SINGAPORE, June 24 — A five-month extension to index provider MSCI's review of Indonesian equities gives Jakarta regulators a longer runway for reforms, but will not immediately lure long-term capital back to the battered market, investors say.
The benchmark index fell 1.6 per cent after MSCI pushed its review to November, deferring rather than eliminating the threat of a downgrade, with the country retaining its emerging market status for now.
Indonesian assets have been hammered since January, when MSCI froze the country's stocks in its indexes and raised the prospect of a downgrade to frontier status, leading to a flurry of reforms, including moves to raise free-float levels.
The index is down 30 per cent so far this year, making it the world's worst-performing major stock market, as overseas investors net sold around US$3.9 billion (RM16.15 billion) worth of shares.
With foreign outflows unrelenting and fiscal worries dragging the rupiah to record lows, the window of opportunity to turn around a market that has gone from darling to deadweight is narrow.
Pictet Asset Management's emerging equities investment manager, Tan Altundag, said that staying within the investable universe for a broader range of funds is meaningful, but "it does not automatically restore confidence or reverse outflows."
"This is not a clear-cut recovery narrative, and the bar for re-engagement remains high," said Altundag, who is underweight Indonesia.
Step in the right direction
Late yesterday, the index provider called measures from Jakarta a "step in the right direction" but warned it would consider options, such as a consultation on a downgrade, if sufficient progress was not evident by November.
Allspring Global Investments' portfolio manager Gary Tan said the outcome was in line with market expectations, with the tone of MSCI’s statement more cautionary than outright negative.
"What stood out is the clear shift toward implementation and measurable outcomes, signalling that announced reforms alone are not sufficient.
"The extension of the review to November keeps pressure on regulators and effectively kicks the decision down the road," he said.
Earlier today, Indonesia's financial regulator said the MSCI announcement would provide momentum to strengthen and accelerate the capital market reform agenda initiated since January.
State Street Investment Management's exchange-traded funds (EFT) equities investment strategist Kunhee Park said that for passive emerging market funds and EFTs, the impact is likely to be limited, noting that Indonesia's weight in the MSCI emerging markets index has already more than halved this year to less than 0.5 per cent.
Investor unease has been growing over President Prabowo Subianto's spending agenda, which has supported initiatives such as free meals to millions of people but has also contributed to the rupiah sliding to record lows, leaving the broader investment backdrop looking fragile.
Credit-rating firms Moody's and Fitch cut their debt rating outlooks for Indonesia to negative earlier this year, citing reduced policymaking credibility.
Goldman Sachs has estimated that a downgrade would be devastating for Indonesia and could trigger as much as US$13 billion (RM53.83 billion) in outflows from the equity market, at a time when the combined market value of Indonesian equities has shrunk by US$370 billion (RM1.53 trillion) since January.
Singapore-based SGMC Capital's fund manager Mohit Mirpuri said the MSCI extension is a better outcome than many had feared, but emphasised that the onus is now on Indonesian regulators.
"The next few months will be about execution, credibility and evidence rather than further policy announcements," he said.
