IHSG’s Sharp Decline: A Market Shock That Forces Long-Overdue Capital Market Reform

 By Kusnandar & Co., Attorneys At Law – Jakarta, Indonesia

 

The sharp decline of Indonesia’s Composite Stock Price Index (IHSG) over two consecutive trading days is not merely a routine market correction. It represents a critical stress test for Indonesia’s capital market structure and a clear warning that long-standing structural weaknesses can no longer be ignored. The scale and speed of the sell-off—severe enough to trigger trading halts—signal a crisis of confidence rather than a temporary bout of volatility.

 

At the core of this turbulence lies global investor concern, particularly following warnings from Morgan Stanley Capital International (MSCI). As a key global index provider, MSCI plays a central role in shaping international portfolio allocations. Its concerns regarding transparency, free-float calculation, and ownership structure in Indonesia’s stock market have profound implications. When doubts emerge over the reliability of market data and investability standards, global investors tend to react swiftly—and decisively—by reducing exposure.

 

The market’s reaction was immediate. Foreign investors engaged in aggressive sell-offs, liquidity thinned rapidly, and price discovery turned disorderly. This response highlights an uncomfortable reality: confidence in capital markets is built not only on economic growth prospects, but also on governance, clarity of regulation, and trust in data integrity. Without these foundations, even fundamentally strong markets become vulnerable to sudden capital flight.

 

In response to the turmoil, Indonesia’s Financial Services Authority (OJK) announced three major reform initiatives aimed at strengthening the capital market. These reforms focus on improving free-float requirements, enhancing transparency of share ownership, and reinforcing regulatory oversight of market data and trading mechanisms. Conceptually, these measures are well-targeted. Higher free float can improve liquidity and price efficiency, while clearer ownership disclosure enhances accountability and reduces information asymmetry.

 

However, the timing of these reforms raises important questions. Why did such fundamental adjustments only gain urgency after a market shock? Structural reforms are most effective when implemented proactively, not reactively. Markets tend to penalize delayed responses, interpreting them as signs that risks were underestimated or overlooked. In this sense, the IHSG correction exposes not only market fragility but also the cost of regulatory inertia.

 

Beyond short-term stabilization, the real challenge lies in restoring and sustaining long-term investor confidence. Global institutional investors do not evaluate markets based on isolated policy announcements. They assess consistency, enforcement, and the credibility of institutions over time. For OJK’s reform agenda to succeed, it must be implemented transparently, communicated clearly, and enforced without exception. Half-measures or prolonged uncertainty would only deepen skepticism.

 

It is also important to recognize that the damage from market turmoil extends beyond index levels. Volatility of this magnitude undermines domestic investor sentiment, discourages retail participation, and raises capital costs for Indonesian companies. If left unaddressed, such conditions could weaken the broader financial ecosystem and reduce the attractiveness of Indonesia as a long-term investment destination.

 

In the short term, market volatility is likely to persist as investors reassess risks and await concrete implementation of reforms. In the medium to long term, however, this episode can serve as a turning point. If regulators use this moment to genuinely align Indonesia’s capital market with global best practices, the crisis could evolve into an opportunity.

 

Ultimately, the recent IHSG plunge should not be viewed simply as a market setback. It is a powerful reminder that credibility, transparency, and governance are the true currencies of modern capital markets. Whether Indonesia emerges stronger from this episode will depend not on how quickly the index recovers, but on how decisively reforms are executed to rebuild trust and resilience for the future.

By : K&Co - February 2, 2026