Greg Earl, Jakarta – Indonesia's President Soeharto has dismissed half the directors of the country's central bank and established a group of private sector advisers amid a growing struggle over economic policy.

The moves coincided with the downgrading of Indonesia's sovereign debt rating yesterday to below investment grade status, and a ratings review of six State-owned banks ahead of an expected announcement of major State bank mergers in the next week.

Moody's Investors Service also downgraded sovereign ratings for Malaysia, Korea and Thailand, warning that weaknesses in the Japanese economy and banking system were another negative for the regional outlook.

The Indonesian Government gave no explanation for the dismissal of four Bank Indonesia directors.

The dismissals followed an intense struggle over the closure of 16 banks as part of the International Monetary Fund rescue package.

President Soeharto's son, Mr Bambang Trihatmodjo, and his half-brother, Mr Probosutedjo, attacked the closure of their banks.

There have also been separate allegations of corruption against the central bank in the past year.

The central bank's governor, Mr Djiwandono Soedradjat, has been criticised for the banks' closures, but as a Cabinet member he would have been much harder to dismiss than the directors.

The State Secretary, Mr Moerdiono, announced the formation of a private-sector advisory group to help co-ordinate economic policy and relations with the business community after a meeting between the president and a group of conglomerate heads.

There has been a public battle between sections of the business community and leading economic ministers over the direction of economic policy for several weeks.

A month ago, the head of the country's peak business group, Mr Aburizal Bakrie, announced some important economic policies.

Late last week, the economic ministers appeared to return to influence. There were speeches and a meeting with Mr Soeharto on Friday after several had receded from public view.

Mr Soeharto has previously used an informal forum of conglomerate chiefs to discuss economic problems. Two years ago he used the group to float a 2 per cent tax surcharge – to deal with poverty – which he controls outside the tax system.

The new Indonesian group parallels the announcement of a similar body by Malaysia's Prime Minister, Dr Mahathir Mohamad, earlier this month, which he said yesterday would be led by former finance minister and leading businessman, Mr Tun Daim Zainuddin.

The Malaysian National Economic Action Council was originally seen as a challenge to the authority of the Finance Minister, Mr Datuk Anwar Ibrahim. Those fears receded with the release of Mr Datuk's economic reform announcement two weeks ago after reported co-operation with Mr Tun.

Moody's downgraded Indonesia's foreign currency country ceiling for bonds one level to Ba1 from Baa3, and its foreign currency ceiling for bank deposits by two levels to Ba3 from Ba1.

Thailand is also below investment grade at Ba1, down from Baa3 previously; Malaysia was lowered to A2 from A1; and Korea was lowered to Ba1 from Baa2.

The agency said the rupiah's fall was likely to create substantial strains in the banking system, although it said the IMF rescue package would be sufficient unless confidence deteriorated because of political factors or other events in Asia.

Indonesia's foreign bond rating was downgraded to the same level as Thailand's, although the Thai foreign currency deposit rating was already one level lower than the new rating for Indonesian foreign currency deposits.

Indonesia is set to announce a merger plan for its seven State banks in the next week in response to the IMF package, but it is not clear how many banks will result from the measure.

Apart from warning of a potential downgrade of the Indonesian State banks, Moody's put the country's second-largest private bank, Bank Danamon, under review for a possible downgrade, reflecting its "higher than average" risk profile and uncertainty about its ownership.

The Admadjaja family, which controls Danamon, recently announced the sale of 29 per cent of the bank's shares to rival business group Salim and Credit Suisse First Boston, leaving the founding family with only 19 per cent.