Goldman Sachs says Jakarta likely to peg currency

Goldman Sachs says Jakarta likely to peg currency

HONG KONG (Dow Jones): A currency board will probably be implemented in Indonesia by the middle of this year and could be announced very soon, according to Goldman Sachs & Co.'s analysis team.

But odds are still against the success of a currency board without big changes in the government, according to the firm"s report.

"Following his opening address at the National Assembly, we now believe (President) Soeharto will install a currency board. He is likely to announce the measure within the next two weeks, but will probably delay implementation until summer, while the government focuses in the near term on resurrecting the banking system," according to a report from the U.S. securities firm.

The Goldman Sachs report, distributed on Friday, said "recent conciliatory statements on both sides increase the chance that the International Monetary Fund and the United States will acquiesce to the currency board, especially if Soeharto moves more aggressively against cartels involving his children."

The widely discussed level of 5,000-5,500 appears unsustainable," due to political uncertainty and the high interest rates that would be required to defend it, according to Goldman Sachs.

Uncertainty would be reduced if a link was established with the U.S. dollar that was valued at 7,000 rupiah. That level "could be sustainable if the administration exercises a strong dose of political will," according to Goldman Sachs.

Late in trading Friday, the dollar was trading at Rp 10,050.

Goldman Sachs said the odds are stacked against a successful implementation of the currency board without a few changes.

"Is it sustainable? This is the key question. The answer should quickly become apparent," said the report, which isn't dated.

The firm would want to see a new cabinet with economic ministers capable of winning public support at home and abroad.

Also, bank restructuring would have to move forward and Soeharto would have to "tough out the reaction to the job losses and economic slowdown that a currency board will exacerbate."

Commenting on Soeharto"s apparent choice for vice president, B.J. Habibie, Goldman Sachs said "his economic outlook and weak links to the military have raised sharp concerns." But the firm doubts Soeharto considers Habibie as his successor.

Political uncertainty remains the largest obstacle to long- term stabilization of the rupiah and recovery of the stock market, according to Goldman Sachs analysts.