Indonesia’s Stock Market Shudders: Lessons from History and the Threat of “Fried Stocks”
Jakarta – The Indonesian Composite Stock Price Index (IHSG) experienced a turbulent period in late January 2026, triggering trading halts and sparking concerns about market stability. The downturn followed a warning from Morgan Stanley Capital International (MSCI) regarding transparency and structural issues within the Indonesian capital market, but likewise highlighted a long-standing problem: speculative trading in shares lacking strong underlying fundamentals, often referred to as “fried stocks.”
MSCI’s Warning and Immediate Market Reaction
On Tuesday, January 27, 2026, MSCI announced a temporary freeze on certain index changes for Indonesian securities, including updates planned for February 2026 and corporate events. This decision stemmed from concerns about a lack of transparency in shareholding structures and free float, as well as the risk of coordinated trading impacting fair price formation Tempo.co. The freeze included halting increases in the Foreign Inclusion Factor (FIF), share count adjustments and novel stock additions to MSCI Investable Market Indexes (IMI), as well as suspending upward migrations between index segments.
The IHSG reacted sharply, dropping from 8,975.33 to 8,320.56 on January 27th and continuing to fall to 8,232.20 on January 29th Tempo.co. Trading halts were implemented on January 28th and 29th as losses approached 8 percent.
The Government Response: Addressing “Fried Stocks”
Finance Minister Purbaya Yudhi Sadewa acknowledged the temporary shock but emphasized the strength of Indonesia’s economic fundamentals. However, he stressed the need for stock exchange authorities to address the issue of “fried stocks” – shares pushed up in price without a solid business foundation CNBC Indonesia.
A Historical Parallel: The South Sea Company Bubble of 1720
The practice of manipulating stock prices for quick gains is not new. A striking historical example is the South Sea Company in England in 1720. Established to manage national debt, the company was granted a monopoly on trade with South America, fueling public optimism and a surge in share prices Kompas.id.
Despite the promise of riches, the company’s business prospects were limited – South America was under Spanish control. This reality was obscured by aggressive propaganda, driving share prices from around 100 pounds sterling to over 1,000 pounds in a short period. Company officials secretly sold their shares while prices were high, anticipating the inevitable collapse.
When doubts arose, panic ensued, and the market crashed. Thousands lost their life savings, including the renowned scientist Isaac Newton, who famously lamented his inability to predict “the madness of men” Kompas.id. A subsequent investigation revealed bribery, conflicts of interest, and market manipulation, eroding public trust in the state and financial markets.
The Threat of MSCI Downgrade
MSCI has warned that if transparency improvements are not achieved by May 2026, it may reassess Indonesia’s market accessibility, potentially lowering the weight of Indonesian securities in the MSCI Emerging Markets Indexes or even downgrading the country to a frontier market Tempo.co.
Looking Ahead
The recent market volatility serves as a stark reminder of the risks associated with speculative trading and the importance of market transparency. Addressing the issue of “fried stocks” and improving the overall structure of the Indonesian capital market are crucial steps to restoring investor confidence and ensuring long-term stability. The coming months will be critical as Indonesia works to meet MSCI’s requirements and avoid a potential downgrade.