TL;DR
MSCI’s quarterly review led to the removal of six Indonesian stocks from its global indices, causing a nearly 2% decline in the Jakarta Composite Index and a record low for the rupiah. Experts warn of potential US$1.7 billion in capital outflows, highlighting market volatility and currency weakness.
Indonesian stocks declined sharply on Wednesday after MSCI removed six local companies from its global standard index following its quarterly review, and the rupiah hit an all-time low of 17,535 against the dollar. This development signals potential capital outflows and increased market volatility, impacting investor sentiment and currency stability.
Following MSCI’s quarterly review, six Indonesian stocks—including major companies such as Amman Mineral Internasional and Sumber Alfaria Trijaya—were removed from the MSCI Global Standard Index and MSCI Small Cap Index, effective June 1. The Jakarta Composite Index closed 1.98% lower at 6,723.32, with 428 stocks weakening, reflecting broad market declines.
Simultaneously, the rupiah weakened to a record low of 17,535 against the dollar, exacerbating concerns over currency stability. According to Harry Su, managing director of research at Samuel Sekuritas Indonesia, this index adjustment is expected to cause between US$1 billion and US$1.7 billion in capital outflows from foreign funds tracking the MSCI Emerging Asia index. The total potential outflow, including further downweighting of other stocks, could reach approximately US$2.8 billion, as estimated by Mirae Asset Sekuritas Indonesia.
Officials from Indonesia’s Financial Services Authority (OJK) and the Indonesia Stock Exchange commented that the market reaction remains within manageable bounds. Hasan Fawzi, chief executive of OJK’s market supervision unit, noted that no stocks experienced auto-rejection and trading volumes remained normal. Jeffrey Hendrik, acting president of the Indonesia Stock Exchange, described the decline as a short-term adjustment already anticipated by market participants, citing ongoing geopolitical and economic uncertainties as contributing factors.
Why It Matters
This development matters because it highlights the vulnerability of Indonesia’s financial markets to external index rebalancing and currency fluctuations. The potential US$1.7 billion in capital outflows could impact liquidity, exchange rates, and investor confidence, especially amid ongoing geopolitical tensions and commodity price volatility. The removal of significant stocks from MSCI indices may also influence foreign investment flows and market sentiment in the medium term.
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Background
The MSCI quarterly review is a routine process that can lead to changes in index composition, affecting passive investment funds. In this cycle, Indonesia saw six companies removed from its indices, including key players in energy, materials, and retail sectors. The country’s inclusion in the MSCI Emerging Markets index was retained, but the reduced weight—down from 0.9% to 0.8%—reflects a reassessment of its market stability and growth prospects. The weakening of the rupiah past 17,500 against the dollar is part of broader currency pressures Indonesia has faced amid global financial market turbulence and domestic economic concerns.
“Even though the major exclusions hit energy and materials tickers, the country weight of Indonesia within MSCI Emerging Asia index would decline to 0.8% from 0.9%, which is calculated to cause US$1-1.7 billion capital outflows from foreign funds who track the index.”
— Harry Su, Managing Director of Research at Samuel Sekuritas Indonesia
“Not a single stock experienced a lower auto-rejection. Transaction frequency, volume and value are also still normal.”
— Hasan Fawzi, CEO of the Capital Market, Financial Derivatives and Carbon Exchange Supervisory Agency at OJK
“This is a short-term consequence of the reforms we have implemented. The market has already factored this in, and we expect a new baseline to emerge.”
— Jeffrey Hendrik, Acting President of the Indonesia Stock Exchange
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What Remains Unclear
It remains unclear how long the currency and stock market pressures will persist, and whether further index rebalancing or external shocks will amplify the impact. The exact timing and magnitude of subsequent capital flows are still uncertain, as is the full scope of investor response.
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What’s Next
Market participants will monitor upcoming MSCI reviews and currency movements closely. Authorities may implement measures to stabilize the rupiah, while investors will reassess their positions based on ongoing geopolitical and economic developments. The next MSCI review scheduled for September 2024 will be particularly influential in shaping market sentiment.
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Key Questions
Why did MSCI remove Indonesian stocks from its index?
MSCI adjusted its index composition based on quarterly reviews, citing factors such as market size, liquidity, and stability. The removal of six stocks was part of this routine rebalancing process.
How will this affect foreign investment in Indonesia?
The removal is expected to cause an estimated US$1-1.7 billion in capital outflows, as funds tracking MSCI indices may reduce their holdings or exit the market altogether.
Is the decline in the rupiah permanent?
No, the current depreciation is considered a short-term response to external and internal factors. Authorities and market participants expect stabilization over time.
What are the potential risks for Indonesia’s economy?
Risks include continued currency weakness, reduced foreign investment, and increased volatility in local markets, especially if external shocks or geopolitical tensions persist.
