Short-selling in limbo as public unrest hits Indonesian stocks

Indonesia’s stock market took a heavy blow in late August during nationwide riots and protests. On the Sep. 5 market close, the Indonesia Stock Exchange Composite fell to 7,867.35; by Sep. 8, after the weekends, it had dropped to 7,766.85, a decline of about 1.28 percent.

The sharp increase of foreign-driven selling has cast doubt on the IDX’s earlier plans to roll out short selling for 243 securities in the form of shares and six mutual fund securities. During periods of political unrest, short selling would exacerbate the Composite index’s downward pressure.

The index’s decline was largely driven by foreign investors who dumped around Rp 1.12 trillion (US$68.4 million) in Indonesian stocks, while the rupiah also weakened.

The turmoil deepened when the market opened on Sept. 1, with the Composite closing down 1.2 percent from the beginning of the day. The rupiah also decreased further to Rp 16,463 per US dollar.

Bank Indonesia (BI) intervened in the foreign exchange and bond markets. The government also sought to reassure investors by highlighting Indonesia’s ample foreign reserves, a stable banking system, 5.12 percent GDP growth and social support measures.

However, the unrest has intensified rather than eased. Protests continued for well over a week, exceeding expectations. By late August, eight people had died and looting and arson attacks had disrupted businesses in major cities, sparking concerns of a repeat of the 1998 unrest that toppled former president Soeharto.

The prolonged unrest has added layers of market uncertainty. Analysts cautioned that political instability could keep uncertainty high for weeks, particularly if investor sentiment did not improve or fresh protests erupt. Companies began to take precautions, telling employees to work from home, while schools in several areas were temporarily closed.

The Financial Services Authority (OJK) issued letters a few weeks earlier saying that the planned start date for short selling was Sept. 29. PT Ajaib Sekuritas Asia and PT Semesta Indovest Sekuritas were granted permits to be brokers. While the situation is developing, it is possible that public unrest could decrease and investor confidence could return before the deadline.

IDX officials are doubtful that the short selling mechanism will be introduced this month. The final decision rests with the OJK, which has until Sept. 26, to make the call. The IDX itself would welcome short selling, viewing it as a way to boost liquidity in Indonesia’s stock trades, potentially increasing turnover by 5 to 17 percent, which was the case for other countries.

Short selling has long been heavily regulated in Indonesia, largely to protect the retail investor base, which tends to be more vulnerable to market swings than institutional players. Retail investors accounted for 18.2 percent of total market ownership in July, up from 10.6 percent before the COVID-19 pandemic.

Both the IDX and the Finance Ministry aim to sustain this retail participation growth, supported by initiatives such as easier account opening, app-based trading and nationwide investor education campaigns.

Short selling works by letting investors borrow shares and sell them at the market price, with the goal of repurchasing them later. If the share price falls, the difference between the price sold and rebought becomes profit. While this mechanism serves legitimate purposes, such as enhancing liquidity and giving investors tools to hedge risk, it also carries risks of magnifying downward moves.

In fragile conditions, intense short selling can create a feedback loop where falling prices draw in more short sellers, triggering sharper declines. Such swings risk sparking panic selling and further eroding confidence. The sense of instability deepened after Finance Minister Sri Mulyani Indrawati announced her resignation, a move that stripped the government of one of its most trusted economic stewards and heightened investor concerns over the country’s fiscal direction.