Indonesia to cut budget deficit to ease bond sales

MADRID, May 4 (Reuters) - Indonesia will reduce its budget deficit by cutting fuel subsidies ahead of planned global bond sales this year worth around $12 billion, a senior finance ministry official said on Sunday.

Fuel and electricity subsidies of $20.5 billion this year are hampering Indonesia's efforts to raise money on the global capital markets, the country's fiscal policy chief told a forum at the Asian Development Bank's (ADB) annual meeting.

"It seems the market doesn't welcome our effort to tap (issue new bonds). We have to bear (a higher) cost of financing. We have to reduce the budget deficit for investor confidence," Anggito Abimanyu said, adding that the government had so far raised only $5.5 billion out of a total planned bond issuance of $17.1 billion for 2008.

The country is planning its first sovereign Islamic bond issue in Indonesian rupiah and U.S. dollars, in addition to another global bond offering.

The Islamic bond deal is expected to raise as much as $2 billion while market participants expect the global bond issue to be for around $1.5 billion.

Indonesia got a taste of harsh global market conditions in January when it sold $2 billion in offshore bonds and had to offer investors a 100 basis point premium on 30-year dollar bonds versus what it paid a year ago.

Soaring oil and energy prices are causing discontent in a country where millions live on $2 a day or less and have prompted the government to revise its budget deficit target up to 2.1 percent of gross domestic product from 1.8 percent, as it struggles to keep the cost of fuel down for citizens.

"The disparity between the international and domestic cost of fuel is getting wider. If we do nothing, the deficit could go higher to 3 percent (of GDP) and we could see a financing gap."

Anggito said cabinet ministers would meet in the next few days to discuss an "adjustment" in the fuel subsidies that would help lower the budget deficit.