(Bloomberg Opinion) -- The latest blow to Indonesia, from MSCI Inc.’s warning it’s considering removing the country from its global indexes, couldn’t have come at a worst time. Southeast Asia's largest economy appeared to be finding its feet after a rocky few years. Now, it faces an exodus of international capital.
The prospect that its stock market is ejected from key industry gauges unless there are improvements in market governance is more than just a setback. It’s also a humiliation for President Prabowo Subianto, who has placed great store in significantly accelerating economic growth. The task, which was a stretch in benign conditions, becomes out of reach in the absence of investor confidence.
The benchmark Jakarta Composite Index, the world's worst performer this year, tumbled almost 12% on Friday after the index provider’s threat, and extended the decline on Monday. It will likely be subject to further losses and currency bears are seeing this as an opportunity to push the rupiah toward a record low. Sovereign bonds are also susceptible. The central bank and finance ministry have their work cut out, and their first goal must be limiting the erosion of trust.
Indonesia has strived since January to stave off a downgrade from MSCI. The announcement Friday morning in Asia that it's considering applying the standalone designation stunned because it was worse than expected. Initially, the question was whether the country would be stripped of emerging-market status and saddled with a frontier-market label. Now, that looks like a good outcome.
If carried out, relegating Indonesia to the standalone rank would amount to the first double downgrade since Russia was cut after invading Ukraine. A decision will be made in June and, while MSCI is prepared to hear from Indonesian officials, Jakarta is clearly looking at some downgrade. Stopping the worst kind, and dealing with instability in the interim, must become the government’s No. 1 priority.