Urip Hudiono, Jakarta – Indonesia's economy is set for moderate growth this year as the country struggles to recuperate from last year's slowdown amid lingering high oil prices, a weak investment climate and possible electricity and wage hikes.

The World Bank's country director for Indonesia, Andrew Steer, said Indonesia could expect GDP growth of between 5 and 5.5 percent this year, with consumption and investment continuing the slowdown that started last year.

This is lower than the 5.5 to 6 percent growth forecast by the World Bank in its October 2005 economic update for Indonesia, as well as the government's official 6.2 percent target for this year as stated in the budget.

"The year 2006 is not going to be the year we had hoped it to be last year," Steer said Tuesday at an economic outlook seminar sponsored by the Hongkong Shanghai Banking Corporation (HSBC).

"Although Indonesia's consumption-driven economy has recently shifted to a more sustainable, investment-oriented one, investment has suffered from the recent high interest rate environment," he said, explaining how investment in 2006 may emulate last year's moderate growth of 10 percent and contribute to less than 22 percent of GDP, as compared to an average of 16 percent investment growth and a more than 22 percent contribution to GDP in 2003, during Indonesia's investment heyday.

Indonesia's economy slowed down from 6.2 percent growth during last year's first quarter to 5.3 percent in the third quarter as high oil prices hit the rupiah and the ensuing fuel price hikes spurred inflation, forcing the central bank to raise its key interest rate to its current level of 12.75 percent.

Steer, however, was upbeat that an economic rebound was on the cards later in the year, saying that "a healthy 5 percent economic growth is better than an unhealthy 6 percent one."

The more important question now, Steer said, was whether the government could manage to provide a platform for further growth, and breakthrough policies to improve the investment climate and increase the quantity and quality of public development spending.

"As we know, there are still problems with the labor regulations, tax laws, infrastructure and red-tape bureaucracy," Steer said.

Meanwhile, HSBC's chief economist for Asia and the Pacific, Arup Raha, summarized Indonesia's economic prospects for this year as "bearish growth, with bullish rates." HSBC is forecasting 4 percent growth for 2006 and 4.3 percent for 2007, compared to 5.2 percent last year, with interest rates still standing at 10 percent at the end of this year.

"Our estimates can be said to be a bit pessimistic, but we would like to maintain a realistic view for Indonesia. A likely global economic slowdown and domestic factors are expected to affect this year's growth," Raha said.

HSBC's president for Indonesia, Richard McHowat, said that higher electricity prices and wages could significantly affect such sectors as textiles, leading to further layoffs HSBC was, however, more optimistic about the rupiah, forecasting that it could strengthen to Rp 9,200 per US dollar as Indonesia still had some of the world's highest yield spreads for investors. The bank also predicted that inflation would come down to 5 percent by this year's third quarter from its current double digit level.