Dion Bisara – Strong growth in Indonesia in the first half of the year and an improved trade balance have prompted to World Bank to take a sunnier outlook on the nation's economy in the short term, forecasting it to grow 6.1 percent this year, up from a July prediction of 6.0 percent.

But the Washington-based lender trimmed its forecast for next year's growth to 6.3 percent from 6.4 percent initially, citing slowing global demand, particularly from main trading partner China, and signs of declining domestic spending.

Indonesia's $850 billion economy grew 6.3 percent in the first half this year, thanks to buoyant household consumption and strong investment.

Consumption and investment have balanced out pressures from deteriorating net exports, as demand for the country's resource-related exports diminished and investment-related imports rose, putting Indonesia's trade balance into deficit from March to July.

The trade balance could recover in the latter part of the year as demand for intermediate and capital goods imports used as inputs for export production falls, making the case for stronger growth this year, the World Bank said in its "Indonesia Economy Quarterly" report on Monday.

The World Bank report came after other institutions cut their estimates for Indonesia's economic growth. The International Monetary Fund forecast the country's economic growth to slow to 6.0 percent this year, down from an earlier 6.1 percent. The Asian Development Bank said Indonesia's economy will expand 6.3 percent this year, slightly lower than its April forecast of 6.4 percent.

"Indonesia's recent growth performance has been strong, but there remain considerable risks to the global economic outlook," Stefan Koeberle, World Bank country director for Indonesia, said in a statement on Monday.

The World Bank said the risks include ongoing uncertainty in the euro zone, possible fiscal contraction in the United States, and the risk of further slowdown in Indonesia's other major trading partners, notably China. The IMF had said that a 1 percentage point fall in China's growth would translate into Indonesia's growth dropping by half a percentage point.

The World Bank urged the government to improve policy consistency and certainty for business in order to boost investment. The move would enhance short-term crisis preparedness while enhancing sustainable growth longer-term.

One such policy, it said, was curbing the nation's energy subsidy. "The significant allocation of spending to the energy subsidies imposes high opportunity costs, adds uncertainty to the fiscal outlook, disproportionately benefits rich household rather than targeting the poor, and impedes the efficient use of energy," said Jim Brumby, World Bank lead economist and sector manager of poverty reduction and economic management for Indonesia.

The government plans to allocate Rp 275 trillion ($29 billion) in fuel and electricity subsidies next year, accounting for around a quarter of the budget.