Inside the Week Indonesia's Stock Market Broke

Transcript

Friday morning, Jakarta: analyst Liza Camelia Suryanata sees something she has never seen in her career. The market opens, sellers stampede, and trading freezes for thirty minutes. This is the inside story of the week Indonesia’s stock market broke. It began with one statement from a company that ranks the world’s stock markets. Why does that company have so much power? And why is everyone talking about 1998, and the man now running Indonesia?

Liza Camelia Suryanata heads research at the stockbroker Kiwoom Sekuritas Indonesia. On Friday 16 October, the exchange opens, and almost at once, everyone wants out. Sell orders pour in so fast that the exchange hits the brakes and halts trading. “It’s the first time this has ever happened in my 20 years in the stock market,” Suryanata says.

The trigger arrived that same Friday, in a statement from a company called MSCI. MSCI builds the indexes that sort the world’s stock markets into four classes: developed, emerging, frontier and standalone. Indonesia has held emerging market status since 1989. Now MSCI said that label no longer fit, and laid out a plan to pull Indonesia from indexes that investment funds follow. And it came a month before anyone expected a verdict.

Investors did not wait to read the fine print. That halt bought a little time, and it did not stop the slide. By the closing bell, the main index was down 11.6 percent. It was the steepest one-day drop since January 1998. Remember that year. It will matter later.

In Jakarta, Rully Arya Wisnubroto, head of research at Mirae Asset Sekuritas, said the proposal went well beyond his worst-case scenario. In money, the damage is hard to picture. Between 60 and 65 billion dollars of market value vanished in one session. That is more than 200 dollars for every person in the country, gone before the weekend. And the currency fell with the shares.

At its weakest that day, the rupiah slid to 18,070 per dollar. This stock market was already the worst performer in the world this year. Investors were stunned, and so were the officials whose job is to keep the market calm. Tan Altundag, an investment manager at Pictet Asset Management, put it plainly: the investment implications could be significant. Nobody in Jakarta could yet say how significant.

So picture it. One statement, from one company, and Southeast Asia’s biggest economy lost a fortune in a single day. And this was only the first day of the week. So who exactly is MSCI, and what did that statement actually say?

To understand Friday, rewind to January. That month, MSCI sent Indonesia its first warning. Its clients, the big funds that follow its indexes, had complained about data that hid how many of a company’s shares could actually be traded. They also pointed to opaque ownership and coordinated trading, which, in MSCI’s words, undermined “proper price formation.” Put simply, some share prices looked as if they were being artificially held up.

Jakarta took the hint. Top officials at the market’s institutions resigned and were replaced by people investors trusted. The financial regulator, known as OJK, doubled the share of stock that listed companies must keep in public hands, from 7.5 to 15 percent. Rules on the minimum capital of brokers and some fund managers were tightened, to make manipulation harder.

Owners holding as little as one percent of a company faced new disclosure rules. A few months later, the authorities said the reforms were done. MSCI was not convinced, and extended its review to November. The exchange kept adding fixes, including a plan to put more names on its list of stocks whose owners held unusually large stakes.

Then came the statement that broke the market. Market participants, MSCI said, had raised significant concerns regarding the investability of the Indonesian equity market. “Sufficient progress has not been observed consistently across the Indonesian equity market,” it wrote. Despite the announced reforms, it said, significant concerns remained around market dysfunction, including suspected coordinated trading and a lack of evidence of meaningful enforcement. So Indonesia’s place among the emerging markets was, in MSCI’s words, no longer appropriate.

Here is the twist few in Jakarta saw coming. The punishment everyone feared was a drop to frontier, one step down. MSCI skipped it. Feedback from investors, it said, suggested frontier status would not recognise the depth of the market’s problems. So it proposed standalone, the bottom rung, outside the emerging and frontier indexes that passive funds track. Funds that track those indexes would have to sell, and funds judged against them could choose to. MSCI usually reserves that label for a severe deterioration in a market’s access, size or liquidity.

Angus Mackintosh, a Southeast Asia specialist at Aletheia Capital in Singapore, said grouping Indonesia with Lebanon, Palestine and Argentina made no sense. He also called it a wake-up call. But that is exactly the group on offer. Indonesia would be the largest economy in it.

