SINGAPORE/JAKARTA, Oct 19 — Indonesian stocks slid to a six-year low today in a record two-day rout, and the rupiah fell after a warning from index provider MSCI Inc. over possible expulsion from its global indexes next year, heaping pressure on Jakarta to respond to the index provider's concerns.
Jakarta's benchmark stocks fell over five per cent after plunging 11.6 per cent on Friday (October 16), as the world's worst performers reeled from MSCI saying it was considering shifting Indonesia to "standalone" status from its current "emerging markets" mantle.
"The MSCI announcement was unexpected to us, causing a market panic," the Indonesia Stock Exchange said in a statement ahead of a meeting between the exchange leaders and MSCI executives later in the day.
Earlier today, the exchange halved its down limit to seven per cent to try to slow the selling.
A shift to standalone status would risk cutting Southeast Asia's biggest economy off from international capital, relegating it to an investment backwater, and clubbing it with a group of standalone markets that includes Lebanon and Zimbabwe.
Jitters over the threat spilt into the rupiah and bond markets. The rupiah weakened to 18,040 per dollar, not far from the record low of 18,190 hit in June, while traders said that a slide in Indonesian government bonds pushed the 10-year yield to 7.4 per cent, from 7.169 per cent on Friday.
The more-severe-than-expected move by MSCI, which first raised concern in January over market manipulation and ownership transparency, has raised the stakes for Indonesia's regulators and finance officials as investors reevaluate their exposure to Indonesian assets more broadly.
According to two government sources familiar with the matter, President Prabowo Subianto is expected to meet with top financial officials in the afternoon to discuss the "current economic condition".
The meeting will include sovereign wealth fund Danantara and Indonesia's Financial System Stability Committee, made up of the finance minister, Bank Indonesia governor, and the heads of the Financial Services Authority and Indonesia Deposit Insurance Corp.
S&P Global Ratings sovereign analyst Rain Lin said MSCI's latest warning was likely to trigger additional capital outflows but does not expect them to be large enough to materially increase financing costs.
"More concerning is the potential damage to investor confidence and the risk that sentiment weakens more broadly across government bond markets and foreign direct investment," Lin said.
Wider risks from MSCI threat
MSCI's warning marked the latest in a string of setbacks for Prabowo's government this year, after Moody's and Fitch cut their sovereign rating outlooks to negative.
The market's nosedive came ahead of a policy decision from Bank Indonesia this week. While the central bank is widely expected to stand pat, some analysts have raised the possibility of a rate hike to stem the selloff in the bond market.
MSCI had threatened to downgrade the Jakarta market to "frontier" status in January but said on Friday that lack of progress in remedying its concerns about opacity in ownership and trading behaviour meant even a drop to that status would not reflect the severity of the issues.
"The burden of proof has shifted: avoiding reclassification will require clear evidence that the announced reforms have been consistently implemented and materially improved market functioning," strategists at Goldman Sachs said in a note.
On Friday, an Indonesian regulator unveiled sanctions against those linked to alleged trading manipulation in shares of three firms, with the fines totalling 2.1 trillion rupiah (RM474.9 million).
"The fines are a positive move, but there needs to be concerted action to stamp the authority of the OJK and take direct action against certain well-known players who have been involved in market abuse," said Singapore-based Aletheia Capital's ASEAN specialist Angus Mackintosh.
Goldman Sachs estimates a full MSCI removal could trigger US$5.6 billion (RM22.86 billion) of passive outflows. Active funds benchmarked to these indexes hold more than US$8 billion (RM32.66 billion), although any selling would be discretionary rather than benchmark-driven.
Foreign investors have net sold US$4.88 billion (RM19.92 billion) worth of Indonesian stocks so far this year, on track for the biggest annual outflow in at least 16 years.
