Indonesia shares pare losses after authorities pledge to address MSCI’s transparency concerns

[JAKARTA] Indonesian shares pared earlier losses on Thursday (Jan 29) to close lower after the authorities pledged to address MSCI’s transparency concerns, which had led the index compiler to freeze changes and go into heavy selling for a second consecutive day.

The benchmark Jakarta Composite Index trimmed its losses to trade down 1.06 per cent, rebounding from an earlier plunge of 8 per cent that triggered a 30-minute trading halt.

The halt occurred for a second consecutive day after MSCI said it had frozen changes to the affected stocks in its indices, following concerns from global investors over the transparency of ownership data and broader market investibility. 

It added that it has completed a consultation process related to its assessment of these stocks’ free-float levels.

Indonesia’s exchange authorities on Thursday said they would work to address MSCI’s concerns. The Financial Services Authority announced plans to raise the free float requirement to 15 per cent from the current 7.5 per cent, in a move aimed at addressing a longstanding concern among investors.

Indonesia’s current free float remains the lowest among major South-east Asia markets; peers such as Thailand and Malaysia both maintain it at 15 per cent.

The bourse said it plans to enhance market data transparency and require listed companies to improve ownership disclosures; the Indonesian stock exchange, IDX, began publishing monthly free-float data on its website on Jan 2.

Nafan Gusta, senior market analyst at Mirae Asset Sekuritas, said the authorities’ actions have reassured the market, as they signal a full response to MSCI’s concerns.

This week’s market sell-off can be traced back to months of consultations following MSCI’s proposal last year to tighten the definition of “free float”.

It had considered using data from the Indonesia Central Securities Depository to assess actual tradeable shares. However, MSCI noted in a statement that many investors had raised “significant concerns” about relying solely on this data set.

Free float has become a concern in Indonesia, where investors say many large companies are thinly traded and tightly controlled by a small group of wealthy shareholders, exacerbating volatility and increasing manipulation risks.

MSCI has said that if sufficient progress is not made by May 2026, Indonesia could be reclassified from an emerging market to a frontier one, reducing its weighting in the provider’s emerging-market indices.

MSCI’s warning prompted investors to offload Indonesian shares, including major banks and other large-cap companies.

Foreign investors sold a net 6.2 trillion rupiah (S$467.5 million) of local shares on Wednesday, based on IDX data, as the benchmark index posted its steepest single-day decline since April 2025.

Ari Jahja and Indra Cahya, analysts at Macquarie, warned that a downgrade could exacerbate capital outflows.

“If Indonesia were to be downgraded to frontier-market status under MSCI’s classification, there is a risk of intensifying foreign outflows from equities,” they said.

Separately, Goldman Sachs Group cut its rating on Indonesian stocks to “underweight”, warning that MSCI’s investibility concerns could trigger more than US$13 billion in outflows if the market were downgraded.

The Wall Street bank estimated that, in a worst-case scenario, passive funds tracking MSCI indices could sell up to US$7.8 billion in Indonesian stocks.

Additional outflows of US$5.6 billion could occur if FTSE Russell, another index provider, reassesses Indonesia’s free-float methodology and market status.

“We expect further passive selling and regard this development as an overhang that will impede market performance,” Goldman Sachs analysts, led by Timothy Moe, said in a note.

Pandu Sjahrir, chief investment officer of sovereign wealth fund Danantara, described the MSCI-driven sell-off as “a good wake-up call” for the Indonesian market. He added that such comments highlight the need to strengthen the market’s depth and resilience.

“Comments from MSCI highlight that the game needs adjustment, and that’s what we’ll focus on,” he said.