24 March 2017

A Firstline Securities Limited Blog by: Mike

Last Friday the Ministry of Finance released the long-awaited, and perhaps depressing news, that a second withdrawal from the HSF would be made at some point this week in the amount of US$251 billion. We look at this withdrawal in the climate of falling oil prices as the American Petroleum Institute reported a bigger than expected rise in US oil inventories causing a fall in Brent to just above US$50 per barrel. With the Minister still not having set a date for the 2017 mid-year budget review (usually held in the second week of April) we might all ask – What’s next?


Conventional Political Wisdom

Conventional political wisdom dictates that if you want to release bad news to the public you release it on a Friday. Such wisdom is based on the edict that come Monday people will either have forgotten what you told them on Friday, or just as likely, completely missed your release altogether and have other things to worry about come Monday.

Accordingly, on Friday 17th March 2017 the Ministry of Finance issued a Press Release stating that the Cabinet had approved a second drawdown from the Heritage and Stabilisation Fund in the amount of TT$1,712,200,000 (US$251 million equivalent). For the record, the first drawdown occurred on 13th May 2016 when US$375 million was drawn from the fund.

The second drawdown will be used to partly finance the Public Sector Investment Programme (PSIP) side of the 2017 budget. I state partial, as the PSIP funding required in the 2017 budget was estimated at TT$5 billion.


How has the HSF Performed in 2016/17?

The HSF prepares accounts annually to 30th September. The last set of accounts (unaudited) in the public domain relate to the quarter ended 30th September 2016. These accounts were released on the 23rd February 2017, and were almost certainly eagerly awaited by the Minister since they formed the basis of the calculation of the maximum amount that could be withdrawn from the fund (see below).

Using the last set of accounts in the public domain, the annual performance of the fund by year to 30th September 2016 has been as follows:

In the 17th March 2017 Press Release, the Ministry of Finance released current financial information that disclosed the financial condition of the fund as at an undefined point in March 2017. At that undefined point, the balance of the fund stood at US$5.695 billion before accounting for the second withdrawal. The second withdrawal will take the balance down to US$5.44 billion, roughly equivalent to the balance of the fund after completion of the first withdrawal in May 2016.

During the third quarter of 2016, the HSF investment portfolio increased by 2.45% compared with an increase of 2.12% for the SAA benchmark for the fund. The last set of accounts for the HSF in the public domain relate to the quarter ended 30th September 2016, and these accounts are subject to audit by the Auditor General.


The Dual Purpose of the Heritage and Stabilisation Fund

The HSF was established by Act No. 6 of 2007. That Act provides that the purpose of the HSF is to save and invest surplus petroleum revenue derived from production business to:

  • Cushion the impact on, or sustain public expenditure capacity, during periods of revenue downturn, whether those are caused by a fall in prices of crude oil or natural gas (this might be referred to as the stabilisation element of the fund).
  • Generate an alternative stream of income to support public expenditure capacity because of a revenue downturn caused by the depletion of non-renewable petroleum resources, (this might be defined as the part heritage and part stabilisation element of the fund).
  • Provide a heritage for future generations of citizens of Trinidad and Tobago from savings and investment income derived from the excess petroleum revenues (that is, the heritage element of the fund).


More Dips into the Honey Pot on the Horizon? – Crude Oil Prices Continue to Fall

On Tuesday 21st March 2017, the American Petroleum Institute reported a bigger than expected rise in US Oil inventories. Traders who had hoped that supplies in oil were getting tighter because of promised cuts in production, including cuts from the major players in OPEC, might now expect that WTI Crude (essentially the US oil benchmark) may be in store for continued punishment moving forward with production in the US rising consistently, resulting in an inflation of US inventories that will likely counteract the efforts of OPEC to stabilise and push prices northwards by reducing output.

This news suggests more dips into the honey pot are on the horizon. Certainly, the Ministry of Finance expects that this will be the case, with the release stating that “as the country continues to experience severe revenue shortfalls as a result of depressed petroleum prices, the HSF will be carefully used by the Government to ensure the country’s financial stability.”

This statement merely reiterates the Minister of Finance’s comment during the 2016 mid-year budget review when the Minister stated that the HSF is not “a trophy to be kept on the shelf and never touched.”


Was the drawdown legal?

Withdrawals from the HSF are governed by Section 15 Act No. 6 of 2007.

Where Petroleum Revenues collected in any financial year fall below the estimated petroleum revenues for that year by at least 10%, withdrawals may be made from the fund.

The amount that can be withdrawn from the fund is measured as the lower of:

  1. Either 60% of the amount of the shortfall of petroleum revenue for that year or,
  2. 25% of the balance standing to the credit of the fund at the beginning of the year.

Section b) is assumed to refer to the 1st October as the HSF prepares its accounts annually to the 30th September each year.

No withdrawal can be made from the HSF in any financial year where the balance standing to the credit of the fund would fall below one billion US dollars.

In the Senate on Tuesday 22nd March 2017, the Minister of Finance stated that applying the withdrawal rule to the current situation, 25% of the balance of the fund under part a) of the rule would amount to US$1.43 billion, and 60% of the shortfall in revenue under part b) of the rule would amount to US$252 billion. Therefore, the lower sum of US$252 billion was used.

It is hoped that for the purposes of transparency, that further details in respect of the computation of the drawdown based upon part b) of the rule would be presented by the Minister in the traditional mid-year review for 2017 (see below).


The 2017 Mid-Year Review

In the meantime, the Minister has still to set a date for the now traditional mid-year review. Last year this took place on the 8th April 2016, so we should expect (hope for) the announcement of a date shortly.


Closing thoughts – time to consider your investing strategies

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers many unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

Comments are closed.