Fallout from MSCI Inc.’s warning that it may remove Indonesia from its global equity indexes is spilling into corporate credit, causing risk premia on dollar bonds of local companies to widen to a six-year high over Asian peers.

The extra credit spread that investors demand to hold the Indonesian notes over regional peers has jumped 28 basis points to 67 basis points, the widest since 2020, since the MSCI move, Bloomberg indexes show. The blowout in Indonesian corporate bond spreads shows how the possible downgrade by the index provider is fueling deeper-seated concerns about governance in Southeast Asia’s largest economy and threatens to disrupt corporate funding.

The renewed spotlight on Indonesia comes at a volatile time in global markets, which has the potential to exacerbate pressures on the nation’s companies. Yield premiums on global corporate bonds widened to their most in 17 months this week as AI and geopolitical concerns mounted, driving investors into haven assets Friday.

“A downgrade would erode market confidence in Indonesia’s willingness and ability to address structural investability concerns,” said Rena Kwok, a senior credit analyst at Bloomberg Intelligence.

The turmoil is only the latest headache for Indonesian companies that tap capital markets for funding after both Moody’s and Fitch lowered their outlooks on the sovereign earlier this year, citing concerns about policy credibility and governance under President Prabowo Subianto. Indonesia’s central bank earlier this week cut the amount of funds that lenders need to keep with it — the reserve requirement— which will free up more than $10 billion for lending, as it sought to avoid policy tightening that would stall economic growth.

MSCI is seeking feedback through April 30 and will make a final decision by June 30, 2027 on its proposal to move Indonesia from emerging-market to standalone status.

“MSCI’s action is fundamentally centered around equity market dynamics, but it has weakened market sentiment across offshore credit as well,” said Dhiraj Bajaj, Chief Investment Officer of Asia fixed income and equities at Lombard Odier Investment Managers. “We have used the opportunity to add to some holdings.”While the government itself is by far the largest Indonesian borrower in overseas bond markets, the nation’s banks and commodity-related companies also tap the dollar funding markets. The selloff in Indonesian assets has been visible in the riskiest debt sold by the banks.

State-controlled Bank Mandiri’s Additional Tier 1 note, which is subordinated in payout ranking, has declined 3 points since the MSCI announcement on Oct. 15, compared with a 0.8 point drop in Asian high-yield bonds overall, data compiled by Bloomberg show. The AT1 is currently trading near 95 cents on the dollar after pricing at par, or 100, last month, the data show.

A comparable bond of Bank Negara Indonesia, which is also government owned, has slipped to about 94 cents, after six straight days of declines, according to data compiled by Bloomberg. Still, senior debt of both lenders remains near 99 cents.

Larger Indonesian banks like Mandiri and BNI have strong capital and funding positions, helping to provide a buffer against elevated asset quality risks, according to Nicholas Yap, head of Asia credit desk analysts at Nomura Holdings Inc.

“While AT1 valuations are starting to look cheap, they could remain cheap until there is greater clarity on MSCI’s eventual decision or there is an improvement in broader macro sentiment in Indonesia,” said Yap.