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Indonesia’s authorities have assured markets of further measures to address MSCI’s key concerns, after the index provider proposed to reclassify the country to a ‘standalone status’ from the current ‘emerging markets’ index late last week (see our note). While bargain hunting helped to lift the domestic equity market from a six-year low on Tuesday, longer-standing concerns are likely to keep the bourse under pressure in the coming weeks. Regulators, including the stock exchange, announced that stocks with a high concentration of ownership by a single person or entity would be excluded from the main index, helping to stabilize sentiment. This follows a series of other measures, including enhanced disclosure of shareholding patterns, a phased increase in minimum free-float requirements over the next three years, and more granular investor-classification data, etc.
MSCI's key ask has also centred on improving visibility of the actual free float, enhancing transparency, and reducing the scope for price distortions, among other issues. Further bilateral consultations are likely to help mitigate broader spillovers to the FX, debt, and credit markets in the near term. The rupiah weakened beyond 18,000 against the US dollar at the start of the week but has since stabilised around that level, while bond yields have risen by around 10-20bp on the week.
Bank Indonesia is expected to raise the benchmark policy rate to 6.0% today to support the rupiah and safeguard broader financial stability. The likelihood of further rate increases will rise if market volatility remains elevated, despite domestic inflation remaining within the target range and the Federal Reserve not expected to deliver a consecutive rate hike this month.
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