Home' Trinidad and Tobago Guardian : January 22nd 2015 Contents What Heritage and
That s the ques-
tion you may be
headline above. Especially as, in the wake of
falling oil and gas prices, the Minister of Finance
has told us that the Government is not seeking
to access the Heritage and Stabilisation Fund
Therein lies part of the fiasco since it begs
the question: if not now when? It further begs
the question: why do we have a stabilisation
fund in the first place?
Note that at issue here is the stabilisation
element not the heritage requirement.
Finally, you have the fiasco associated with
how we have funded the HSF.
The dictionary definition of stabilisation is
to make stable, hold firm and limit fluctuations.
In the context of this discussion we have expe-
rienced a fall in oil prices and, to some extent,
natural gas prices. This fall in oil prices is to
the tune of over 50 per cent in less than six
months. The majority of the fall is coming
after the budget for the year was read in Sep-
tember 2014 and the programme of expenditure
for 2015 outlined.
The last time there was a decline in oil prices
of this nature and magnitude was in 1986,
almost 30 years ago. Clearly what is occurring
now can best be described as an outlier event,
one outside the realm of the annual budgeting
In such circumstances, one would expect
that where there is a fund designed to stabilise
short falls in revenues so as to manage the
volatility associated with wild intra-year swings
in energy prices, one would access such a fund
in a time such as this.
Let me be clear. I am not in favour of tapping
into our HSF. I believe that the fund is still
too small in size. My argument is that if we
are not going to use it now, then we should
drop the "stabilisation" element of the fund
The fund, as it is currently configured, is
designed in part to address situations such as
the one we currently find ourselves. The impli-
cation for sharp and unexpected intra-year
changes in our budgets can be quite debili-
It is well understood that the T&T economy
is heavily dependent on government expen-
diture. Government spending directly accounts
for around 35 per cent of gross domestic prod-
uct (GDP) so a market reduction in spending
is going to negatively impact GDP. Year-on-
year GDP is the basis upon which we determine
whether we are in a recession or not.
Steep cuts will result in less private sector
business activity. In many instances, this can
result in job losses. Eventually individuals will
also cut back on expenses, all resulting in fur-
ther reductions in economic activity that can
impact everything right through to property
Once this rut sets in it will take a significant
uptick in government expenditures in the
future to cause economic activity to rebound.
If this story sounds familiar, this is exactly
what we have experienced since 2009. After
the economy slowed it took elevated and record
levels of government expenditure to bring the
economy out of recession. These record expen-
ditures have outpaced our revenues to the
extent that for the past seven years we have
had budget deficits.
If we were to adopt the approach of bor-
rowing to spend in order to shore up economic
activity (Keynesian economics) but without
the necessary structural reforms that politicians
are loath to engage in a democracy, we will
continue to dig a bigger debt hole for ourselves.
For all that has been expended, to date, the
situation regarding economic growth is still
tenuous. GDP per capita have not recovered
to 2008 levels. The GDP per capita is obtained
by dividing GDP, adjusted for inflation by the
At the end of 2008 we were at US$15,055,
the following year, 2009, it fell to $14,328 and,
at the end of 2014, we have just gotten back
to 2009 levels at $14,370 but still below where
we were at in 2008.
If we appreciate that momentum plays a
big part in ongoing economic activity, the
boom bust cycles that we subject ourselves
to only results in more and more lost ground
The problem is that the HSF as it is currently
configured presents a type of moral hazard
for the country. Politicians have given them-
selves access to levels of stabilisation funding
that allows for some measure of irresponsibility
in the short term.
If we are not going to tap into the HSF in
the current situation then there should be
debate around whether we keep the stabili-
sation element of the fund at all. Should T&T
ask that our government base our economy
on the premise that we must reduce the size
of our non-energy deficit, have a balanced
budget and effectively live within our means.
What a novel idea!
Every first-year student in investing under-
stands that you invest your short-term cash
reserve differently to your long-term retirement
fund. The former represents your stabilisation
fund and is prudently invested into short-
term securities primarily "A" rated fixed income
securities. The latter represent your retirement
fund and given the extended horizon long-
term bonds or equities would be the investment
By lumping the two funds together our
politicians give an artificial representation of
our savings position to an unsuspecting public.
Currently 25 per cent of the HSF is in short-
term fixed income. Assuming that amount is
set aside for the stabilisation element, it means
we have just US$4.3 billion for the heritage
In 2012 the International Monetary Fund
commented about clarifying the savings (her-
itage) objective. Clearly it is something that
needs urgent attention. However for the sta-
bilisation element, the IMF suggested the
opposite to what I am recommending here.
They suggested that the stabilisation element
be preserved in order to insulate from fluc-
tuations in energy prices.
However, the IMF have also suggested that
transfers to the HSF should only be made
when we have a budget surplus as ostensibly
borrowing to put into a savings fund makes
little financial sense and is not sustainable.
That is what we have been doing since 2008.
The problem from a political standpoint is
that in order to have a meaningful budget sur-
plus we were required to either increase our
revenues exponentially or reduce our expen-
diture levels. Both at this stage require sig-
nificant political will and some measure of
At the turn of the last decade we had an
interim Revenue Stabilisation Fund.
By 2006, this fund had accumulated US$1.4
In 2007, the HSF came into law but no
sooner had this happened our expenditure
levels were so high in relation to our revenues
that we effectively had to borrow money in
order to put into the fund. An unsuspecting
population duped by political window dressing.
In November 2006, at the time when the
HSF Bill was laid in Parliament under the
headline "Revenue or Expenditure Stabilisa-
tion," I made the case that we needed to sta-
bilise our expenditure levels in order for this
fund to make any sense.
What makes our approach to the HSF even
more damning was the following situation,
present at the time when the Bill was being
From my column in November 2006:
"Oil prices peaked at US$78 per barrel. At
the time of writing it has fallen to US$55. Last
week, commentary from a number of analysts
suggests that in response to an anticipated
slow down in global economic growth into
2007, OPEC is prepared to accept the falling
oil price and would only take measures to cut
production if prices fall below US$50 per barrel
in an attempt to defend a price of US$45."
Note the parallels to today and the manner
in which history rhymes. Instead of ramping
up expenditures back then we would have
been much better off had we reigned in our
expenditures, balanced our budget at an oil
price of $45 per barrel and saved the surplus
into two funds one for stabilisation and a
bigger fund for the long term. We are now
seven years behind the curve.
Back then the argument was that we were
a natural gas economy, even though in 2006
no new gas exploration was taking place.
Today, many who could have made a positive
difference then are expressing concern about
falling oil prices.
At what stage are we going to stop playing
politics and discuss what is best for T&T?
Ian Narine is a broker registered with the
SEC and can be contacted at
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 2015 • WEEK FOUR
The HSF fiasco
By lumping the two
funds together our
politicians give an
of our savings
position to an
T&T HSF as at June 30, 2014
Net Asset Value
Quarterly Income Accummulated Surplus &
September 30, 2007
September 30, 2008
September 30, 2009
September 30, 2010
September 30, 2011
September 30, 2012
September 30, 2013
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