Geopolitical tension, not a possible MSCI downgrade, is the bigger force behind the rupiah’s weakness, according to Irman Faiz, Chief Economist at Bank Danamon. Speaking at a Bank Indonesia media briefing in Sabang, Aceh, on Saturday, he said foreign capital continues to flow out of Indonesian equities even as attention has focused on MSCI’s review of the country’s market status.
Geopolitics over index risk
Irman said escalating tension in the Middle East tends to push global oil prices and inflation higher. That, he said, can keep interest rates high for longer and strengthen the dollar, drawing foreign portfolio flows toward safe-haven economies and away from markets such as Indonesia’s.
“If geopolitics improves, foreign active funds still enter the Indonesian stock market; if geopolitics worsens, they tend to exit,” he said. He added that bond outflows tend to hit the rupiah harder than equity outflows, since they raise yields and push up the country’s interest payment ratio.
MSCI review still pending
MSCI has been weighing whether to downgrade Indonesia’s stock market status from emerging market to standalone market, a prospect that has already weighed on the Indeks Harga Saham Gabungan and coincided with capital leaving the country. A final decision is due in June 2027.
“The MSCI impact is probably limited through its direction before the final decision occurs,” Irman said.
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According to CNBC Indonesia’s records, foreign investors have sold a combined 95.98 trillion rupiah worth of shares in the Indonesian stock market, with net foreign selling at 16.5 trillion rupiah. Using a sensitivity estimate of $100 million in equity outflows as a base, Irman’s study points to a rupiah depreciation of around 11-12 rupiah from its previous level for each such outflow.
Related: Rupiah hits record low of Rp18,175 per dollar · Rupiah slips past Rp18,000 as MSCI pressure lingers
Source: Bank Danamon
