Jakarta. Indonesia risks being grouped with Zimbabwe and Palestine under MSCI’s Standalone Market classification, potentially cutting the country off from major emerging-market benchmarks and triggering portfolio adjustments by global funds.

“If Indonesia is downgraded by MSCI to Standalone Market status, it will be removed from the MSCI Emerging Markets and MSCI Frontier Markets indexes and placed in the standalone market category, like Zimbabwe and Palestine,” Nafan Aji Gusta, senior market analyst at Mirae Asset Sekuritas, told the Jakarta Globe on Friday.

However, the proposed reclassification would not automatically force all foreign investors to sell their Indonesian holdings. Passive exchange-traded funds (ETFs) that track the MSCI Emerging Markets index could be required to sell Indonesian stocks once they are removed from the benchmark, while active funds and investors using different benchmarks would not necessarily face the same obligation, Nafan said.

The potential outflows could nevertheless put pressure on large-cap stocks with significant foreign ownership, including major banks, while reduced liquidity and wider bid-ask spreads could amplify market volatility and weigh on the rupiah.

The proposal reflects concerns over the transparency and integrity of Indonesia’s capital market, with MSCI maintaining its plan unless its consultation process uncovers clear evidence of material improvements in market governance and functioning, according to a Friday review by Kiwoom Sekuritas.

MSCI froze some index changes involving Indonesian stocks in January 2026. During its June 2026 Market Classification Review, investors raised concerns about opaque ownership structures and suspected coordinated trading, Kiwoom said, summarizing MSCI’s findings.

“Authorities have announced reforms. However, market participants consider the progress inconsistent. Suspected coordinated trading continues, and there is no meaningful evidence of law enforcement,” Kiwoom said, referring to information from MSCI.

The concerns also explain why a downgrade to Frontier Market status may not be sufficient to reflect the extent of the problems. Under the proposed Standalone Market classification, Indonesia would leave both the MSCI Emerging Markets and Frontier Markets index families.

“Indonesia’s main problem is not technical access, but market integrity,” Kiwoom said.

Nafan similarly argued that Indonesia’s challenge extends beyond market size or trading depth to whether global investors can trust the market’s ownership disclosures, free-float figures and price-formation mechanisms.

“Announcing policies and changing regulations are not enough to maintain market confidence. Global investors need evidence that ownership structures are becoming more transparent, free float genuinely reflects shares available for trading, and market manipulation is consistently addressed when proven,” he said.

MSCI has raised concerns about concentrated shareholdings, ownership transparency and suspected coordinated trading that could undermine fair price formation, as well as the effectiveness of enforcement. Announced reforms, including plans to increase the minimum free-float requirement to 15%, have yet to demonstrate consistent and meaningful improvements across the market, Nafan said.

The proposed reclassification therefore poses a significant test for the Indonesia Stock Exchange, the Financial Services Authority (OJK), the Indonesia Central Securities Depository (KSEI) and the government. Nafan said regulators needed to improve ultimate beneficial ownership disclosure, strengthen oversight of concentrated holdings and suspicious transactions, and demonstrate consistent law enforcement.

He also called for regulators to present verifiable data on reform implementation when engaging with MSCI and global institutional investors, rather than relying solely on policy announcements.

Indonesia still has time to respond. The consultation deadline is April 30, 2027, with MSCI scheduled to make a final decision by June 30, 2027.

Nafan warned that failure to address the concerns could lead to more persistent foreign capital outflows, higher capital costs and greater difficulty attracting long-term investment.

Add as a preferred source on Google +