Home' Trinidad and Tobago Guardian : May 12th 2016 Contents BG14 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt MAY 12 • 2016
The Heritage and Stabilisation
Fund (HSF or the fund) has
been in the spotlight over the
past few months as the Gov-
ernment of T&T indicated its
intention to access it for the
first time in order to assist in filling the deficit
between revenues and expenditures.
To the layperson this is akin to drawing
from your savings account in order to meet
your living expenses. In simple terms, the
principles used in determining whether to
withdraw money from the HSF are very sim-
ilar to the principles you would apply in util-
ising money from your individual savings
You would consider the necessity of the
expenditures in question and decide if it were
possible to defer those expenses or use your
savings for that purpose. You should consider
the level of savings, in relation to your overall
lifestyle, and whether it is sufficient to meet
your expected needs in the future before
seeking to utilise some of the proceeds today.
Finally, you should consider the rate at which
you are likely to replenish your savings
account in order to get it back to the current
levels and what changes you would need to
make to your existing lifestyle in order for
this to happen in the shortest possible time.
Overall, you would be appreciative that
utilising your savings now increases your
level of financial risk as it means that you
have less of a buffer in the years to come.
While I agree that the HSF is not "a trophy,"
the considerations identified above should---
and may I say must---be addressed and dis-
cussed prior to accessing the fund.
Before we can get to that point, there is
the issue of accountability, which has not
been raised until now.
The latest report on the HSF from the Web
site of the Ministry of Finance is for the quar-
ter April to June 2015. The year-end of the
fund is September 30 so, as it stands, we are
in mid-May and there has been no disclosure
about the fund s performance for the last
quarter of 2015 nor has the annual report for
the year ended 2015 been published.
The date on which the 2014 annual report
was posted was July 2015 so we are not yet
outside the comparative timeline from the
prior year. While the status quo might be
acceptable if the HSF was not being accessed,
more timely reporting needs to occur if that
situation were to change.
The standard for financial reporting should
be three months after the year end and what-
ever impediments exist to achieving this
should be addressed before any funds are
accessed. We are dealing here with invest-
ments and returns. In other words, informa-
tion that is, by nature, time sensitive. Ten
months after the fact simply is unaccept-
Based on the current and anticipated mis-
match between revenues and expenditures,
it is unlikely we would have a balanced budget
This means that, for all practical purposes,
there would be no contributions to the HSF
for the next five years. From all accounts
there were no contributions to the HSF in
2015 and the record shows there were no
contributions to the fund in 2014. This rep-
resents a period of seven years during which
time there would be no contributions.
Further, nothing was contributed to the
fund in 2009. For the period 2011-13, while
contributions were made, this has to be taken
in the context that we also ran budget deficits
in those years so, in effect, we were borrowing
to put money into the HSF. Clearly, this was
an impractical approach to saving and the
rating agencies and the International Monetary
Fund (IMF) pointed this out during their
respective annual reviews.
The HSF was first established via an Interim
Revenue Stabilisation Fund in 2000. It took
us six years to accumulate around US$1.4
billion when the HSF was formally established
in late 2006. Appreciate the timing, which
was just before the 2007 General Election.
Since 2006, despite the billions from a nat-
ural gas boom, the actual contributions to the
HSF totaled approximately US$2.9 billion with
around US$700 million deposited during a
time of budget deficits. We must take this into
context when we consider the size of the fund
at US$5.7 billion, based on the quarterly report
dated June 2015.
When the IMF suggested we had "under
saved" the low level of contributions to the
fund speaks directly to that point.
Our reality: just about half the size of the
HSF has come from investment returns. In
the aftermath of the global financial recession,
interest rates have fallen. Falling interest rates
represent a gain to bondholders as the price
of a bond rises as the interest rate falls.
Also, since March 2009, the US stock market
has tripled in value.
The last administration spoke about growing
the HSF by almost US$2 billion during their
five-year term. This is true but the majority
of that increase has come from unrealised
investment gains on the portfolio as opposed
to contributions to the HSF itself.
All of this is to highlight the very precarious
state we find ourselves given the fact that this
fund seemed more of a political tool to rally
public opinion than an instrument to create
buffers for the benefit of the wider society, if
and, when revenues from oil and gas are no
We are at that juncture now and the size
of the HSF is grossly inadequate to serve our
needs. I argued back in November 2006---
when the HSF was being formalised in the
Parliament---that we should, in fact, have two
funds. One that deals with revenue stabilisation
and the other that deals with the heritage
aspect. This approach would have been obvious
to anyone who had an entry level understand-
ing of investing and portfolio management.
The stabilisation element was short term
in nature, while the heritage element was
longer term. Comingling the two funds clouded
the investment objective of the single fund.
The reason for having a combined fund was
obviously political as it allowed the politician
to stand on a platform and boast about the
size of the fund. If it were disaggregated then
the political directorate would more likely have
been called to account for their profligate
spending and the level of under saving would
be more obvious.
As at June 30, 2015, US$1.2 billion---or just
over 20 per cent of the fund---was in short-
term fixed income instruments. These short-
term investments should equate to the size of
the stabilisation element.
Yet, the indications are that the Government
would be seeking to withdraw US$1.5 billion
from the fund, which seems to encroach on
the heritage element. Had there been two sep-
arate funds at the onset, the situation would
be very clear at this point.
Currently, the issue of splitting the fund
into two distinct funds has been raised. How-
ever, if the US$1.5 billion is withdrawn then
there really should be no more stabilisation
fund. If the fund is split after the withdrawal
of the $1.5 billion, then it would be very likely
that amounts originally intended for use in
the heritage portion of the fund would be
transferred to the stabilisation.
A heritage fund, once established, would
possibly have a maximum size of US$4.5 billion
but likely less. There will likely be no contri-
butions to this fund for the next five years.
We would then be at the mercy of investment
returns to grow the fund size.
A few weeks ago a report issued by con-
sulting firm McKinsey suggested that "the
golden era" for investment returns is at an
end and estimates from this point on the
annual returns on equities could be 1.5 to 4.0
per cent lower than the average over the past
30 years and for fixed income (bonds) returns
could be between 3.0 and 5.0 per cent lower.
Since June 30, 2015 to today, we have already
seen wild swings in the US stock market and
there are some suggestions that the rally is
nearing an end. Even if this rally were to be
extended, it is likely we would be faced with
a declining market within the five-year horizon.
Most investment professionals will point
out that the only ways to overcome tepid
investment returns is to search for yield by
taking on greater risk or by saving more. We
have discounted the latter option for the fore-
seeable future. I am not sure we understand
enough about what we are doing to take on
greater investment risk. We are, therefore,
seeking to access the HSF fund without any
strategy as to maintaining or growing this
fund going forward.
To truly appreciate our predicament, recall
my point from last week that 40 per cent of
the population is over the age of 40 and that
the pension responsibilities of the State is set
to rise exponentially over the next 20 years.
This is where having a heritage fund of a suf-
ficient size becomes critical.
Think carefully before touching the HSF.
Please email your questions and com-
ments to Ian Narine via firstname.lastname@example.org
with our HSF
To truly appreciate our predicament
recall my point from last week that 40
per cent of the population is over the age
of 40 and that the pension
responsibilities of the State is set to rise
exponentially over the next 20 years.
Links Archive May 11th 2016 May 13th 2016 Navigation Previous Page Next Page