UPDATE 1-Indonesia raises budget deficit f'cast on oil, food

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JAKARTA, Feb 18 (Reuters) - Indonesia's finance ministry said on Monday it has raised its forecast for the 2008 budget deficit due to soaring fuel and food subsidies, and will increase its funding from the domestic bond market to cover the shortfall.

The budget deficit is now forecast at 2 percent of GDP, compared with a forecast of 1.7 percent in the original 2008 budget.

The finance ministry has proposed increasing net debt issuance -- or total debt sales minus maturing debt -- to 116.6 trillion rupiah ($12.74 billion) this year, which is about 27 percent higher than its original forecast for debt issuance of 91.6 trillion rupiah.

"The (debt) market could still absorb it, but there will be an adjustment in the yield," said Wiling Bolung, head of markets at ANZ Panin in Jakarta, adding that the bond market has already taken the likelihood of higher government borrowing into account.

"The bond market remains bullish now," on expectations of further interest rate cuts, he said.

Anton Gunawan, economist at Citigroup in Jakarta, said the budget revisions were necessary to help the government cope with the sharp jump in global fuel prices, which have resulted in a surge in domestic fuel subsidies.

Indonesia's fuel prices are among the cheapest in Asia thanks to the fuel subsidies.

"Usually the government revises the budget around the middle of the year, but many of the (budget) assumptions are no longer suitable given the current economic conditions," Gunawan said.