JAKARTA, Oct 29 (Reuters) - Global index provider MSCI's warning of a potential downgrade for Indonesia's stock market was a "short-term shock" and the country would recover, its central bank governor told a business community gathering on Thursday, where equity market turmoil took centre stage.
MSCI warned this month that it could cut Indonesia's stock market to "standalone" status, a more severe downgrade than its January warning of a demotion to "frontier" class due to opaque ownership and alleged
coordinated trading. Indonesia is currently classified as "emerging".
The surprise warning has accelerated the selloff on the stock market, with the main index down about 40% this year, making it the worst-performing in the world.
The performance of the stock market was discussed by nearly every speaker at Thursday's gathering of Indonesia's Chamber of Commerce, attended by some of Indonesia's biggest business groups.
"We see the MSCI situation as a short-term shock and we hope that once the issues causing concern have been addressed, it will be able to recover again," Bank Indonesia Governor Destry Damayanti said.
Destry said stock prices have become cheap, even reaching "unreasonable" levels "for a country like Indonesia".
Improving transparency could not happen overnight but she believed several reforms introduced by Indonesia's Financial Services Authority (OJK) would be enough to address MSCI's concerns, Destry said.
President Prabowo Subianto's brother, businessman Hashim Djojohadikusumo, told the same gathering MSCI's warning was "a very, very serious issue" that could trigger further capital outflows and drag the rupiah exchange rate as low as 22,000 per US dollar. The rupiah was currently trading around 18,100 per dollar, already near a record low.
"This could become a disaster and a catastrophe for the Indonesian economy," he said, adding that a much weaker rupiah could also have "an incredibly negative political impact".
Destry said BI would remain focused on stabilising the rupiah.
Prabowo told a cabinet meeting last week that MSCI was trying to "intimidate" Indonesia, but said the country would not be afraid, striking a combative tone in his first public reaction to the warning.
OJK head Friderica Widyasari Dewi, speaking at the Thursday event, reiterated Indonesia's commitments to reform the capital market and underlined that the country's economic fundamentals remained sound.
The OJK has adopted measures such as strengthening rules around stocks with high shareholder concentrations and increasing the minimum free float of shares.
"What MSCI thought we have not done well was enforcement. I as the regulator ... will convince them that we are going to continue reforms in a bold and ambitious way," she said.
She said parties sanctioned this month for violating trading rules have already paid up their fines of 2.1 trillion rupiah to the financial authority.
(Reporting by Stefanno Sulaiman, Ananda Teresia; Editing by Martin Petty and David Stanway)
