T

he government is likely to face higher borrowing costs next year as the upward trend of global interest rates will push up bond yields, making it more expensive for the government to finance its budget shortfall.

In the 2015 budget assumption presented to the House of Representatives on Tuesday, the yield on the government'€™s three-month treasury bills (T-bills), an indicator of borrowing costs, is set between 6 and 6.5 percent, higher than this year'€™s assumption of 5.5 percent.

'€œThe relatively tight liquidity in 2015 will push up the yield for our three-year T-bills,'€ Finance Minister Chatib Basri said in his speech during the House plenary session to discuss the 2015 state budget assumptions.

Details of the 2015 state budget plan will be unveiled by President Susilo Bambang Yudhoyono in his annual state speech, a day before the commemoration of Independence Day on Aug. 17.

Chatib said the end of monetary stimulus in the US would in turn push up global interest rates in developed countries, ultimately driving up local interest rates.

Previously, the yield on the government'€™s three-month T-bills was the only macroeconomic assumption left unchanged. Other estimates, such as economic growth, the rupiah and oil production, all failed to hit the government'€™s initial predictions.

The government is issuing bonds to finance its fiscal deficit. Chatib said the combination of a tax revenue shortfall and rising fuel-subsidy spending would drive the fiscal deficit up to 2.51 percent of gross domestic product (GDP) this year; higher than the initial assumption of 1.7 percent.

Last year, Indonesia suffered the most from the spike in bond yields, after its rupiah bonds became Asia'€™s worst performer due to the combination of the country'€™s high current-account deficit, soaring inflation and tighter global liquidity environment.

For investors, the higher yields will offer bondholders greater returns. However, for a bond issuer, such as the Indonesian government, higher yields lead to greater borrowing costs, as it will have higher obligations on interest rate payments in the future.

The government has seen its interest rate payment obligation increase sharply over the last five years. Finance Ministry data shows that the government will have to pay Rp 121.3 trillion (US$10.5 billion) in interest on its debts this year, increasing sharply from Rp 88.4 trillion in 2011.

Ezra Nazula, a fixed-income analyst with Canada-based fund manager Manulife Asset Management, argued that the new yield assumption for the three-month T-bills was more realistic.

At 6 to 6.5 percent, the new assumption was in line with market developments, he said Tuesday, adding that the previous assumption of 5.5 percent would have been too low for next year, given the upward trend of global interest rates.

Besides forecasting higher yields for the three-month T-bills, the government predicts next year'€™s GDP growth to expand at 5.5 to 6 percent, the rupiah to trade at between 11,500 and 12,000 per US dollar, inflation to fall to between 3 and 4 percent and oil production to stand at between 900,000 and 920,000 barrels per day.