Indonesia's benchmark stock index tumbled more than 5% on Monday, falling to its lowest level in six years, due to growing concerns in the market about a possible downgrade of MSCI, which further triggered panic about the outflow of foreign capital.

The Jakarta Composite Index fell to its lowest point since early October 2020, continuing the continuous selling in Indonesia's stock market. MSCI , an index provider, proposed last Friday to reclassify Indonesia from an emerging market to an independent market, which means that the country may be removed from major global stock benchmark indices.

MSCI is expected to make a final decision in June, and whether to reclassify will depend on whether Indonesian authorities can demonstrate substantial improvements in market governance and transparency.

In a report on Sunday, Goldman Sachs warned that if Indonesia were to be completely removed from the MSCI Emerging Markets Index, it could trigger an outflow of approximately $5.6 billion from passive funds, which is equivalent to the average trading volume of the constituent stocks in the MSCI Indonesia Investable Market Index over 18 trading days.

The same line states that if FTSE Russell takes similar actions subsequently, another $2.7 billion in funds could be at risk. However, Goldman Sachs emphasizes that this would be an independent scenario.

Goldman Sachs estimates that active funds tracking MSCI and the FTSE index hold more than $8 billion in Indonesian stocks, but whether such investors will sell will depend on their own decisions, and not be automatically triggered by a downgrade in ratings.

Goldman Sachs maintains a low rating for Indonesian stocks, citing uncertain index prospects, weak corporate earnings, and the persistent presence of macroeconomic headwinds.

Goldman Sachs strategists led by Alvin So wrote: "Valuations have been significantly compressed, but they are still above historical lows; indices, earnings, and macro risks limit revaluation of valuations."

Data provided by Goldman Sachs shows that as of last Friday, the MSCI Indonesian index had fallen by 47% this year, and during the same period, foreign capital net flowed out of Indonesian stocks by $5.1 billion.

The proportion of foreign capital holding Indonesian stocks has dropped from 27% in January to 25% in October, while the market value of foreign-held shares has almost halved from $250 billion to about $130 billion, according to Goldman Sachs.

Despite the heavy decline, Goldman Sachs still warns that Indonesian stocks may not have hit bottom yet. The expected price-earnings ratio for the Indonesian index over the next 12 months has dropped to 7.3 times, the lowest level since the global financial crisis, but it is still higher than historical lows. MSCI

These strategists also expect that the Bank of Indonesia will raise interest rates by 25 basis points in each of the fourth quarter of 2026 and the first quarter of 2027, for a total of two more rate hikes, which could further put pressure on economic growth and stock market valuations.