Indonesia has moved to overhaul its main stock market index after MSCI threatened to remove the country from its emerging-market classification, potentially forcing ETFs tracking its indices to sell billions of dollars of Indonesian shares.
The Indonesia Stock Exchange has announced plans to exclude around 80 companies with highly concentrated share ownership from the Jakarta Composite Index. The affected stocks represent approximately 18% of the index, although they will remain available for trading.
The move follows MSCI’s announcement on 15 October that it was consulting on reclassifying Indonesia from an emerging market to a standalone market, a category reserved for markets facing significant accessibility or investability problems.
MSCI cited persistent concerns about opaque ownership structures, suspected coordinated trading and insufficient enforcement of market regulations. It said a downgrade to frontier-market status would not adequately reflect the seriousness of the problems and expects to proceed with the proposed reclassification unless there is clear evidence of improvement.
The announcement triggered a sharp sell-off, with Indonesian equities falling 14.8% over Friday and Monday, before recovering 5.3% on Tuesday following the exchange’s intervention. The market has lost around 40% this year.
The implications extend to European ETFs. Products tracking MSCI’s emerging-market indices would have to remove their Indonesian holdings if the country were excluded from those benchmarks. UBS estimates that such a move could trigger approximately $4bn of passive investment outflows.
Dedicated UCITS products exposed to Indonesia include the HSBC MSCI Indonesia UCITS ETF (HIDR), Amundi MSCI Indonesia UCITS ETF (INDO) and Xtrackers MSCI Indonesia Swap UCITS ETF (XMID).
MSCI has invited feedback until 30 April 2027, with a final decision expected by the end of June 2027. No downgrade has yet been confirmed.
Our view
David Batchelor, senior analyst at QuotedData, said: “This is a striking demonstration of the influence index providers now wield over global capital flows. A downgrade would force passive funds to sell regardless of whether they considered individual Indonesian companies attractive. With billions potentially heading for the exit, the prospect of exclusion risks becoming self-reinforcing as investors sell ahead of any formal decision.
The distinction between broad emerging-market ETFs and dedicated Indonesia funds is important. The former would be required to follow any changes to their benchmarks, whereas the latter would not necessarily have to close, as standalone country indices can continue to operate. Nevertheless, both face the consequences of deteriorating confidence and liquidity. Indonesia’s latest intervention may help stabilise sentiment, but removing closely held companies from a domestic index is not the same as addressing the underlying governance problems. MSCI has made clear that it wants evidence of meaningful reform and enforcement, rather than further promises.
