On the stronger fundamentals built in 2006, Indonesia's economy is expected to expand by 6 percent next year on the back of continued increasing consumption and exports of selected commodities, economists predicted, but meanwhile cautioned many problems should be resolved for meeting the target.

Rising domestic demand will keep consumption robust, backed by declining inflation and interest rates -- the main ingredients for spurring consumer spending, according to ANZ Bank's chief international economist, Amy Auster.

"We forecast that real GDP growth for Indonesia in 2007 will increase to 6 percent in line with increasing domestic demand," Auster said recently during a presentation on Indonesia's economy .

Based on government estimates, Indonesia's economy is expected to grow by 5.8 percent this year. The Indonesian Central Bank sees the country's economy picking up further next year with a growth of 6.3 percent, but warned that problems in the banking sector could undermine all the recent gains in macroeconomic stability.

Consumption makes up about 60 percent of Indonesia's gross domestic product (GDP), with net exports and investment making up the remainder.

While consumption will continue to be strong in 2007, the economy is also likely to get a boost from anticipated export growth, particularly in the case of such commodities as coal, crude oil and rubber, Auster said, citing China and Europe as the main markets.

The economist held that with the U.S. no longer the main importer of goods from developing countries such as Indonesia, as it has now been replaced by China and Europe, the expected slowdown in the U.S. economy next year would have little impact on global demand.

"Asia's economy is becoming less dependent on the U.S. In 1986, Asia's exports to the U.S., excluding China, reached more than 30 percent of its total exports, whereas they are now at around 15 percent."

Although this year's 5.8 percent growth rate cannot be achieved, stronger economic fundamentals are reflected by decreasing inflation and interest rates. The inflation rate is predicted to be lower than 7 percent late this year, while Bank Indonesia (the central bank) cut down its interest rate by 2.5 percent points to 10.25 percent. The rate is believed to keep decreasing to one digit next year.

The export value is ascertained to record the highest annual record this year and hopefully able to reach 100 billion U.S. dollars. The exchange rate of the rupiah is stable at level satisfying exporters and importers. External conditions also improve in line with the downtrend of international oil price thus making the domestic selling price of subsidized fuel oil possible to decrease too.

As bonus, the composite share price index at the Jakarta Stock Exchange hit the first-ever record of 1,700 points, and the increase is important to attract interests of foreign investors, economic observers said. Indonesian central bank also predicted that currency reserves will reach a new record of 47 billion U.S. dollars in 2007.

Next year's higher economic growth is quite ideal to curb jobless rate significantly, local economists said. The 6 percent or higher growth will be the highest level since the economic crisis. The success to achieve the level will become next proof that Indonesia's economic recovery embarks on a new level after the crisis.

However, Indonesian and foreign economists also realized that many serious problems impeding the growth in 2006 must be solved. Firstly, tax revenue fails to meet the target because there is no concrete measures to improve the taxation system when the government increased the target to 333 trillion rupiah (9,100 rupiah is equal with one U.S. dollars).

Secondly, banks should further improve efficiency and the prudent management of loans. Indonesia's banking industry has not been synergetic with business communities. The banking sector still faces non-performing-loan (NPL) problems, which discourages lenders from increasing lending. If the banks were to invest their excess liquidity in treasury bills and government bonds instead of loans, this will contribute almost nothing to economic growth.

Thirdly, the government should speed up infrastructural development for fascinating foreign investment. In the first nine months of this year, the country's realized and actual foreign direct investment reached 4.3 billion U.S. dollars, a decline of some 44 percent compared to the same period of last year. Meanwhile, the government should fix its corrupt bureaucratic and legal system to attract foreign investment.

Fourthly, the government should focus on efforts to boost the real sector, instead of relying on consumption alone for growth, economists say.

In its editorial, local "Business News" magazine said, "the latest development remind us that on-paper targets cannot be accomplished fully this year. Yet, economic fundamentals starting to strengthen bring about new expectation to us to welcome next year optimistically and prevent us from getting hijacked by failure in this year. Indeed, Indonesia is not yet a prosperous nation but we know that the country is leading to the extent."