The Weekly Report: About the Heritage & Stabilisation Fund

28 March 2012


Finance Minister Winston Dookeran has said that the Heritage and Stabilisation Fund (the “HSF”) now stands at US$4 billion and that the returns on the Fund have been modest but still positive given what is happening in the international environment in which the Fund invests.

In addition, he has said that the legislation establishing the Fund is currently the subject of public consultation and one of the issues being considered is whether there should be a separation of the Fund and the creation of a Heritage Fund and a Stabilisation Fund.

How much do you know about your HSF?

In essence, the HSF seeks to ‘put away for a rainy day’ by buttressing potential downturns in oil revenue (stabilisation) and providing for future generations (heritage). This weekly report seeks to answer the following questions with regard to the much-debated HSF:

  • What is its purpose?
  • How is it funded?
  • What are its contents?
  • Where does it rank globally?
  • How has it performed?
  • What can be done to improve its performance?

In official terms, the purpose of the Fund is to save and invest surplus petroleum revenues derived from production business in order to:

Cushion the impact on or sustain public expenditure capacity during periods of revenue downturn whether caused by a fall in prices of crude oil or natural gas;

Generate an alternative stream of income so as to support public expenditure capacity as a result of revenue downturn caused by the depletion of non-renewable petroleum resources; and

Provide a heritage for future generations from savings and investment income derived from excess revenues.

Deposits to the Fund are generated when petroleum revenues collected in each quarter of any financial year exceed the estimated petroleum revenues for that quarter of a financial year by more than ten percent. If the excess is below 10%, the Minister of Finance may still direct that the excess revenue be withdrawn from the Consolidated Fund and deposited to the HSF.

So what does the government do with these excess revenues? The images below give a high-level view of the investments made into the HSF and their returns:

Source: HSF Quarterly Investment Report July 2011-Sep 2011

In terms of sovereign fund sizes, the chart below ranks the Top 10 heavy-hitters:

T&T’s HSF ranks at number 42 in terms of fund size. Though we’d like to be closer to Singapore’s level than at present, given the thrust to model ourselves after their success, by way of comparison (and to make us feel better), our neighbour Venezuela ranks at 47 and started its fund in 1998, two years ahead of T&T. Of course it also gets a 1 out of 10 on the transparency index compared to our 8, so who knows.

The “modest” HSF returns were symptomatic of struggling financial markets. Despite a 2012 largely labelled as a year for recovery, there may yet be several hiccups in developed markets to come. For example, has Greece really been mended or is the patchwork of bailout funds and debt-swap agreements sufficiently hiding the fundamental cracks for us to see?

In terms of achieving better performance, the question can be asked: what about Emerging Market fixed income? It’s a question that applies as much to the institutional portfolio investment manager as to the worker bees behind the HSF. While risk appetites may not be able to stomach the perceived riskiness of a sovereign like Venezuela for example, there are several investment grade sovereigns and corporates in the emerging world who govern themselves in a less volatile manner than our southern neighbours and whose returns have surpassed those found in more established markets:

The above results speak for themselves, but for any of your questions we at Firstline certainly aim to provide answers as to how superior returns can be attained for your portfolio without having you jumpy and on the lookout for breaking international news. Give us a call or email me at gerard.stephens@nullfirstlinesecurities.com

In closing, the debate rages on as to whether the HSF should be separated between “Heritage” and “Stabilisation”. Consequent on the ‘stabilisation” requirement the fund will only invest in highly liquid and rated assets which may not permit it to ever earn high returns. It may outperform its benchmark, which it hasn’t done in the aforementioned review period, but also underperform other sovereign funds that are solely for heritage purposes. As such, the question remains, can a portfolio ever fulfil these two strategic objectives simultaneously? When the public consultation comes around your neck of the woods, what will you say?

Gerard Stephens
Account Executive Sales & Trading

2 Responses to “The Weekly Report: About the Heritage & Stabilisation Fund”

  1. Senyela says:

    This was indeed an interesting topic. The answer to the question is not as straight forward as it may appear and whilst there are differences in the terminology ie heritage vs stabilization, there is an area where the two philosophies converge.
    To facilitate my answer, can you tell me-
    1. whether there has been any draw down from the fund since 2000
    2. What is meant by public expenditure?is this Development work or recurrent expenditure?
    3. Is revenue downturn measured by or reflected in a budget deficit? What are the yardsticks?
    4.What are the regulatory requirements for use?
    5. Are future generations defined in time buckets?

    • FSL says:

      Hi Senyela, there haven’t been any draw downs on the fund since 2000 to my knowledge, and the former Minister of Finance in the previous administration mentioned that government ought to be hesitant to withdraw unless there is a significant buffer present. I suspect that this buffer may not readily come in these tough economic times.

      Public expenditure generally refers to spending by central government, public corporations and local authorities on development, health, infrastructure, education etc. As such, this may be specific to a particular project or recurrent in nature.

      The Ministry of Finance identifies certain conditions for a withdrawal from the Fund:

      “Where the petroleum revenues collected in any financial year fall below the estimated petroleum revenues for that financial year by at least ten percent (10%), withdrawals may be made from the Fund as follows, whichever is the lesser amount:-

      Either sixty percent (60%) of the amount of the shortfall of petroleum revenues for that year; or

      Twenty-Five percent (25%) of the balance standing to the credit of the Fund at the beginning of the year.”

      From my research, I haven’t seen any time buckets defined for ‘future generations.’

      I hope this helps!