As Indonesia faces MSCI downgrade threat, officials vow reforms to ease fears

As the threat of a reclassification by MSCI that could relegate Indonesia to an investment hinterland looms, the country’s financial regulators and stock exchange officials have vowed to address systemic concerns, including removing stocks with concentrated ownership.
The global index provider announced on Friday it was launching a formal consultation to decide whether to downgrade Southeast Asia’s largest economy from “emerging market” to “stand-alone” status, similar to countries such as Argentina, Zimbabwe, Ukraine and Russia.
MSCI cited persistent concerns over Indonesia’s market dysfunction, including opaque ownership structures, highly concentrated shareholdings and coordinated trading practices. Its final decision is expected by June 30 next year.
On Monday, officials from the Indonesia Stock Exchange (IDX) held an online meeting with MSCI representatives, where they laid out measures to reform the country’s problematic stock market.
“First, we will include a description of whether 1 per cent shareholders are affiliated or unaffiliated [with the company] when publishing the names. Second, to provide a more credible and integrated price index, we will remove all high shareholding concentration [HSC] shares from the Jakarta Composite Index,” IDX CEO Jeffrey Hendrik told reporters.
“We hope these two initiatives will provide greater transparency and greater market data integrity.”
HSC refers to a market situation in which a huge percentage of a company’s shares – in some cases above 95 per cent – are owned by a small number of shareholders, with a very small free float available for public trading.
According to Hendrik, HSC shares currently account for 18 per cent of JCI’s total weighting. Such shares had been excluded from Hong Kong’s benchmark Hang Seng Index, he added.

Hendrik said the new measures followed previous steps taken by the Indonesian bourse to improve transparency, such as setting 15 per cent as the minimum requirement of free float, or the proportion of a company’s shares readily available for the general public to buy and sell, and expanding the number of investor categories from nine to 39, among others.
The JCI plunged 3.64 per cent at the close of trading on Monday to a six-year low at 4,996.60. After MSCI issued its warning, the benchmark index plunged 11.6 per cent on Friday, making it one of the world’s worst performers and wiping out around US$85 billion in market capitalisation. On Tuesday, the index rose 5.65 per cent to close at 5,278.
A downgrade to stand-alone market status could trigger US$5.6 billion in passive fund outflows, with another US$2.7 billion fleeing if FTSE Russell – a leading global provider of benchmarks – were to take similar action, Goldman Sachs warned in a note on Sunday, as quoted by CNBC.
As of Sunday, the proportion of foreign ownership of Indonesian stocks was 25 per cent, down from 27 per cent in January, while the value of foreign holdings had dropped to US$130 billion from US$250 billion in January, the investment bank said.
Over the weekend, the Financial Services Authority (OJK) in Indonesia and IDX sought to steady the nervous market by declaring a fine of 2.1 trillion rupiah (US$116.4 million) on three firms alleged to have manipulated trading of their shares.
Two of the firms, Barito Renewables Energy and Petrindo Jaya Kreasi, belonged to a group owned by conglomerate Prajogo Pangestu, while another, Dian Swastatika Sentosa, is part of the Sinar Mas conglomerate.

More fixes needed
While economists welcomed the measures by IDX, they said regulators still needed to impose firm law enforcement to help Indonesia avoid reclassification by MSCI.
“The key to adjusting the perception of Indonesia needs to come from strict enforcement of IDX and OJK rules and regulations and the imposition of sanctions, including significant fines and even imprisonment. This is criminal behaviour after all,” said Angus Mackintosh, an Asean specialist at Aletheia Capital in Singapore.
“Forthright statements from the top are required to ensure that actions are taken to their logical conclusion, even if those market abusers are closely connected to the government.”
Bhima Yudhistira, executive director at Jakarta-based think tank Centre of Economic and Law Studies (Celios), said that the disclosure of 1 per cent shareholders “must be accompanied by an investigation into their ultimate beneficial ownership, as many companies use the names of other companies, or nominees, as their shareholders”.
The market was also rattled by an effort by state wealth fund and investment agency Danantara to acquire shares of the IDX, which would “ultimately lead to a decline in the independence of the stock exchange”, Bhima added.
The IDX is currently undergoing a demutualisation process, which will see it become a limited liability company owned by shareholders. IDX is currently owned by its members, including 90 securities companies.
Dipo Ramli, an economist with the Centre of Reform on Economics Indonesia, said that IDX was still facing “a decline in market confidence,” which could “indirectly influence” the assessment of the Indonesian economy by rating agencies.

Earlier this year, Fitch and Moody’s downgraded Indonesia’s rating outlook from stable to negative due to concerns relating to economic governance by President Prabowo Subianto’s administration.
Martyn Terpilowski, a British investor in Indonesia, said that “foreigners are unlikely to buy” the charm offensive by regulators to lure them back into the market.
“What you find in Indonesia, a lot of the deals are off-market transactions. That’s because the actual real price of the stock is heavily inflated and the insiders know that,” Terpilowski said. “It’s just not a transparent market that people can invest into.”
He also questioned the authorities’ promise to make the market more open to investors.
“It’s a difficult one because the economy will be hurt if US$40 billion flows out of the economy. The question…