In Jakarta, the shock quickly turned into anger. Airlangga Hartarto, the senior economic minister, said there was a big question mark over why MSCI never raised this at a meeting that very week in Bangkok, Thailand. The exchange’s chief executive, Jeffrey Hendrik, said the bourse got no clue, and no direct warning, from MSCI or anyone else. Later, the exchange put it in one line: the announcement was unexpected, and it caused a market panic.

Hours after MSCI spoke, the regulator struck back at the market itself. OJK announced fines of 2.1 trillion rupiah, about 116 million dollars, against those linked to trading in the shares of three companies. The fines were tied to market manipulation practices, and the police were called in to investigate possible crimes in the capital market. The police chief promised firm action.

Investors were not satisfied. Angus Mackintosh called the fines a positive move, but said the regulator needed concerted action to stamp its authority and act directly against market abuse. And at S&P Global Ratings, an analyst said the bigger worry was not money leaving, but potential damage to investor confidence.

Then Monday came, and it was worse. The exchange’s leaders met MSCI executives online, looking for answers. Meanwhile the exchange halved its daily limit on price falls to 7 percent, just to slow the selling. The selling went on anyway.

By Monday’s close, the index had lost 14.8 percent in two sessions. That record two-day rout erased about 82 billion dollars.

The rupiah weakened to 18,040 per dollar, close to its record low from June. Government bonds slid too, pushing the ten-year yield to 7.4 percent. That day, President Prabowo Subianto held talks with his top financial officials, among them the finance minister, the central bank governor and the head of OJK.

Here is why one company’s statement carries so much weight. If MSCI goes through with it, index funds that track its emerging markets would have to sell their Indonesian shares. Goldman Sachs estimates that passive outflow at 5.6 billion dollars, while active funds judged against those indexes hold more than 8 billion dollars and are free to sell or stay. And foreign investors had already been pulling money out all year.

The next day, as stocks began to rebound, the head of OJK, Friderica Widyasari Dewi, said she had not had a moment’s rest since Friday. Then she asked the country for something unusual. “Please pray that we can get through this successfully.”

MSCI lit the fuse, but the powder had been piling up for two years. For one columnist, the first clear warning came in September 2025, when Prabowo abruptly fired his finance minister, Sri Mulyani Indrawati. For investors, she was the face of Indonesia’s economic credibility. She had run the finance ministry under two earlier presidents and served as a managing director of the World Bank. Then she was gone.

Next came the central bank. In July, its governor, Perry Warjiyo, left two years before his term was due to end, citing personal reasons. Investors were not convinced, especially after Prabowo named his own nephew, Thomas Djiwandono, a deputy governor. Two months later, the president replaced his finance minister again.

All the while, the spending grew. Prabowo promised growth of 8 percent a year, a pace Indonesia had not seen since the eve of the 1997 crisis. He launched a free meal programme worth billions of dollars, and with fuel prices spiking worldwide, the deficit widened. He also pulled the state deeper into the economy, to squeeze more out of natural resources and trade.

Last year the deficit reached 2.92 percent of GDP, a whisker under the legal ceiling of 3 percent. In March, Moody’s and Fitch both cut Indonesia’s outlook to negative. Fitch pointed to the erosion of the credibility of Indonesia’s policy mix, and to the growing centralisation of policymaking authority.

Critics also worried about Danantara, the giant new sovereign wealth fund, and what one columnist called its murky governance. A report in The Diplomat put the president’s personal, combative style of governing at the root of much investor concern. And when Citi analysts warned the budget deficit could widen, officials dismissed their forecaster as not a real economist, according to Asia Times.

The money noticed. Foreign investors have sold a net 4.9 billion dollars of Indonesian stocks this year, on track for the biggest outflow in at least 16 years.

The rupiah has lost about 8 percent this year, the worst performance in Asia. And since January, the stock market has lost more than 350 billion dollars of value.

Spread across 288 million people, that is more than 1,200 dollars each. As one columnist put it, traders did not need MSCI to tell them something was wrong. MSCI simply made the whole world look. So what really happened the last time Indonesia’s money and markets broke together, in 1998?

The story begins in a different country. On 2 July 1997, Thailand let its currency, the baht, float, and investors who had poured money into Asia for a decade ran for the doors. Indonesia was hit hardest of all. Its own currency was set free that August, and it began to sink.

Many Indonesian companies had borrowed in US dollars, short term, with no protection against a falling rupiah. As the rupiah dropped, their debts swelled, and they rushed to buy dollars, which pushed it down even further. By New Year’s Day 1998, the rupiah was worth just 30 percent of what it had been six months earlier.

