BENGALURU (Oct 16): Indonesian stocks suffered their steepest one-day fall in 28 years on Friday after MSCI said the country was no longer worthy of "emerging market" status, threatening billions of dollars in capital outflows from Southeast Asia's largest economy.

In a surprise move on Friday, MSCI said it would put Indonesia on a path to a "standalone market" status, worse than the previously flagged "frontier" category. A downgrade would exclude Indonesian stocks from indices tracked by global funds, potentially triggering billions of dollars in capital outflows.

The Jakarta Composite Index plunged as much as 11.4% to its lowest point since early November 2020, clocking its worst one-day drop since January 1998. Indonesian shares have  lost nearly 40% this year, making them the world's worst-performing equity market.

"Indonesia's immediate priority should be to demonstrate measurable improvements in market transparency and regulatory enforcement, rather than merely announcing additional reforms," Josua Pardede, chief economist at Bank Permata, said.

Foreign investors have pulled US$4.6 billion (RM18.8 billion) from Indonesian equities this year, as per LSEG data. UBS estimates that removal from global indices could trigger a further US$4 billion in passive outflows and about US$15 billion from active investors.   

If downgraded, Indonesia would join Argentina, Lebanon, Palestine, and Ukraine in the standalone category, becoming the only Asia-Pacific market in the group and its largest economy, with a GDP more than twice Argentina's.

On Friday, blue-chip stocks, including major lenders, miners, and energy firms, declined nearly 15%, the exchange's lower limit. The rupiah, one of the worst-performing currencies this year, weakened to 18,070 per US dollar, its lowest since late July, before paring losses to 18,000 a dollar.

"Conviction has weakened and a pick-up of active fund outflows in the short term cannot be ruled out," Citi analysts wrote, adding that their base case remains for Indonesia to retain its emerging-market classification.

"Continued outflows by active funds have become likelier in our view in light of the latest MSCI downgrade warning. This would come ahead of potentially mid-single-digit billion dollars of passive fund outflows if the downgrade materialises."

In East Asia, South Korean stocks rebounded from a six-month closing low, but remained on track for their biggest weekly loss in 18 years following a brutal sell-off on AI worries.

Stocks in Taiwan edged higher after an over 3% decline the previous day, while its dollar weakened to late-July lows of 32.520 per US dollar, mainly pressured by equity outflows.

An MSCI gauge of emerging Asia equities, dominated by chip stocks in East Asia, rose 1%, but was headed for its worst week since the start of the Middle East war.

Elsewhere in Southeast Asia, Singapore stocks added 0.5%, while those in the Philippines advanced more than 2%. The Philippine peso recovered from a record low hit on Thursday, last selling at 62.991 a dollar.

Stocks in Malaysia slipped 0.7%. Thai stock markets were closed for a holiday.

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