Jakarta. Global investment banks UBS and Goldman Sachs have cut their recommendations on Indonesian equities after MSCI warned about market transparency issues in Indonesia’s capital market, raising the risk of a downgrade from emerging market to frontier market status and potential large capital outflows.

UBS lowered its view on Indonesian stocks to neutral from overweight, citing MSCI’s concerns over free float, liquidity, and regulatory certainty, according to research summarized by Phintraco Sekuritas. The Swiss bank said pressure on local equities is likely to persist until MSCI completes its reassessment, keeping markets on edge in the near term.

Beyond index classification risks, UBS also flagged growing policy uncertainty following the government’s decision to revoke business permits held by several companies. Such moves, the bank said, could further erode global investors’ confidence in Indonesia’s regulatory stability. While foreign ownership of Indonesian equities remains overweight, UBS warned that the room for maneuver is narrowing as risks mount.

Goldman Sachs struck a more cautious tone, cutting Indonesian equities to underweight and warning of potentially large capital outflows if MSCI proceeds with a downgrade.

In a worst-case scenario, where Indonesia is reclassified as a frontier market, Goldman Sachs estimates that passive funds tracking MSCI indexes could exit as much as $7.8 billion (Rp 130.9 trillion). Additional outflows of around $5.6 billion could follow if FTSE Russell also revises its free-float methodology and market status, bringing total potential outflows to more than $13 billion.

“We expect further passive selling and regard this development as an overhang that will impede market performance,” Goldman Sachs analysts, including Timothy Moe, wrote in a report quoted by Bloomberg.

The warning comes as Indonesian equities are already under heavy pressure. The Jakarta Composite Index plunged as much as 10% on Thursday, extending losses into a second session and highlighting the market’s vulnerability to shifts in global sentiment.

Goldman Sachs said the prospect of sustained passive selling could weigh on Indonesian stocks over the medium term, especially against a backdrop of heightened global volatility and risks of declining domestic liquidity. The situation may also prompt long-only investors to rebalance portfolios, while creating opportunities for hedge funds to take speculative positions, the bank said.

Phintraco Sekuritas echoed the cautious outlook, saying the risk of passive outflows is likely to dampen market sentiment in the short to medium term. Companies with low free float, thin trading liquidity and high dependence on foreign investors are expected to be the most exposed to selling pressure, the brokerage said.

Looking ahead, Phintraco said investors are watching for concrete steps to improve transparency in share ownership, maintain policy consistency and strengthen market governance. These factors are seen as critical to containing the knock-on effects of MSCI’s concerns and preserving Indonesia’s appeal to global investors.

Regulatory risk has become a growing concern. UBS analysts noted that concerns have intensified after senior government officials said 28 companies whose business permits were revoked could have their assets managed by sovereign wealth fund Danantara. Earlier this month, authorities said they would revoke permits held by several resource companies, including one of the country’s largest gold miners, over alleged forest misuse.