Stock and bond markets in Indonesia continue to plunge after Morgan Stanley Capital International (MSCI) warned that it could downgrade the country's stock market by two notches.

According to Bloomberg and other sources on October 19, Indonesia's Jakarta Composite Index (JCI) was down 5.1% as of the afternoon.

The sharp decline follows a 12% crash on October 16.

The current index sits at its lowest level since 2020.

The drop on October 16 marked the largest single-day decline in 28 years.

The decline for the year has reached 43%.

The 10-year government bond yield also surged 12 basis points (1 bp = 0.01 percentage point) to hit a four-month high.

The value of the Indonesian rupiah fell 0.2% as well.

Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken (SEB) in Singapore, said, "Foreign capital is exiting the Indonesian stock market entirely, and the fallout is now being felt in the bond market."

She added, "The depreciation of the rupiah is eating into real returns, and global funds will remain on the sidelines until the currency stabilizes."

MSCI announced on October 16 that it is considering downgrading Indonesia's market status from "emerging market" to "standalone market."

This is a harsher step than its announcement last January that it could downgrade the market to a "frontier market" due to investability concerns.

Because global funds tracking MSCI indexes amount to billions of dollars, Indonesia could face additional capital outflows if it is ultimately expelled from the MSCI index.

Foreign investors are already leaving the Indonesian market.

Global funds have net sold a record $5.1 billion in the Indonesian stock market this year.

According to Bank Indonesia, the share of Indonesian stocks held by foreigners decreased from 27% in January to 25%.

The value of assets held by foreigners has nearly halved from $250 billion to about $130 billion.

Indonesian authorities have stepped in to manage the market shock.

The Indonesia Stock Exchange tightened individual stock trading limits starting October 19, reducing the maximum daily downside limit from 15% to 7% through the end of the year.

In addition, Indonesian government officials plan to meet with MSCI representatives on October 19 to demand a clear explanation regarding the downgrade warning, according to sources.

Herditya Wicaksana, an analyst at PT MNC Sekuritas, noted that selling pressure remains high, particularly in heavyweights like major bank stocks that heavily influence the JCI index, adding that stricter trading limits could help prevent further declines.

Goldman Sachs forecasted that if Indonesian stocks are completely excluded from the index, it could trigger about $5.6 billion in capital outflows, with an additional risk of $2.7 billion in outflows if they are also excluded from FTSE Russell indexes.

Lloyd Chan, a foreign exchange strategist at MUFG Bank in Singapore, projected that MSCI's recent announcement will fuel a sell-off in Indonesian government bonds amid growing concerns among foreign investors.

(Photo: AP, Yonhap News)