Indonesian stocks fell sharply, losing 7% after MSCI Inc. signaled serious doubts about the market's investability and moved to pause specific index changes. The index compiler said the suspension is effective immediately and will remain until Indonesian regulatory authorities tackle ongoing structural problems it identified.
MSCI described the situation as involving "fundamental investability issues" in the region's largest market. The index provider highlighted two principal concerns: ownership structures in many listed companies that result in tightly held shares, and what it characterized as potential coordinated actions that may distort market prices.
"fundamental investability issues"
As part of its measures, MSCI will halt any further additions to its indexes and will freeze increases in the number of shares it deems available to investors for inclusion in its gauges. Those actions effectively stop the flow of new listings into MSCI's emerging market benchmarks and prevent the recognition of higher free-float shares until the flagged issues are resolved.
The move is a significant development for Indonesia's stock market. MSCI warned that the persistence of these structural concerns could lead to the country being downgraded from emerging-market status to frontier-market status. Such a downgrade would carry material consequences for passive and active funds that benchmark to MSCI's emerging market indexes; MSCI noted that a downgrade would likely result in outflows from those funds.
Market participants are now left to await a response from Indonesian regulators addressing the specific issues MSCI raised. Until regulators take action to resolve the investability concerns, the index provider's pause on additions and free-float increases will remain in effect, prolonging uncertainty for investors exposed to Indonesian equities.
Below is a concise account of the key developments and immediate implications stemming from MSCI's announcement and its effect on Indonesia's market.