When trust trades at a discount: Indonesia’s market plunge and the hard work of credibility repair

The sharp sell-off that rattled Indonesia’s capital markets in late January was not triggered by collapsing earnings or a sudden macro shock. It was sparked by something far more elusive – doubt. In a matter of days, uncertainty over Indonesia’s standing in global indices erased decades of market gains, pushed the rupiah to near-record lows, and forced a rare reset at the country’s most powerful financial institutions. What followed was not merely a market correction, but a country-level reckoning over trust.

The immediate catalyst was a warning from MSCI, the global index provider whose classifications quietly govern trillions of dollars in capital flows. When MSCI flagged concerns that could jeopardise Indonesia’s emerging market status, foreign investors reacted swiftly. Funds sold first and asked questions later. The Jakarta Composite Index plunged to levels not seen in decades, while repeated trading halts underscored the severity of the panic.

What began as a technical concern over index classification escalated into a full-blown confidence crisis, culminating in leadership resignations at both the Indonesia Stock Exchange (IDX) and the Financial Services Authority (OJK). The episode became a referendum not just on market mechanics, but on how Indonesia governs, communicates and earns investor trust.

Don't miss: Indonesia's capital market turmoil spurs leadership change and messaging shift

MSCI: the scorekeeper markets cannot ignore

As Joel Shen, head of tech at law firm Withers, explained, MSCI is neither a regulator nor a policymaker. It is a scorekeeper. Its role is to classify countries into Developed, Emerging or Frontier markets, determine which stocks enter global indices, and assign country weightings.

That technical function carries immense power. Trillions of dollars are invested passively against MSCI benchmarks. Global emerging market funds, pension funds and ETFs do not selectively choose exposure to Indonesia; they buy what MSCI includes, in the proportions MSCI sets.

When MSCI flagged “investability problems” in Indonesia – and froze index adjustments pending further review – it was not passing judgment on the country’s growth story. It was questioning whether foreign investors could reliably buy, sell and price Indonesian shares. To global funds, that distinction barely matters. What they hear is uncertainty, and uncertainty is toxic.

That’s a red flag to foreign investors.

“What investors hear is: ‘Something is wrong. We don’t know how bad yet’. And if there’s one thing investors hate more than bad news, it’s uncertainty,” Shen added.

Liquidity, transparency and the free-float problem

MSCI’s concerns were not new, but their timing proved explosive. According to the index provider, Indonesian listed companies suffer from chronically low free-float levels, tightly held ownership structures, and insufficient transparency around ultimate control. These issues raise questions over liquidity and fair price formation – the foundations of any investable market.

Once MSCI pressed pause, rules-based funds moved automatically. Emerging market mandates began to de-risk. Index trackers rebalanced. Billions of dollars flowed out of Indonesian equities, and the rupiah weakened as foreign investors sold local currency to exit positions.

This dynamic highlights a structural vulnerability. Indonesia’s markets are deeply integrated into global capital systems, yet confidence in governance has not kept pace with market growth. When opacity appears systemic, investors stop distinguishing between individual companies and the broader market.

Why leadership certainty matters

As volatility intensified, the government responded decisively – and visibly. IDX president director Iman Rachman resigned, framing his departure as accountability for the turmoil. Finance minister Purbaya Yudhi Sadewa backed the move, describing it as a positive signal that authorities were acting quickly and seriously.

The reset did not stop there. OJK’s chairman and several senior commissioners also stepped down, leaving Indonesia’s two most important market institutions under interim leadership. President Prabowo Subianto instructed both bodies to prioritise stability, accelerate reforms and restore confidence among global investors.

Yet the scale of the response underscored the gravity of the situation. This was no longer about halting a sell-off. It was about repairing credibility.

For Bhima Yudhistira, executive director of the Centre of Economic and Law Studies (CELIOS), the most urgent task is appointing a definitive OJK chair. Prolonged interim leadership, he argued, prolongs uncertainty at a time when markets are hypersensitive to signals.

In his view, the next OJK chair must meet several non-negotiable criteria: independence from political parties, deep competence in financial services and technical regulation, high integrity with no legal baggage, and commitment to reforming market supervision.

The person has to carry a positive reputation in financial markets, ideally coming from a professional background.

This emphasis reflects how investors assess regulators today. Markets are not looking for administrators. They want stewards who understand global capital flows, investor psychology and the consequences of regulatory ambiguity.

Narrative management is not optional

Beyond regulation, Yudhistira highlights a less tangible but equally powerful factor: narrative discipline. In fragile conditions, inconsistent or poorly informed public statements can amplify fear. Comments from officials without market expertise – particularly on sensitive issues such as bank governance or state-owned financial institutions – can quickly erode confidence.

Clear, direct and unambiguous communication matters. So does consistency. “Regular updates on reform progress, transparency around policy rationale, and evidence-based decision-making are critical to restoring credibility,” he said. Overproduction of new regulations, especially complex POJK rules that burden industry without improving clarity, risks undermining confidence further.

In short, credibility is shaped as much by how institutions speak as by what they do.

Trust as a system-wide issue

The market shock did not occur in isolation. It coincided with heightened scrutiny of governance failures in Indonesia’s startup ecosystem, from fraud cases to weak disclosure practices. While private-market scandals and public-market downgrades may appear unrelated, they are symptoms of the same underlying anxiety.

“The more I reflect on them, the more it feels like they are manifestations of the same underlying issue: trust (or the erosion of it) playing out in parallel across private and public markets,” Shen said.

When governance lapses become frequent, investors stop treating them as exceptions. Trust erodes across the system. Public markets anchor private valuations, and any downgrade in perception ripples outward – resetting exit expectations, compressing valuations and cooling capital inflows.

This is why the MSCI episode matters beyond listed equities. “This isn’t just a public markets problem, but a country-level repricing of risk,” Shen emphasised.

If you’re an Indonesian VC or a startup founder, and think the recent market crash doesn’t affect you, think again.

Rebuilding trust is slower than restoring prices

IDX acting president director Jeffrey Hendrik has pledged engagement with MSCI and reaffirmed Indonesia’s ambition to build a world-class capital market grounded in transparency and governance. Early signals suggest foreign investors are watching closely, waiting to see whether reforms translate into execution.

Danantara Indonesia CEO Rosan Roeslani has noted that overseas investors have been understanding, provided commitments are followed through. That caveat is crucial. Markets forgive volatility. They are far less forgiving of broken promises.

“Trust is no longer a soft concept,” Shen said. “Recent events have made clear that trust is not branding, but liquidity. If investors can’t see how the sausage is made, they won’t buy it, no matter how good the sizzle sounds.”

Indonesia remains rich in resources, opportunity and long-term growth potential. But the events of January exposed a gap between economic promise and institutional trust. In global capital markets, trust lowers transaction costs, compresses risk premiums and allows capital to move at scale. Without it, even strong fundamentals struggle to attract patient money.

The sell-off may yet prove temporary. But its implications are lasting. For regulators, issuers and corporate leaders alike, the message is clear: trust is no longer a soft virtue or a branding exercise. It is infrastructure.

And once damaged, it is expensive – and time-consuming – to rebuild.

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