MSCI faced pointed questions from investors on Tuesday over its warning that Indonesia could face a potential “double downgrade,” with more than 100 participants joining an afternoon conference call hosted by UBS. Investors asked why the index provider was considering such a sweeping move and whether Indonesia could still retain its emerging-market status.
The discussion focused on more than a potential index reclassification. Raman Aylur Subramanian, a managing director at MSCI, said the issue was rooted in Indonesia’s market structure and reforms rather than the index itself. He said Indonesia needed to pursue reforms and remove “bad participants” from the market.
Investors Seek Clarity on a Possible Double Downgrade
MSCI’s warning has surprised investors because a change in Indonesia’s market classification could affect capital allocations by funds tracking relevant benchmarks. It could also alter how international investors assess the investability of Indonesian equities.
During the call, investors concentrated on two questions: why MSCI believed such a significant change in the market rating might be necessary, and whether Indonesia could avoid losing its emerging-market status through reforms. MSCI has not announced a final decision, and Indonesia’s market classification remains under discussion and review.
MSCI Points to Market Structure and Conduct
Subramanian described the Indonesia case as a market-level issue, emphasizing the need for reforms to address specific problems involving market participants and the trading environment. His comments indicate that MSCI is assessing more than the short-term performance of Indonesian stocks. The review also covers market rules, participant behavior and whether international investors can access a stable and transparent trading environment.
Subramanian’s reference to “bad participants” was not accompanied by public details identifying the institutions, conduct or regulatory measures involved. As a result, investors still lack clarity on the potential scope of any downgrade, its timetable and the conditions that could trigger a final decision.
Indonesia’s Emerging-Market Status Remains Under Review
Retaining emerging-market status has direct implications for Indonesia’s capital flows and market positioning. If the classification changes, some portfolios that rely on market categories or index weights could reassess their exposure to Indonesian assets. There is currently no indication that any adjustment has taken effect, and MSCI has not published a final rating decision.
What is clear is that MSCI has placed Indonesia’s market reforms at the center of its next assessment. Investors will be watching for any specific reform proposals from Indonesia, as well as MSCI’s decision on whether to maintain, revise or withdraw its warning of a possible “double downgrade.” The final classification and the timing of any implementation remain the two key issues for market participants.