MSCI opens consultation on dropping Indonesia from emerging markets

MSCI opened a consultation Friday on dropping Indonesia from its emerging market benchmarks and reclassifying it as standalone, skipping frontier status.

Indonesia's main stock gauge fell 16% over the two sessions immediately after the announcement and now trades at its lowest level in more than six years, ETF Trends reported. The same report called it the world's worst-performing stock market this year.

Indonesia was less than 0.5% of the iShares MSCI Emerging Markets ETF (EEM) as of Oct. 16, according to ETF Trends. The iShares MSCI Indonesia ETF (EIDO) gives investors a concentrated bet on the same market, and ETF Trends described the impact there as more direct. Because MSCI's emerging market indexes are widely followed, the report said a downgrade could push billions of dollars out of passive funds and ETFs.

In a statement, MSCI said: "Market participants have indicated to MSCI that, to date, sufficient progress has not been observed consistently across the Indonesian equity market." The index provider cited "significant concerns" around market dysfunction and added: "Feedback from market participants suggests that a reclassification to Frontier Markets would not properly recognize the depth of the market problems."

The consultation follows a January warning that Indonesia could be downgraded to frontier, citing concerns over market opacity, "suspected coordinated trading behaviour" and very small free floats. The government responded with several measures designed to make its capital markets more transparent.

Standalone is a separate MSCI designation from both emerging and frontier. ETF Trends says Ukraine, Palestine, Argentina and Zimbabwe are among the small handful of countries MSCI currently considers standalone.

MSCI is accepting feedback on the proposal until April 2027 and plans to announce a final decision by the end of June.

The Indonesia Stock Exchange said it would request "further clarification from MSCI regarding the basis for the considerations and assessments behind this announcement," the Financial Times reported.