Indonesian Stocks Plunge Amid MSCI Downgrade Warning and Fiscal Policy Concerns

Market Rout Triggered by MSCI Warning

Indonesian stocks experienced a significant downturn over two days, with the benchmark Jakarta Composite Index (JCI) falling as much as 9% on Wednesday, January 28, 2026, before paring losses to 7.4% or 7.7%. The decline continued on Thursday, January 29, with the JCI sinking 8% in early trading, triggering a halt, and ultimately closing down 1.1% after an earlier plunge of up to 10%. This market rout wiped off approximately $80 billion in overall market value.

The sharp sell-off was primarily triggered by global index provider MSCI, which flagged concerns about investability issues, market transparency, and 'possible coordinated trading behavior that undermines proper price formation.' MSCI warned of a potential downgrade of Indonesia's market status from emerging to frontier, a move that could force passive funds tracking MSCI indexes to sell Indonesian equities. In response, investment banks Goldman Sachs cut its recommendation for Indonesian equities to 'underweight,' and UBS lowered its rating to 'neutral.' Goldman Sachs also cautioned that a downgrade could lead to outflows ranging from $2.2 billion to $7.8 billion.

Fiscal Policies and Governance Under Scrutiny

Underlying the market's anxiety are growing concerns over President Prabowo Subianto's fiscal policies and governance. Investors are particularly worried about:

• Widening Fiscal Deficit: Concerns have mounted regarding the potential for a widening fiscal deficit under the new administration. Prabowo's social initiatives, such as the flagship 'free lunch' program, are seen as contributing to these fiscal risks.
• Central Bank Independence: The appointment of Prabowo's nephew, Thomas Djiwandono, to Bank Indonesia (BI) this month has raised questions about the central bank's independence. This follows the abrupt sacking of respected Finance Minister Sri Mulyani Indrawati in 2025, further shaking investor confidence in fiscal stewardship.
• State Involvement in Markets: There are also concerns about the state's increasing involvement in financial markets.

The rupiah has also been impacted, hitting record lows, including 16,985 against the dollar last week, and trading at 16,745 on Thursday. Foreign capital outflows from Indonesia totaled $1.6 billion as of January 19.

Authorities Respond to Stabilize Market

In an effort to calm investor fears and address MSCI's concerns, Indonesian authorities have swiftly announced regulatory measures. The Financial Services Authority (OJK) indicated plans to double the free-float requirement for listed firms to 15%. Mahendra Siregar, head of the Financial Services Authority, stated that communication with MSCI has been positive, and they are awaiting a response to their proposed measures, hoping for resolution by March. These actions led to a modest recovery in stock prices by late Thursday.

While other rating agencies like S&P and R&I have maintained Indonesia's credit rating at investment grade with stable outlooks (BBB in July 2024 and BBB+ in October 2025, respectively), the MSCI warning specifically targets market accessibility and transparency, which are crucial for attracting and retaining foreign investment.