Indonesia Faces Rare MSCI Exclusion That Could Cut Off Foreign Capital Flows

MSCI is preparing to remove Indonesia from its global equity indexes, according to reporting on October 18, in what would be a rare exclusion of a major emerging-market economy. Indonesian officials described the looming move as a 'wake-up call' for the country's capital markets. Exclusion from MSCI indexes matters because large pools of passive and institutional capital are benchmarked directly to those indexes; removal typically forces index-tracking funds to sell local shares and can shut a country off from a steady source of foreign portfolio investment. Indonesia would be a notable case given its size among emerging-market economies. What is unresolved is the timeline for the exclusion and whether Indonesian authorities will respond with market reforms aimed at reversing or delaying MSCI's decision.