TEMPO.CO, Jakarta - MSCI, the global index provider whose benchmarks guide trillions of dollars of investment, decided last Tuesday to keep the Indonesia Stock Exchange in its Emerging Markets index. On the surface, the decision should have been welcomed. Indonesia had escaped an immediate downgrade to Frontier Market status.
Yet financial markets reacted as though the opposite had happened. In the three trading sessions following MSCI’s announcement, Jakarta’s benchmark stock index fell by almost 4 percent, while foreign investors sold a net Rp2 trillion worth of Indonesian equities. Since the beginning of the year, cumulative foreign outflows have reached Rp71.4 trillion.
The negative sentiment quickly spilled over into the currency market. The rupiah weakened once again, approaching Rp18,000 against the United States dollar. That happened despite Brent crude, the global oil benchmark, remaining relatively subdued at around US$75 a barrel. Normally, lower oil prices ease pressure on Indonesia’s external balance and support the rupiah. This time, however, that favorable backdrop counted for little.
The reason is straightforward. MSCI’s decision came with an important qualification. The index provider will reassess Indonesia’s market classification again in November before deciding whether the country still deserves to remain an Emerging Market. Rather than removing uncertainty, the decision merely extended it by another five months.
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