transparency improvements and a firmer policy mix that reassures investors on institutional strength and fiscal discipline."
Speaking at a press conference, Mahendra Siregar, head of the Financial Services Authority, said communication with MSCI had been positive and it was awaiting a response to its proposed measures, which he hoped could be implemented soon with the issues resolved by March.
"We will exclude investors in the corporate and other categories from the free float calculation and then publish shareholdings above and below 5% for each ownership category," Mahendra said.
The measures appeared to ease some of the investor concerns, although sentiment is likely to remain fragile in the near-term.
"This is an ongoing process, not a single announcement," said Mohit Mirpuri, a portfolio manager at SGMC Capital in Singapore. "What investors needed to see was alignment and intent, and that was clearly delivered."
"Policy clarity usually comes after volatility, not before it. The last two days of selling have been fairly indiscriminate and historically you don’t wait for everything to look perfect before stepping in."
DOWNGRADES AFTER WARNING
Investment banks Goldman Sachs and UBS lowered their recommendations for Indonesian stocks on Thursday, a day after MSCI warned about a possible downgrade.
Such a downgrade by MSCI, one of the biggest providers of market indexes - which are tracked by billions of dollars in passive investments - would force tracking funds to sell.
Active managers, whose performance is rated against the benchmarks, would also probably need to sell.
"The MSCI warning came at an inopportune time," said Gary Tan, Singapore-based portfolio manager at Allspring Global Investments, pointing to a series of negative macro headlines and a weakening rupiah.
"This triggered a typical sell first, ask questions later response from passive and benchmark-driven investors, resulting in a sharp near-term correction," Tan said.
Brokerage sources described MSCI's warnings as a "slap in the face" for market authorities, adding that inflows of foreign capital would dry up if MSCI flagged Indonesia as "uninvestable" or non-transparent.
Goldman Sachs warned that outflows of as much as $7.8 billion were possible in the event of an MSCI downgrade, though the strategists said that prospect was unlikely. UBS lowered its rating to "neutral."
A downgrade to frontier market status, which analysts so far believe is unlikely, would bring Indonesia on par with Bangladesh, Pakistan, Sri Lanka and Vietnam.
Overseas investors sold 13.96 trillion rupiah ($834 million) worth of Indonesian shares in 2025, the worst year for outflows since 2020, with the selloff continuing in January, LSEG data showed.
(Reporting by Rae Wee, Gregor Stuart Hunter and Ankur Banerjee in Singapore, Ananda Teresia and Stefanno Sulaiman in Jakarta, Sameer Manekar in Bengaluru; Writing by Ankur Banerjee, Editing by Thomas Derpinghaus, Clarence Fernandez and Ros Russell)
A downgrade refers to a reduction in the credit rating of a country or financial instrument, indicating increased risk and potentially leading to higher borrowing costs.
The Jakarta Composite Index is a stock market index that tracks the performance of all publicly listed companies on the Indonesia Stock Exchange.
Foreign investments are investments made by individuals or entities in assets or businesses located outside their home country, often to diversify portfolios or access new markets.
Market transparency refers to the ease with which information about market conditions, prices, and trading activity is available to all participants, promoting fair competition.
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