When it's murky, there's trouble: why is Indonesia in the cellar?

After MSCI, S&P Dow Jones is now placing Indonesia under review. The IDX Composite is down over 31% since January, the worst performance amongst major markets. Jakarta is paying for its gray areas, from tiny free floats and poorly identified shareholders to the risk of being downgraded in the world's major indices.

Another blow for Jakarta today. S&P Dow Jones Indices has placed Indonesia under review for a possible downgrade from emerging market to frontier market, citing transparency issues, according to Reuters. The IDX Composite fell 1.5%, snapping a five-session rally, and the rupiah moved back above 18,000 to the dollar. The currency is down 7.4% since January 1, the biggest drop in Asia, according to Reuters. The index, meanwhile, is down 31.5% over the same period.

Even so, despite the ongoing correction in tech stocks, South Korea's Kospi is still up over 80% since January 1, with Taiwan up nearly 61%, lifted by semiconductors and AI infrastructure.

The market's makeup explains part of the gap. The Jakarta exchange has no AI champion to offer. No Samsung, no SK Hynix, no local TSMC. This is a market of banks, energy and commodities. But sitting out a rally does not translate into a 30% loss. A slide like this normally has a visible cause: recession, a credit crunch, or a sector shock. Nothing of the sort here, GDP even grew 5.61% in Q1 y/y, its best pace since late 2022, according to the national statistics agency. The cause lies elsewhere.

 

Source: MarketS

Source: MarketScreener

It starts with a warning

It comes down to a warning published by MSCI in January. The index provider is concerned about the opacity of shareholding structures at Indonesian listed companies and suspicions of related-party trading. Local brokers have a name for the practice, "goreng-goreng saham", literally: frying shares. Stocks that rise in close hands, with no obvious link to fundamentals. And MSCI raises the stakes: if nothing changes, Indonesia could be cut from "emerging market" to "frontier market", a category that includes Bangladesh, Pakistan and Vietnam. Foreign investors have sold nearly $3.9bn of shares since January 1, according to the New Straits Times, and the market's capitalization has fallen from more than $900bn in January to about $600bn at the end of June.

A giant with a phantom float

What MSCI fears, the market saw full-scale in the spring, with the collapse of Chandra Asri. At the end of 2024, the petrochemicals group owned by billionaire Prajogo Pangestu was worth about 649,000 bn IDR, roughly $40bn, according to MarketScreener data, one of the very largest market caps, after joining major MSCI indices a few months earlier. But the base is narrow. Five identified blocks lock up nearly 90% of the capital, according to the company's disclosures. Barely 11% of the shares are in public hands.

It is the reform that triggers the reversal. In early 2026, Jakarta requires shareholders to declare themselves starting at 1% of the capital. The new data expose the concentration, and the hammer falls in mid-May. MSCI removes Chandra Asri and five other stocks from its Global Standard index. Passive funds that track the relevant indices have to sell, with too few buyers on the other side to absorb the shock. The stock goes into free fall, two years after joining the index. The company is now worth just $9bn. Four times less than at the end of 2024.

Banks on the front line

What happened to Chandra Asri, Indonesia fears for its entire market. If MSCI confirms the downgrade in November, passive funds tracking MSCI emerging market indices will have to exit their Indonesian positions, not by choice, but because their replication rules require it. Goldman Sachs estimates those potential outflows at up to $13bn. And banks would mechanically be on the front line. Financials are the top sector in the IDX Composite, at 32.5% of the index, well ahead of basic materials and energy. They are already taking the hit. Bank Central Asia is down 29.4%. Bank Rakyat Indonesia is down 19.4%, according to data from the Indonesian exchange.

In MSCI Indonesia, the weight of banks is even more overwhelming: they account for more than 65% of the index.

Source: Indonesia Stock Exchange

Four months to convince

Jakarta has not stood still. The minimum free float has been doubled, from 7.5% to 15%, with a compliance deadline of one to three years depending on company size. Stocks with overly concentrated ownership have been publicly listed. Even the exchange has to change its skin. Still controlled by its members, it is being pushed toward a conventional shareholder structure, like its regional peers. The task is enormous: about $10bn in shares will have to be offered to the market for the entire exchange to comply with the new free-float rule. And to ensure there are buyers on the other side, local insurers and pension funds have been allowed to increase their equity exposure. While foreigners sell, Jakarta is trying to mobilize domestic savings.

MSCI welcomed "a step in the right direction", but pushed its verdict to November. The warning from S&P Dow Jones adds a second judge to the case. Investors no longer want just announcements, but evidence that accessibility, liquidity and governance are truly improving, sums up Mohit Mirpuri, a fund manager at SGMC Capital, quoted by Reuters. In the meantime, skepticism is visible in prices. Indonesia's large caps trade at less than 9 times expected earnings, versus nearly 12 times for emerging markets overall, according to MSCI.

Indonesia is not the first to go through this. Argentina was downgraded to frontier market status by MSCI in 2009, and it took 10 years to rejoin the emerging markets club. That is the scenario Jakarta must avoid by November.