Downgrade Fears Trigger Massive Indonesian Market Sell-off
Synopsis
Jakarta Composite plunges 7.4% Wednesday, 8% halt Thursday, for worst two-day drop since 1998 as MSCI flags transparency risks, potential emerging-to-frontier downgrade triggering $2-8B outflows. Indonesia’s markets were shaken this week as fears of…
Jakarta Composite plunges 7.4% Wednesday, 8% halt Thursday, for worst two-day drop since 1998 as MSCI flags transparency risks, potential emerging-to-frontier downgrade triggering $2-8B outflows.
Indonesia’s markets were shaken this week as fears of a possible downgrade sent investors rushing for the exits. The Jakarta Composite Index plunged 7.4% on Wednesday, hitting a nine-month low, before trading was halted on Thursday after losses deepened to 8%. The two-day slide was the worst since the 1998 financial crisis.
The sell-off followed a warning from MSCI, which said it had frozen changes to its Indonesia indexes because of concerns over ownership transparency, trading practices and how prices are formed in the market. Global banks quickly reacted. Goldman Sachs downgraded Indonesia to “underweight,” while UBS moved to a “neutral” stance.
Investor unease has also been fueled by policy concerns under President Prabowo, including plans to widen the fiscal deficit and the appointment of President Prabowo’s nephew to the central bank, moves that have raised questions about governance.
The pressure spilled into the currency market, with the rupiah slipping 0.5% to around 16,780 per dollar, near its lowest level of the week.
MSCI Warning Ignites Panic
The risk of a downgrade carries real consequences for Indonesia’s markets. Passive funds, which track benchmarks tied to billions of dollars in assets, would be forced to sell if the country were pushed into the same category as Bangladesh or Pakistan. Such a move would also reset the yardstick against which active fund managers are measured.
Authorities are expected to address the media at 0600 GMT in an effort to calm markets.
Fiscal, Macro Headwinds Mount
Foreign investors are pulling back at a pace not seen since the pandemic. Asset sales have reached around 14 trillion rupiah in 2025 so far, the biggest outflow since 2020, and the pressure has continued into January.
The retreat reflects growing worries about slowing credit growth, weaker consumer demand and the risk that the government could exceed its 3% of GDP fiscal deficit target. According to Rahul Ghosh of T. Rowe Price, the combination could become self-reinforcing, as higher risk perceptions push up capital costs and further weigh on growth.
Outlook Amid Volatility
Goldman Sachs played down the risk of a formal downgrade but warned that Indonesia could still see capital outflows of $2.2 billion to $7.8 billion. Officials sought to calm markets, describing the sell-off as a temporary shock and arguing that the country’s fundamentals remain sound if steps are taken to improve transparency.
The weakness was not confined to Indonesia, with regional peer markets tracked by the Nikkei also slipping.
Follow Inspirepreneur Magazine for the latest news.
At Inspirepreneurs Magazine, covering entrepreneurship, business failures, and the human stories behind the world's most ambitious founders. She writes at the intersection of strategy and storytelling.
You Might Also Like
Aussie slides to one-year low against Kiwi as markets reprice rates
Deadly Attack in Jerusalem Leaves Six Dead and Many Injured
