T

he Indonesian economy has never looked better, with significant improvements in key areas, but economists and business players have warned of flaws that could deter investors.

Indonesia’s gross domestic product is expected to grow by more than 6 percent this year, up from 4.5 percent in 2009, fueled by higher exports, increased investment and strong consumer spending. Inflation is contained, stock prices are at record levels, and the rupiah has also strengthened.

Capital is also flowing in in large quantities, both for portfolio and physical investment, as Indonesia maintains economic and political stability.

Most rating agencies have ranked Indonesia a notch or two below investment grade, which means it is at a low risk of defaulting. Several Japanese rating agencies have already given Indonesia the top rating.

However, as with most good news there is also the “but”.

In a discussion on the prospect of the Indonesian economy, organized by the Jakarta Foreign Correspondents Club on Thursday, economists and a businessman warned about the poor implementation of many of the government’s economic plans, in particular the desperate shortage of infrastructure including roads, ports and power plants.

“Infrastructure is our biggest bottleneck,” said Sofjan Wanandi, the chairman of the Indonesian Employers Association and the owner/founder of the Gemala business group.

The government is lagging in its plan to improve Indonesia’s power supply capacity, casting uncertainty over the viability of some of the investment projects in the country.

The government, Sofjan said, needs to do its homework to translate the rising interest among foreign investors into actual physical investment, and not simply limit it to portfolio investment in Indonesian stocks and bonds.

“We have to start implementing or else we will lose the momentum,” Sofjan said.

Recognizing that some investment had been taking place in Indonesia in recent years, he noted that most investors concentrated on extraction industries, services, property and automotive, and very little in labor-intensive manufacturing sectors.

Bank Danamon chief economist Anton Gunawan noted policy inconsistencies, such in the setting of Bank Indonesia’s key interest rate that did not support the national inflation target.

He also said the government’s pledge to improve inter-connectivity in Indonesia did not correspond to its decision to prioritize road transportation rather than inter-island transportation.

While both the official unemployment rate and poverty figures have declined, Anton said, they both remained high in absolute figures. He added that unemployment had declined largely because more people had been employed in the informal sector.

Anton cautioned that the capital inflows into Indonesia’s stocks and bond markets could carry risks of sudden reversals.

Frederica Widyasari Dewi, the director of development at the Indonesian Stock Exchange, said two-thirds of the market capitalization was in the form of foreign funds. The agency is currently conducting a promotional campaign in the region, since only around 1 percent of the Indonesian population have stock investments at present.

Other speakers at the discussion were Finance Ministry advisor Edward Gustely and Bank Mandiri economist Moch. Doddy Ariefianto.