Riding on the confidence and bullish market sentiment generated by the estimated 6.3 percent growth in 2007, the Indonesian economy is forecast to continue surging this year. The consensus among analysts put the growth this year in a range of at least 6.3-6.5 percent. Government economists are even more optimistic, projecting an expansion of between 6.4 and 6.8 percent.

The downside is that rarely has our economy been so vulnerable to unfavorable external factors as it is now. This is also by and large the view of analysts as carried in our special year-end outlook issues.

The high oil prices, weakening world economy and the global credit crunch will loom over Indonesia's economic prospects and, given the uncertainty about these external factors, our economy will have to depend mainly on domestic market demand for most of its growth. This means that private and government consumption and investment will have to expand at an even faster rate.

The key indicators do point to even stronger fundamentals for sustainable growth this year. The central bank's bench mark interest rate has now been cut to 8 percent, inflation is well under control, the rupiah fairly stable and balance of payments prospects seem bright with exports likely to continue rising on the back of the high prices of natural resource commodities such as palm oil, rubber, cacao, copra, coal and other non-oil minerals. Capital inflows, direct and portfolio (short-term), will also increase steadily.

The biggest potential threat to this optimism lies in the uncertainty about oil prices. This factor alone will have quite an adverse impact on the whole economy through its repercussions on fiscal sustainability, inflationary pressures and exchange rate stability.

Many energy analysts forecast oil prices this year at a range of $80-85 a barrel, substantially higher than the $60 average assumed by the government for fuel subsidies. Several analysts, however, consider these estimates rather conservative, instead expecting oil in the range of $90-100.

Whichever of these predictions materializes, the consequences will be quite severe for Indonesian economic management. The government has persistently claimed that the state budget and the economy will do fairly well if prices stay below $100. But again the big question is how the government would be able to prevent the misuse of subsidized fuels through illegal sales to industrial users and export smuggling with the difference between domestic and international fuel prices so wide.

Even though the government would not raise fuel prices this year, given the high political risks in view of the 2009 presidential election, industrial users have been feeling the brunt as they have to buy fuel at international market prices. Most companies still refrain from passing their higher costs on to consumers, given the fierce market competition with imported products. They prefer, for the time being, cutting their profit margins.

However, if oil prices continue above $80 or even higher, manufacturing companies will eventually have to pass the additional costs over to the consumers at the risk of creating stronger inflationary pressures, weakening the purchasing power of the consumers at a time when they are sorely required to act as the prime driver of economic growth.

It is certainly most imperative now than ever that the government make significant progress in bureaucratic reform to reduce business costs related to regulations and licensing procedures and accelerate the repair of crumbling infrastructure. Cost reduction in these sectors could offset the additional costs of fuel.

The optimistic growth estimate may be foiled if the pace of government capital spending, which has run very slowly due to bureaucratic inertia and procedural bottlenecks in the procurements of goods and services, does not materialize smoothly. The 2008 state budget, like that of 2007, has been designed for economic pump priming, but that would not mean much in the way of fueling growth if budget disbursement remains as slow as last year. Two weeks before the end of the 2007 budget, only 70 percent of budgeted capital expenditures had been realized.

So all in all, despite the uncertainty about the oil prices, the weakening world economy and the global credit crunch, our growth prospects remain rosy. provided inflation is controlled so that consumers' purchasing power remains strong, infrastructure development accelerates and budget implementation by the central government and regional administrations runs much faster than last year.

On top of that, deeper structural reforms are key to maintaining the robust economic growth required to reduce unemployment and poverty.