Indonesian Rupiah: Depreciation bias with MSCI risk – MUFG

MUFG’s Lloyd Chan highlights that MSCI reclassification risk could trigger a broader Indonesia risk-premium shock, weighing on the Rupiah and local assets. The bank notes existing IDR headwinds from high Oil prices, weaker external balances and elevated US yields, and maintains a depreciation bias with specific USD/IDR forecasts through mid-2027, alongside expectations for higher BI policy rates.

MSCI shock adds to rupiah pressures

"MSCI risk extends beyond equities. A potential move from Emerging Market directly to Standalone status risks becoming a broader Indonesia risk-premium shock, affecting foreign portfolio participation, IDR, BI policy and local bond yields."

"Foreign confidence is the key transmission channel. Passive selling could reach around USD3.1bn, with a stress scenario of up to USD5.5bn including assumed active de-risking. More importantly, persistent governance and investability concerns could keep foreign institutional participation structurally weaker."

"Equities are cheaper, but not yet compelling. The JCI correction has improved valuations, but persistent foreign selling, weaker earnings expectations and the absence of a clear marginal buyer argue against calling a durable bottom. Credible reforms and a return of foreign flows are needed for a sustained re-rating."

"Higher BI rates may slow, rather than reverse, the rupiah depreciation trend. We expect BI to raise the policy rate to 6.25% by end-2026, but tighter policy cannot directly resolve MSCI’s structural concerns. Local bond yields are increasingly attractive, but rupiah weakness would likely undercut their appeal."

"MSCI compounds existing IDR headwinds. Equity outflows add to an already difficult mix of high oil prices, weaker external balances and elevated US yields. We maintain a depreciation bias, with USD/IDR forecast at 18,350 in Q4 2026, 18,500 in Q1 2027 and 18,700 in Q2 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)B