The government is optimistic it can secure the financing to plug the budget deficit as the market is positive towards government bonds - a key source of funds, aside from overseas loans.

“We are optimistic [we can] secure  [our] targets from bonds  using all existing financial instruments” the Finance Ministry’s director general for debt management, Rahmat Waluyanto, told a press conference Wednesday.

As an example, Finance Minister Sri Mulyani pointed to a 70 percent drop in Indonesia’s credit default swap indicator (CDS) since last October - a key component in determining default risks which would eventually make the cost of servicing bonds cheaper.

This year’s budget deficit has been set at Rp139.5 trillion (US$13.47 billion), or 2.5 percent of the country’s gross domestic product (GDP). The government plans to sell a total of Rp 99.6 trillion in bonds this year, with Rp89 trillion already issued.

The Ministry says the government expects to secure Rp142.3 trillion in total financing this year. Of the total, Rp44.5 trillion (about US$4 billion) will be backed up by a deferred drawdown option (DDO) from the World Bank, the Asian Development Bank (ADB), Japan and Australia, said Rahmat.

The DDO is a conditional standby financing facility, meaning government would only be able to draw on this if it decided against selling  bonds due to low demand, which should increase bond yields.

If not drawn in these circumstances, the funds could be drawn down for other agreed purposes, such as overseas project loans.

But it seems the government will not need to draw on the DDO because of as the yield of government bonds has decreased from 17 percent in October last year to 11 percent in May this year, so that the cost of bond issuance is now more practical.

“We see that between February and May there was a significant decrease in all bond yields due partly to the government issuing in February large amounts of global medium-term notes, creating positive sentiment in the market,” said Rahmat.

The 2009 budget deficit of Rp139.5 trillion, according to Mulyani, arose because government has to finance the stimulus package and other budget expenditure to boost economic growth to cushion the impact of the global economic crisis.

The stimulus has been set at Rp73.3 trillion in total, Rp12.2 trillion of which is allocated for infrastructure projects involving 10 ministries.