World Bank lowers outlook for Indonesia economy this year

A vendor receives cash from her customer at a street market in Jakarta July 1, 2013.

JAKARTA (Reuters) - The World Bank on Tuesday lowered its forecast for economic growth in Indonesia this year due to a slower-than-expected recovery in exports, a weaker outlook for foreign investment and softer commodity prices.

In its quarterly economic outlook, the World Bank also forecast a significant pick-up in inflationary pressures in Southeast Asia's largest economy following a fuel price hike in late June.

The World Bank now expects Southeast Asia's largest economy to grow 5.9 percent in 2013, down from its previous forecast of 6.2 percent in March.

"While the World Bank's base case is for a moderate slowdown in Indonesia's growth in 2013, picking up again in 2014, the risk of a more pronounced growth slowdown is high," it said.

"The recovery in exports is expected to be more subdued and import growth is expected to be weaker, reflecting the weaker outlook for investment."

Indonesia's central bank said last month that it expected the economy to expand by 6.1 percent in 2013 and by around 6.4 to 6.8 percent next year.

Last month's fuel price hike is expected to boost inflationary pressures and hurt domestic consumption.

Inflation in Southeast Asia's largest economy is now expected at 7.2 percent this year and 6.7 percent in 2014, the World Bank projected.

In March, it forecast inflation at 5.5 percent in 2013 and 5.2 percent in 2014.

On Monday, the statistics bureau reported annual headline inflation in June at lower-than-expected 5.9 percent as the full impact of the fuel price hike has yet to be felt.

Some analysts expect the central bank could raise interest rates again when it meets next week to contain the expected pick-up in inflation and support the weak rupiah.

"Indonesia's policy setting will likely need to adjust to somewhat less buoyant economic conditions and potentially to more difficult external financing conditions," the World Bank said.

In mid-June, Bank Indonesia surprised the market by raising both the overnight deposit facility rate and benchmark rate by 25 basis points.

The World Bank also estimated Indonesia's current account deficit at 2.7 percent of gross domestic product (GDP) this year and 2.1 percent in 2014.

In March, it estimated the current account deficit at 2.5 pct of GDP for this year.

(Writing by Randy Fabi; Editing by Kim Coghill)