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side from facing limited fiscal space to spur growth, the incoming government may face further economic risks from the swelling debt payment obligation, as tighter global liquidity may drive up borrowing costs next year.

The fiscal deficit of 2.3 percent of gross domestic product (GDP) in the proposed 2015 state budget should not rely too heavily on overseas financing, such as the issuance of US dollar bonds, due to the more hostile external environment, warned Finance Minister Chatib Basri.

'€œThe financing of the proposed 2015 state budget will be a challenge for the new government, which must look at the issue very carefully due to the potential higher borrowing costs and tighter global liquidity next year,'€ he said on Thursday after a House of Representatives plenary session to discuss the budget.

Particularly worrying was the possibility that the benchmark interest rate in the US could be hiked sooner than expected, Chatib said, adding that the situation could pull up domestic bond yields in Indonesia, making it more expensive for the government to borrow funds.

In the proposed 2015 state budget, the government assumes the yield for the three-month treasury bills, a benchmark for borrowing costs, at 6.2 percent, slightly higher than this year'€™s 6 percent. The budget assumes that the government would finance Rp 304.9 trillion (US$26.07 billion) from the issuance of government bonds, 25 percent of which would come through the issuance of foreign currency bonds.

While foreign currency bonds normally offer lower yields compared with rupiah bonds, meaning lower borrowing costs for the government, they normally come with currency risk, as debt payment obligations could swell in line with exchange rate volatility.

'€œThe issuance of foreign currency bonds will only be complementary and will prioritize less volatile foreign currency,'€ the Finance Ministry claimed in the 2015 state budget note.

Of Indonesia'€™s total outstanding debt, 56 percent is currently denominated in rupiah, 27.9 percent in US dollars, 10.8 percent in Japanese yen and 2.7 percent in euros, according to Finance Ministry data.

In anticipation of tighter global liquidity next year, the Finance Ministry is trying to diversify funding sources and reduce reliance on foreign currency debt, Chatib said. The ministry is discussing with the Social Security Management Agency (BPJS) for the latter'€™s managed funds to be invested in government bonds.