Indonesian stocks climbed on Tuesday, recuperating slightly as authorities in Jakarta introduced measures, including to restrict selling after a record two-day $82 billion rout sparked by index provider MSCI's warning of possible removal from its global indexes.
Jakarta's benchmark index rose 4% on Tuesday, after hitting a six-year low in the previous session as the world's worst-performing stock market this year dropped 14.8% over Friday and Monday. Still, the index is down about 40% this year.
MSCI on Friday said it was considering shifting Indonesia to "standalone" instead of "emerging markets" status, a more-severe-than-expected downgrade that shocked investors and officials and fueled fears of a sell-off by passive funds that track global indexes.
The index provider's latest warning stemmed from concerns that Indonesia had yet to improve ownership transparency or clamp down on coordinated trading and was much worse than the January threat of a downgrade to "frontier" market status.
Relegation to "standalone" would be a devastating blow to Indonesia as Southeast Asia's biggest economy grapples with eroding investor confidence over its fiscal health and central bank independence under President Prabowo Subianto.
After an online meeting with MSCI on Monday, the Indonesia Stock Exchange said it would exclude from its benchmark index any stocks with a high concentration of ownership by any person or entity.
"We are doing what is best for our market," IDX President Director Jeffrey Hendrik said, adding the exclusion would provide a more accurate picture of the index's movements. He said the affected stocks account for roughly 18% of the total index weight.
Gary Tan, portfolio manager at Allspring Global Investments, said excluding tightly held stocks should help address some investability concerns, but implementation would be key, given the potential for domestic pushback.
"From here, we think the bigger incremental risk to flows is likely to come from active rather than passive funds," he said.
Jakarta aims to calm nerves with market measures
To slow the heavy selling on the market, the stock exchange this week halved the daily down limit on stock prices to 7% from 15%, while setting a 1 rupiah down limit on shares priced at 14 rupiah or less.
Also on Monday, Prabowo held talks with finance chiefs, including the head of the Financial Services Authority (OJK), the finance minister and the Bank Indonesia (BI) governor.
After the meeting, OJK chief Friderica Widyasari Dewi said the regulator would continue to advance Indonesia's capital market reforms, particularly regarding transparency, liquidity, and law enforcement against various forms of violations.
"A particularly important special message is how we must continuously enforce regulations against those who have committed violations related to coordinated trading and other similar practices," Friderica said.
Market watchers said the stock exchange had taken a constructive step in eliminating stocks with highly concentrated ownership from the benchmark index, but that would not automatically eliminate investors' exposure to those companies either directly or through products such as mutual funds.
"We must ensure that even if a stock is delisted from the Jakarta Composite Index, concentration risk does not continue to accumulate within products purchased by the public," said Liza Camelia Suryanata, head of research at stockbroker Kiwoom Sekuritas Indonesia.
Eyes on central bank
MSCI's warning has weighed on the rupiah, which strengthened slightly to 18,000 per U.S. dollar on Tuesday but remained close to the record low of 18,190 hit in June ahead of a policy decision from Indonesia's central bank.
BI is expected to hold rates steady on Wednesday, although some economists have raised the prospect of a rate hike to defend the currency, which is down 7% this year, making it the worst-performing currency in the region.
George Xu, a director in Fitch Ratings' sovereigns team, said the latest concerns and substantial market sell-off reinforced the risks the rating agency identified when it revised the outlook on Indonesia to negative in March.
"From sovereign rating perspective, we do not anticipate the consultation announcement itself to have material immediate credit implications," he said, but added that external pressure could raise the government’s borrowing costs and erode external buffers.