Indonesian capital markets risk a massive outflow of funds if the country fails to persuade global index provider MSCI not to downgrade it to frontier market status, analysts warn after a recent rout in shares.
Authorities are working to improve the stock market’s transparency and increase its free float ratios to calm the waters. But the effort to improve the quality of its share listings threatens another goal: to reverse a slump in IPOs.
Indonesia is currently classified as an emerging market, one notch above frontier. A downgrade would lead many risk-averse investors to pull out their cash.
“Currently, total investment in the MSCI Indonesia index is about USD 120 billion, while the largest investment in the MSCI Frontier index is Vietnam, at less than USD 60 billion,” said Harry Su, managing director of research at Samuel Sekuritas Indonesia. “So potentially, we could see more than USD 60 billion of foreign fund outflows in aggregate. That is massive and unimaginable.”
On January 27, MSCI decided to stop adding Indonesian stocks to its indexes and paused adjustments to the proportion of those that are already in its indexes, citing insufficient transparency and free float ratios. Investors anticipated a possible outflow and began a selloff on the following day. By January 29, analysts from Goldman Sachs and UBS lowered their outlooks for Indonesian equities to “underweight” and “neutral,” respectively.
The benchmark Jakarta Composite Index slid 7.3% on January 28, following the index provider’s announcement. The rout continued into the next day, with shares falling more than 10% at one point in the session, although it erased most of those losses, ending the day off 1.1%. The benchmark index rose 1.2% on January 30.
Authorities’ steps to deal with the turbulence lent support to shares in Southeast Asia’s largest economy. On January 29, the authorities proposed increasing the free float requirement for listed companies to 15%, easing some investor worries.
In Indonesia where many listed companies are affiliated with large conglomerates or state-owned enterprises, the free float ratio is often low, at 20% or less. Another factor contributing to volatility is the market’s large proportion of small investors. Individual investors accounted for nearly 60% of trading volume in the October-December quarter last year. Speculative trading is also common.
The authorities revealed additional measures on Friday, including mandatory reporting of share ownership below 5% to meet global transparency standards. It was previously only above 5%.
The Indonesia Stock Exchange (IDX) held a news conference on January 29, passing on comments from Indonesia’s Financial Services Authority that MSCI “still wishes to include shares of Indonesian issuers in its global index.” This demonstrates the Indonesian capital market’s significant potential for international investors, the bourse said.
The stock market’s swoon forced IDX CEO Iman Rachman to step down on January 30, along with chiefs and officials from several other financial authorities and organizations. Rachman had set a bold target of doubling IPOs on the IDX this year versus 2025. He said on January 2, “We anticipate the listing of 50 new securities in 2026. The IDX is undertaking various efforts and expanding its information channels, targeting an addition of two million new investors this year.”
Rachman said the bourse had expected six large-cap issuers and stated the exchange’s targets are based on macroeconomic and global assumptions. With these listings, the bourse’s average daily transaction value was forecast to reach IDR 15 trillion (USD 885 million).
The IPO market of Southeast Asia’s largest economy cooled significantly last year, with just 26 companies listing on the exchange. That marks a sharp decline from 41 offerings in 2024 and was far short of the bourse’s annual target of 66 listings. Among the notable listings in 2025 was Merdeka Gold Resources, which raised USD 283 million.
Indonesia’s stock market trails far behind Bursa Malaysia, which led Southeast Asia’s IPO activity in 2025 with a total of 60 listings. Among Malaysia’s most notable share flotations was Eco-Shop Marketing, whose offering raised USD 230 million, its largest of the year.
But the MSCI warning and subsequent market volatility pose a serious challenge to Jakarta’s hopes for an IPO rebound. The disappointing 2025 for IPOs reflected a deliberate pivot toward high-quality listings. The index provider’s demands are forcing the market to focus on such listings, making it difficult to raise the number of IPOs.
“If a company that plans to go public is supported by strong fundamentals and strong transparency, it won’t cause any issues. The problem is, if it does not want to be transparent, it may be difficult to be included in MSCI indexes,” Su said. Being included in stock indexes broadens a stock’s investor base, enhancing its stability. Lower-quality listings could face funding difficulties in the future, as investors tend to shun riskier shares.
High-quality IPOs require strong fundamentals and steady growth to attract major fund managers, Su noted. This presents a clear challenge, as Indonesia’s economic growth remained stuck at around 5% from 2015–2024, consistently falling short of former President Joko “Jokowi” Widodo’s 7% target.
“The reality is, strong IPOs require supportive economic expansions. With growth having stalled at around 5%, it becomes much harder for companies to demonstrate the steady progress investors demand,” Su said.
Indonesia last reached 7% growth in mid-2021, a high water mark driven by a post-pandemic rebound. The new administration under President Prabowo Subianto has set an even more ambitious goal of 8% growth.
“At the end of the day, getting corporations to go public is crucial, not only unlocking capital for expansions, but also directly fueling broader economic growth,” Su said. “Although the advantages are clear, continued listing by companies requires constant support from both the government and authorities to provide an improved operating environment.”
Family businesses remain a cornerstone of Indonesia’s job market. Their role was highlighted in 2025 when two homegrown dynasties, Bank Central Asia and Gudang Garam, were ranked in a global Family Business Index. The fact that both are listed on the IDX highlights the link between family enterprises going public and their ability to expand job creation and economic impact. This dynamic is central to Indonesia’s ambition to revitalize its capital markets and drive future growth.
Hermanto Tanoko, founder and CEO of Tancorp, the holding company behind big Indonesian brands such as Avian, Cleo, No Drop, and Vasa, and the country’s ninth richest person according to Forbes 2025, attributed sluggish economic growth in part to weak upstream industries. These, he said, have eroded Indonesia’s competitiveness compared with countries such as China.
According to Tanoko, Chinese exporters’ formidable advantage stems from a combination of large state subsidies and an industrial scale that dwarfs competitors. They have production capacities dozens of times larger than those of Indonesian companies. This scale drives down costs through automation, robotics and cheaper raw materials, creating an ecosystem that can dominate global markets.
“We must not be intimidated. Our strategy is straightforward, that is to expand our capacity and relentlessly lower unit costs. Our products must have the resilience to stand strong, both in the domestic market and overseas,” Tanoko said.
“That is precisely why we need resilient leaders with a tenacious mindset and bold vision. When I entered the ceramics industry, I encouraged my entire team not to be intimidated by products from China or India. Instead, we focused on expanding our capacity and driving down per-unit costs. By doing that, we can compete confidently, both here in Indonesia and abroad,” he added, saying he is also focusing on mergers and acquisitions to support medium-size companies and enable their growth.
“If these companies can eventually go public, it would be a definitive win-win,” Tanoko said.
Tanoko further suggested the Indonesian Stock Exchange’s greater selectivity bodes well for the future because it can foster generation of savvy investors who can analyze company fundamentals and create a robust national investment culture.
The clock is ticking for Indonesia to improve the market’s quality. The MSCI warnings came as part of an ongoing review scheduled for release on February 10. The next review is due out on May 12. The May review may include a downgrade for Jakarta.
“We have four months until the exodus occurs, and I don’t think anyone in the country wants this to materialize,” Su said.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.