Back in October, Suharto’s government had asked the International Monetary Fund for help. The IMF arrived with a 43 billion dollar rescue. Its conditions included closing 16 private banks, some of them controlled by Suharto’s cronies. Instead of calming people, it set off a run on the other banks.

Then, in January, the rupiah lost half its value in just five days. Families hoarded food. Suharto signed a second rescue deal with a long list of reforms, then dragged his feet.

In May, his government cut fuel subsidies all at once, and riots broke out in Medan, Jakarta and Solo. At a university in Jakarta, four students were shot dead during a protest. Over the next days, Jakarta suffered its worst riots ever, and Chinese Indonesians were singled out. By the end, more than a thousand people were dead.

On 21 May 1998, after weeks of student-led protests, Suharto resigned. He had ruled for 32 years, and he never faced a court for his actions. Since then, Indonesia has built guardrails, among them OJK, the same watchdog now fighting for the market.

But one figure links 1998 to today. Prabowo Subianto was then one of Suharto’s generals, and his son-in-law. Activists were abducted that year, and 13 of them have never been found. Some of Prabowo’s men were tried and convicted, and he was discharged from the military, but he never faced trial himself. In 2014 he told Al Jazeera he had helped abduct activists under orders, and that the operations were legal at the time. He has denied involvement in rights abuses.

Twenty-eight years later, that general is Indonesia’s president.

Tuesday 20 October marked exactly two years since Prabowo was sworn in. Jakarta’s police said they would deploy around 9,500 officers for the day. Students from at least two universities planned protests at several spots in Jakarta, and no one knew how many would come. In the end, hundreds of students marched in Jakarta, Yogyakarta, Bandung, Pekanbaru and Makassar. In Yogyakarta, clashes broke out near the regional parliament, and police detained several protesters.

The student body of the University of Indonesia said it would protest the recent forest fires, and the stock market rout. Together with the weak rupiah, the students called it a sign of the national economy’s fragility. Greenpeace activists climbed the Welcome Monument in the heart of Jakarta and hung a banner: take action on the climate crisis, bring down the cost of living. Police and firefighters took the banners down, and police said the activists were brought down from the monument.

The mood has changed since the election. Prabowo won with a huge majority, but in surveys by the pollster SMRC his approval has fallen to 44.5 percent this month, from 81.2 percent last November. He has lost almost half of it in under a year.

In 2025, the police killing of a motorcycle taxi driver set off nationwide protests, and several people died. And as recently as August, hundreds were detained.

In the market, that same Tuesday brought relief. Stocks bounced back 4 percent after the exchange promised to drop companies with highly concentrated owners from its main index. Those companies make up roughly 18 percent of the index by weight. The exchange also promised to name investors who hold 1 percent or more of a company, though it said the timelines would come later.

Liza Camelia Suryanata, the analyst who had never seen an opening like Friday’s, warns that even when a stock leaves the index, the risk must not keep building up in funds sold to ordinary savers. Gary Tan of Allspring Global Investments says the change should help, but that implementation will be key. And the head of OJK said the important thing now was to keep building confidence.

All eyes then turned to Bank Indonesia. Before Wednesday’s decision, some economists expected a rate rise to defend the rupiah, and Citi expected a jump to 6.25 percent. Holding still, one economist warned, could revive fears that the central bank is kowtowing to political pressure. On Wednesday, Bank Indonesia held its rate at 5.75 percent. The central bank said the decision was consistent with its strategy to steady the rupiah, as pressure from abroad grew stronger. Governor Destry Damayanti has said reserves of 146.3 billion dollars at the end of September would be enough to steady the currency. Josua Pardede, chief economist at Bank Permata, puts it simply: market confidence can fall much faster than the economy itself.

Indonesia now has until 30 April 2027 to convince MSCI, and the verdict is due by the end of June. MSCI expects to go ahead unless it finds clear evidence of real improvement.

In the end, the problems MSCI named come down to trust: in who owns the shares, and in who polices the trading. Fines, new rules and a cleaner index all help, but as Goldman Sachs put it, the burden of proof has shifted. Avoiding the downgrade will take clear evidence that the reforms really work, not just that they were announced. That evidence has to reach MSCI before that deadline.

And it falls to a president who began his third year facing student protests and sliding approval. In 1998, a crash and a crowd ended an era. This time, the question is whether Jakarta can rebuild trust before the money decides for it.