Indonesian stocks suffered their steepest one-day fall in nearly three decades on Friday after MSCI said the country was no longer worthy of "emerging market" status, threatening billions of dollars in capital outflows from Southeast Asia's largest economy.

South Korea's benchmark KOSPI rebounded from a 6-month closing low hit in the previous session, but remained on track for its biggest weekly loss in 18 years following a brutal selloff earlier in the week on AI worries.

Stocks in Taiwan also edged higher after an over 3% decline the previous day, while its dollar weakened to late-July lows of 32.518 per US dollar.

SHROUDED IN DOWNGRADE GLOOM

Indonesia's equity index plunged as much as 11.4% to its lowest point since early November 2020, clocking its worst one-day drop since January 1998.

Earlier in the day, the benchmark opened 8% lower, which triggered a 30-minute trading halt. Major banks in the country, including Bank Central Asia, Bank Rakyat Indonesia and Bank Mandiri each plunged nearly 15%.

The rupiah weakened to 18,070 per US dollar, its lowest level since late July and approaching its lifetime low of 18,190.

In a surprise move, MSCI said it would put Indonesia on a path to "standalone market" status, worse than the previously warned "frontier" category. It also intends to remove the country from a suite of products tracked by global investors.

A downgrade to "standalone" status would place Indonesia alongside Argentina, Lebanon, Palestine, and Ukraine, making it the only Asia-Pacific market in that classification. It would also be the largest economy in the group, at more than twice the size of Argentina, the next-largest economy.

A "standalone" status would exclude Indonesian stocks from global indexes tracked by billions of dollars in passive investment, forcing funds that follow or are ranked against the indexes to sell.

"Indonesia's immediate priority should be to demonstrate measurable improvements in market transparency and regulatory enforcement rather than merely announcing additional reforms," said Josua Pardede, chief economist at Bank Permata.

"Preventing a downgrade would be an important near-term achievement, but the more fundamental objective should be rebuilding Indonesia's credibility as a transparent, well-regulated, and reliable destination for long-term international investment."

With the session's losses, Jakarta stocks have now lost nearly 40% this year, making them the world's worst-performing equity market.

Elsewhere in Southeast Asia, Singapore stocks added 0.8%, while those in the Philippines advanced more than 2%. Stocks in Malaysia slipped 0.7%.

An official advance estimate showed the Malaysian economy grew 5.3% year-on-year in the third quarter.

Thai stock markets were closed for a holiday, according to the stock exchange website.

Highlights:

** FACTBOX: Indonesia suffers a series of market sentiment setbacks in 2026

** Indonesia financial regulator pledges improvement after MSCI downgrade warning

** EXPLAINER: Why is the haze so bad in Southeast Asia this year? - Reuters