T

he Asian Development Bank (ADB) has upgraded its outlook of Indonesia's economic growth this year to 4.3 percent citing strong private consumption and improving investment.

The ADB previously estimated that Indonesia's economy would grow by 3.6 percent this year.

Indonesia's economic growth is predicted to further expand to 5.4 percent in 2010 due to "the expected modest rebound in global economic growth and stronger world financial markets that underpin growth in external and domestic demand, particularly in promoting further recovery in investment," the ADB said in a report released Tuesday.

Last week the World Bank also scaled up its forecast of Indonesia's economic growth this year to 4.3 percent, saying large spending on the legislative and presidential elections and faster government spending had propelled Indonesia's economy into recovery by mid-2009.

The World Bank previously predicted Indonesia's economy would expand 3.5 percent this year. The 4.3 percent growth forecast is in line with the government's projection of 4.3 percent. The central bank has forecast that the economy will expand close to 4 percent.

The ADB said Indonesia's economy could grow by more than 5.4 percent next year if the government managed to "accelerate its rollout of infrastructure investment by addressing constraints such as legal uncertainties and land acquisition for projects".

The corporate income tax rate, which will be lowered by 3 percentage points to 25 percent next year, will also support investment, the report said.

A leading World Bank economist, William Wallace, said that to spur growth in 2010, Indonesia should spend more on infrastructure and social protection, adding the fiscal stimulus would not be a crucial aspect of Indonesia's economic growth next year.

Next year's fiscal stimulus is estimated to reach Rp 60 trillion (US$6.18 billion), included as part of regular programs at ministries and government agencies, said Anggito Abimanyu, the Finance Ministry's head of fiscal policy.

In comparison, Rp 73.3 trillion has been allocated for a specifically-designated economic stimulus package this year, mainly in the form of tax incentives and infrastructure funds.

The ADB said Indonesia's main threat next year would be much higher than expected world oil prices, which would increase energy subsidies and could force the government to cut public spending.

In the 2010 budget bill, the government provided Rp 8.63 trillion in fiscal risk-cushion funds to protect the budget from increasing oil prices. The Indonesian Crude Price (ICP), Indonesia's benchmark oil price, is set at $65 per barrel. If the price soars 10 percent above $65, the government may raise subsidized fuel prices.

During a working group between the government and the House of Representatives last week, expenditure of the 2010 state budget bill was set at Rp 1,047.67 trillion.