Jakarta stocks plunge 11 percent, the steepest fall since 1998, after MSCI moves to strip Indonesia of emerging market status

A label changed on Friday, and Southeast Asia's biggest economy had its worst market day in almost three decades.

MSCI, the index provider whose classifications steer billions of dollars of passive investment, said Indonesia's continued classification as an emerging market is no longer appropriate and launched a consultation on moving the country to standalone status. Standalone is a colder category than it sounds. A standalone market sits outside the emerging market indexes entirely, which means every fund that tracks those indexes, or is measured against them, has to sell Indonesian shares whether it wants to or not.

Jakarta's benchmark index fell 8 percent at the open, enough to trigger a 30 minute trading halt, and kept falling when trading resumed, down as much as 11 percent on the day and heading for its steepest one day drop since January 1998, the depths of the Asian financial crisis. The index has now lost nearly 40 percent this year, the worst performance in the region. The rupiah weakened to 18,070 per dollar, its lowest since early August and close to its lifetime low of 18,190.

The downgrade lands on a market that was already shrinking inside the indexes. Indonesia's weighting in the MSCI emerging market index had fallen to 0.4 percent at the end of September from 1.16 percent at the start of the year. Reuters reported the news stunned investors and angered officials in Jakarta, and that the proposal is worse than the threat investors had priced in, which was a demotion to frontier market status. Frontier at least keeps a country inside a tracked index family. Standalone takes it out of the room.

The rest of Asia spent Friday recovering from Thursday's technology rout rather than following Jakarta down. South Korean shares rebounded about 2.5 percent after the previous session's fall of more than 7 percent, and Taiwan and Singapore added about 1 percent each. The Indonesian fall was its own event, caused by a classification decision, not by the regional selloff. What happens next runs through the consultation: MSCI proposes, market participants respond, and the provider decides. Until then, every Indonesian company that raised money on the promise of index inclusion is trading under a question mark. This report describes market moves and a pending index decision only. It is not financial advice. The picture is an illustration of a trading floor board in the red, not a photograph.