Indonesia's economy is expected to register higher growth this year and ahead as a revival in domestic demand continues to drive more consumption and investment, the Asian Development Bank (ADB) says in its latest economic outlook.
The ADB revised upwards its 2007 growth forecast for Indonesia to 6.2 percent from 6.0 percent previously, and its 2008 estimate to 6.4 percent from 6.3 percent.
"First-half private consumption and investment showed greater strength than expected, and this is likely to be maintained in the second half," the Manila-based multilateral agency said Monday in an update on its Asian Development Outlook 2007, which was released in April.
The ADB's growth forecasts are still lower than the government's, which is expecting 6.3 percent growth this year and 6.8 percent next year.
Mainly driven by consumer spending, a recovery in private investment and a solid expansion in net exports, the economy expanded by 6 percent in the first quarter and 6.3 percent in the second, translating into 6.1 percent first-half growth. The economy grew by 5.5 percent last year.
Looking ahead, the ADB sees growth in 2008 as likely to continue being driven by domestic demand, with inflation picking up only slightly to 6.3 percent this year but easing to 6 percent next year, which will be unlikely to dampen Indonesia's consumption-driven economy.
"The reductions in domestic interest rates since May 2006 and an improving investment climate are set to push investment growth next year, while a recovery in consumer confidence will lead to an acceleration in private consumption expenditure," the ADB said.
Bank Indonesia trimmed its benchmark interest rate to 8.25 percent at the moment from 12.5 percent in May last year. In the last two months, however, the bank refrained from further rate cuts due to a pickup in inflation, which reached 6.51 percent in August.
Among the risks that the ADB saw on the horizon for Indonesia's growth prospects include the fact that the positive developments could be partly offset by a smaller trade surplus as imports rise in response to stronger investment and consumption demand, while exports moderate in line with a projected decline in global non-fuel commodity prices.
The ADB also pointed to domestic risks in the form of inadequate action on structural reform, insufficient investment in infrastructure and the inability of local governments to implement development projects.