T

he Finance Ministry is readying the nation'€™s first ever euro-denominated bonds as well as other debt papers in Japanese yen and US dollars to plug this year'€™s higher-than-expected state budget deficit.

The deficit is estimated to soar to 2.5 percent of the country'€™s gross domestic product (GDP) this year, from an earlier target of 1.7 percent.

That had led the government to plan the issue of an additional Rp 69 trillion (US$6 billion) of debt papers to finance the deficit, said Robert Pakpahan, head of the Finance Ministry'€™s debt management office.

'€œWe may issue more foreign-currency bonds to accommodate the shortfall,'€ Robert told reporters late on Wednesday.

'€œI plan to have the right mix between local and foreign-currency bonds, so that we can avoid higher borrowing costs due to being '€˜cornered'€™ in one specific market,'€ he added.

Foreign currency-denominated financial instruments are issued to prevent an overreliance on rupiah bonds that could increase yields in the local market and make borrowing more expensive for the government.

The government'€™s historic first issue of Eurobonds, which had previously been put on hold due to the uncertainty of demand in the European market, will '€œdefinitely'€ go ahead in the second half of this year, according to Robert.

The government has also planned a return for the yen-denominated '€œSamurai'€ bonds '€” the last offering was held in 2012 '€” as well as continuing to offer dollar-denominated bonds in the form of global bonds and global sukuk to finance the budget deficit.

'€œThe main risk [to the current fiscal target] will likely be in lower prices of government bonds as a higher budget deficit will result in more bond issues,'€ Leo Rinaldy, an economist with state-run Mandiri Sekuritas, wrote in a research note that analyzed the revised 2014 State Budget released this week.

Increased supply of bonds normally leads to cheaper pricing among investors. As bond yields move in the opposite direction to prices, lower prices in turn drive up yields, leading to higher borrowing costs for the bond issuers '€” in this case the government.

In their research note distributed to clients on Thursday, analysts from Malaysia-based Maybank noted that Indonesia'€™s bonds '€œsignificantly slumped'€ upon hearing the news that the Finance Ministry would have to issue more bonds to finance the widening budget shortfall.

According to Asian Bonds Online, the yield for Indonesia'€™s benchmark 10-year bonds has risen 4 basis points this month to 8.02 percent '€” a worrying upward trend as throughout 2014 the yields have actually fallen by 43 basis points, the best performance in Asia.

The government has already frontloaded its bonds issuance to the first half of this year, easing its burden as it braces to pay higher yields and borrowing costs in the coming months. As of May 12, the government had already issued bonds worth Rp 203.2 trillion, or 55 percent of its target this year.

'€œOur frontloading strategy has been successful in anticipating [higher yields],'€ said Robert from the Finance Ministry.