Rupiah fairly valued: Goldman Sachs

Rupiah fairly valued: Goldman Sachs

NEW YORK (Reuter): Despite concerns over political stability and President Soeharto's health, the Indonesian currency has adhered to its fair value, Goldman Sachs said in its "Weekly Analyst" on Tuesday.

According to the Goldman Sachs model, a long-run equilibrium value for the rupiah is 2,395 per U.S. dollar for the average of August 1996, compared to the average spot rate of 2,332 per dollar.

The Indonesian economy in 1995 grew faster than any year since 1991, to which the government responded with tighter macroeconomic policies to prevent overheating.

Slower exports would lead to marginally wider current account deficits about 3.9 percent of the GDP in 1996 before retreating in 1997.

"We do not see a change in Indonesia's policy of steady depreciation of the rupiah at 4.5 - 5.0 percent, which is considered consistent with a steady real exchange rate," it says.

Despite political uncertainty economic fundamentals are improving with slowing inflation and a manageable trade imbalance. The central bank will therefore attempt to keep interest rates up in coming months to slow the economy,

"We believe limited pressure on the currency due to political fall-out is likely to be met with higher interest rates rather than devaluation," it says

The rupiah is forecast to be at 2,354, 2,372, 2,400 and 2,456 per dollar at one-, three-, six- and 12-month horizon, in line with the corresponding forwards.