Indonesia Market Plunge: Confidence Crisis Looms

Indonesia's stock market faced a severe crisis of confidence recently, experiencing its worst two-day rout in nearly three decades. The benchmark index plunged as much as 10% following a warning from MSCI Inc. regarding a potential market accessibility downgrade. This triggered trading halts and frantic calls from investors, raising fears of significant foreign outflows.

In response, Indonesia's market regulator announced the implementation of a 15% minimum free-float rule starting next month, a key demand from MSCI. The sovereign wealth fund may also provide market support. Despite these measures, investor sentiment remains fragile due to lingering concerns over tightly held shares, weak governance, and the potential for passive funds to trigger $13 billion to $15 billion in outflows if Indonesia is downgraded.

Further pressure came from downgrades by investment banks, exacerbating the selloff and affecting retail investors, particularly those using leverage. While some see the market as oversold and an opportunity, deeper structural issues remain unresolved. With MSCI's reassessment in May, the market remains vulnerable to volatility, and foreign investors are not rushing back in.