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S&P Dow Jones Indices has warned of a possible downgrade of Indonesia to a frontier market, following rival index provider MSCI in raising concerns about transparency of shareholdings in south-east Asia’s largest economy.
S&P DJI has placed Indonesia, along with Turkey, on a watchlist for a potential downgrade in its next review in 2027, it said on Tuesday. Both countries are currently classified as emerging markets.
The index provider said it would continue to “track developments related to stock ownership transparency” and monitor the Indonesian stock exchange’s progress in addressing concerns.
“If circumstances worsen, S&P DJI may consider implementing special treatment for Indonesian securities,” it said.
If its concerns remain unaddressed one year from the date S&P DJI implements special measures, Indonesia’s market classification will be assessed at its next annual review, the index provider said.
S&P DJI’s announcement follows a similar warning from MSCI, which is also reviewing Indonesia’s classification as an emerging market.
That warning in January prompted a flood of outflows from Indonesian equities. The Jakarta Composite index has declined 31 per cent, making Indonesia the world’s worst-performing stock market this year.
The index was down 1 per cent on Wednesday.
In its report, MSCI flagged concentrated and opaque ownership structures that undermined proper price formation in Indonesian stocks. The index provider is due to make a decision on reclassification in November.
Since MSCI’s warning, Jakarta has taken steps to improve transparency.
It has doubled the requirement for minimum free float — the portion of stocks available for public trading — to 15 per cent, giving companies up to three years to comply.
It has also tightened rules on shareholder disclosures, requiring public reporting of stakes above 1 per cent, down from the previous 5 per cent.
“While MSCI remains the more important benchmark for global passive capital flows, today’s statement is a reminder that Indonesia’s reforms are still a work in progress,” said Gary Tan, an emerging markets portfolio manager at Allspring Global Investments.
“Long-term institutional investors are likely to remain cautious until there is clearer evidence that the proposed reforms are being effectively implemented and address the concerns raised by major index providers,” he said.
Beyond the downgrade risks, investors have also been concerned by President Prabowo Subianto’s costly populist policies and increasing state control over the private sector.
The macroeconomic and fiscal policies have sent Indonesia’s currency tumbling against the dollar. The rupiah, which is trading at all-time lows, has lost 8 per cent of its value this year.
