REFILE-UPDATE 1-Indonesia targets higher 6.7 pct growth in 2012 budget

(Refiles to remove misplaced bullet point)

* Budget sees inflation at 5.3 pct, rupiah at 8,800/$

* 2012 revenue seen up 11 pct, spending to rise 7 pct

* Budget deficit forecast at 1.5 pct of GDP in 2012

By Olivia Rondonuwu and Aditya Suharmoko

JAKARTA, Aug 16 (Reuters) - Indonesia is targeting higher growth of 6.7 percent next year through increased spending in its 2012 budget on infrastructure and improving the investment climate, while keeping inflation at 5.3 percent, the country's president said on Tuesday.

Southeast Asia's biggest economy has hummed along with 6.5 percent growth this year, roughly in line with a government forecast, while in recent months inflation has fallen below this year's annual target of 5.65 percent.

"The momentum of increasing economic growth has expanded," said President Susilo Bambang Yudhoyono in a speech to parliament on Tuesday.

Hours after the speech, Yudhoyono presented his proposed budget for 2012.

Indonesia's strong economic performance has led foreign investors to take its stock market to uncharted territory and bond ownership to record levels, with only a limited sell-off amid global risk aversion following the U.S. sovereign rating downgrade.

Fitch Ratings looks set to upgrade Indonesia to an investment grade sovereign rating next year, if the G20 member can continue to keep inflation under control and improve poor infrastructure in the sprawling archipelago.

"I think investment probably is still going to look very positively into Indonesia, the growth picture is there, capacity is there, changes on the ground are relatively positive," said Gundy Cahyadi, an economist at OCBC Bank in Singapore.

He said the 2012 growth projection was in line with OCBC's forecast, but he saw much higher inflation of 6.8 percent.

SUBSIDY CUTS

The government's challenge will be to lift spending without stoking inflation, an Achilles heel in an sprawling archipelago where transportation costs lead to a structural inflation problem.

The central bank has helped moderate imported inflation this year by allowing the rupiah to rise to a seven-year high. The 2012 budget saw the rupiah averaging 8,800 per dollar, versus around 8,500 per dollar now.

The actual rupiah level is often well off the budget forecast as it depends partly on capital flows.

Yudhoyono said revenues would rise 10.5 percent to 1292.9 trillion rupiah ($151.4 billion), including a 16 percent increase in the tax take, while spending would rise 7 percent to 1418.5 trillion rupiah.

He said spending priorities included infrastructure -- such as improving Jakarta's notorious traffic jams -- plus institutional reform, education, food and energy security.

"We will still not see massive spending on infrastructure which we believe is the key for growth in Indonesia," said Jemmy Paul, head of research at Waterfront Securities in Jakarta. "We need to be more aggressive," he said, adding the government could lift spending and allow a wider deficit.

Yudhoyono said the 2012 deficit was projected at 1.5 percent of GDP, steady to this year's initial forecast before higher oil prices forced up spending on fuel subsidies to take the revised forecast for the budget deficit this year to 2.1 percent -- still enviable by global standards.

Yudhoyono said spending on subsidies would be cut 12 percent from this year to 208.9 trillion rupiah in 2012, but did not detail how.

The government has yet to curb fuel subsidy use or hike electricity prices this year, two moves that could blow its budget inflation forecast next year. Raising fuel and electricity prices would prove unpopular, but economists and rating agencies say these are important steps for the economy's long-term health.

The proposed budget, for the year that begins January 1, is subject to discussion and approval by parliament. ($1 = 8538 Rupiah) (Additional reporting by Andjarsari Paramaditha, Adriana Nina Kusuma and Rieka Rahadiana; Writing by Neil Chatterjee; Editing by Richard Borsuk)