EU plans more aid for ASEAN energy program

Ika Krismantari, The Jakarta Post, Jakarta

The European Commission (EC) has pledged to further support ASEAN countries in the development of renewable energy after the existing partnership agreement comes to an end this month

With the end of the five-year EC-ASEAN Energy Facility program (EAEF) now in sight, the commission's first secretary Ronan Mac Aongusa said Wednesday in Jakarta that the next stage of the partnership would involve the participation of technology suppliers and the private sector, as well as a new package of assistance.

The EAEF program has attracted 180 proposals from 500 European and ASEAN companies.

A total of 77 projects received financial assistance for five-year terms from 2002 to 2007 under the partnership program. The total cost of the EAEF program is estimated at 38.51 million euros (US$50.06 million), comprising the individual project partners' contribution of 15.6 million euros, the EC's commitment of 21.5 million euros and the ASEAN Center for Energy (ACE)'s contribution of 51,000 euros.

Seven of the program's projects are located in Indonesia, including a 4.2 megawatt (MW) rice husk-fueled power plant in Bolang, North Sulawesi, and a 10 MW palm oil residue-fueled power plant in Riau.

Of the total of 77 projects under the program, 34 focused on renewable energy and 14 on energy efficiency and conservation, including associated feasibility studies and demonstration projects.

"Even though a lot of the programs are still at the stage of feasibility studies, we have proven that they are bankable. Therefore, (in the next phase) the private sector will be able to value the projects," Aongusa said. "We want to encourage economic cooperation, we want to increase the capital involved in the projects."

For the next stage, the partnership would focus on discussions and dialogue to establish an energy policy in the ASEAN region.

Aongusa said the EC would also consider offering other financing mechanisms for companies involved in the development of renewable energy, such as biofuel, biomass and biodiesel. However, he did not elaborate.

Last January, under its new energy policy, the EU agreed that it must reduce its carbon emissions by 20 percent and increase the use of renewable energy, including biofuels, by 20 percent by 2020.

ACE executive director Weerawat Chantanakome said that the partnership would provide an opportunity for ASEAN to move in a similar direction.

"Renewable energy and energy efficiency are the most important components of energy security in the region," he said, adding that the ACE would list what each country needed to do to promote biofuel use.

BI to need three months to switch to new interest rate benchmark

The Jakarta Post, Jakarta

Bank Indonesia, the country's central bank, says it may start setting the overnight lending rate as the new benchmark for the money market by June, replacing the current reference rate on its one- and three-month Bank Indonesia Certificates (SBI).

"We will need about three months to serve as a transition period," Bank Indonesia Governor Burhanuddin Abdullah told reporters Wednesday.

Burhanuddin further said that BI planned to issue shorter-maturity bills to provide more depth to the local market and provide it with a better yield curve.

The overnight lending rate is the interest rate banks use to borrow and lend one-day funds between themselves. A central bank can use it -- by setting a target rate for it -- as a monetary policy instrument to influence market liquidity.

Deepening the local overnight lending market could help BI provide an alternative location for banks to park their excess funds, but based on a shorter cycle so as to avoid the funds being idle for too long.

BI currently uses its SBI sales and banking sector reserve requirements as its main tools for influencing money supply. It sets a BI rate target for the SBIs, which is also used as a benchmark for bank lending rates, thereby eventually influencing inflation and growth.

The fact that the SBIs currently held by the banking sector are worth Rp 235 trillion has been the subject of criticism lately as it leads to too much money being taken out of circulation, thus affecting growth.

BI Deputy Governor Aslim Tadjuddin said previously that the central bank was considering gradually replacing the SBI mechanism with government short-term treasury bills, with the first issues of such bills likely in April, July and December of this year.

Proceeds from the sale of government treasury bills -- as with other bonds -- can be used to support government spending, such as financing infrastructure projects, although a portion must also be reserved to support the monetary policy purpose of such bills.

Bank Mandiri treasury director Thomas Arifin was quoted by Bloomberg as saying that BI's plan would benefit the market, and result in the creation of a better yield curve as a result of the availability of more market instruments.

Meanwhile, Danareksa Research Institute, the research arm of investment house Danareksa, said that switching to the overnight lending rate and shorter-term bills would take some time considering the large number of outstanding SBIs in circulation.

BI would have to purchase enough of the new treasury bills from the secondary market to replace its own SBIs, Danareksa said in its analysis. It would also need to be prudent in doing so in order to avoid pushing up the money base and inflation.

Fed more optimistic about economy in Jan, inflation still to be watched

WASHINGTON (AFX) - Federal Reserve Board Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee were slightly more optimistic about the prospects for the US economy at their January meeting than they were a month earlier, but they were still worried about the prospect of rising inflation.

'The confluence of better-than-expected news on economic activity and inflation suggested somewhat smaller downside risks to economic growth as well as improved prospects for core inflation,' the Fed said, according to minutes of the Jan 30-31 meeting, released today.

Nonetheless, 'all members agreed that the statement should continue to stress that some inflation risks remained and note that additional policy firming was possible,' the minutes said.

Relative to their assessment of the economy at their December meeting, Fed members said economic expansion remained resilient despite the decline in housing activity and recent manufacturing weakness.

They added that they 'did not yet see a downtrend in core inflation as definitively established.'

In January, the Fed kept the key federal funds rate at 5.25 pct, where it has remained since June. Their next meeting is March 20-21.

They said they saw 'tentative signs of stabilization' in most housing regions, and most members were optimistic that the housing market's drag on the overall economy would diminish throughout the year.

FOMC Minutes, Poole, Yellen remain hawkish

The minutes from the last FOMC meeting as well as two separate Fed speakers reflect diverging views from the inflation outlook espoused by Fed Chairman Bernanke in his Congressional testimony last week. Recall that Bernanke explicitly stated that "inflation pressures are beginning to diminish", helping the dollar to surrender the 1.3060 resistance against the euro and leading to a slide in treasury yields following his testimony before the Senate Banking Committee.

However, the FOMC minutes showed that inflation is still a valid concern among all the members via a unanimous opinion on the possibility of additional firming and a focus on persisting inflation risks. St. Louis Fed President William Poole commented that the Fed "must be ready to raise rates if CPI surprises on the upside". After this morning's uptick in the core CPI rate, this assessment becomes that much more relevant. Meanwhile, San Francisico's Fed member Janet Yellen, traditionally an inflation dove, has also sounded off on inflation as being higher than she would like.

We see this rhetoric as hardly indicative of leading to a rate-cutting bias in the near future and will look for the slide in USD as well as the treasury yields to subside in sessions to come.

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Analysis by Fx Money Trends