Sovereign wealth funds are relatively new. They have been devised as a defensive measure to address the macroeconomic impact of revenue volatility in resource rich countries. Other objectives include ensuring inter generational equity, addressing future financial needs, and protecting a country’s economy from extraordinary shifts in its fiscal situation.
There are also several different types of funds, the investment horizons of which vary depending on the fund. Chile for example, has a stabilisation fund to insulate the economy from the volatility of resource prices (copper). Abu Dhabi has a savings fund to transform current earnings into diversified financial assets. There are other funds which can be characterised as development funds, pension reserve funds (Australia), or investment reserves (China, Singapore).
As set out in Section 3 of the Heritage and Stabilisation Fund (HSF) Act, the HSF is multifunctional: to save and invest surplus petroleum revenues derived from production; to cushion the impact on or sustain public expenditure capacity during periods of revenue downturn, whether caused by a fall in the prices of crude oil or natural gas; to generate an alternate 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 to provide a heritage fund for future generations of citizens of Trinidad and Tobago from savings and investment income derived from excess petroleum revenues.
The HSF was started in 2000 and by 2015 it had grown to US$5.8 billion. This sum is modest. It amounts to 23.5% of our current gross domestic product (GDP) (country earnings) of TT$165 billion and 61.7% of the 2015/16 government’s budgeted expenditure of TT$63 billion. The Minister of Finance recently announced a withdrawal of US$1 billion in accordance with the Act. The current economic outlook suggests Trinidad and Tobago is likely to suffer depressed revenues for some time. Estimates vary as to the length of time the depressed conditions will last and the quantum of the revenue loss, but we can reasonably expect that there will be further withdrawals in the near future.
It is clear that we did not save enough, however, we can do nothing about the past and must therefore focus on the future. What are the minimum changes to the fund that need to be made and why?
Firstly, the Act does not indicate what part of the fund is stabilisation and what part is heritage. The Act does say in Section 15(3) that there can be no withdrawals from the HSF if it would cause the fund to fall below US$1 billion. We can infer therefore that this minimum balance is the heritage part and that the balance of the fund (now US$3.8 billion) is available for stabilisation. At current exchange rates and given the government’s current revenue shortfall, this amounts to budgetary support for approximately three years.
The second and more troubling issue is determining how funds are saved. The procedure is set out in Sections 13 and 14 of the Act. Section 13 says that the calculation of estimated petroleum revenues (except royalties) shall be determined on an 11-year moving average: “such 11 years being five years immediately prior to that current financial year together with the prices projected for the disposal of such crude oil and natural gas for the five years immediately following the current financial year.” Oil and gas prices are notoriously difficult to predict; none of the energy majors were able to anticipate or predict the current price scenario. This raises a significant issue.
But the real problem is to be found in Section 14 which provides that “a minimum of 60 per cent of the aggregate of the excess revenues shall be deposited to the fund during a financial year.” In other words, funds are put aside only if revenues are in excess of the budgeted figures. Any financial planner will tell you that you must programme savings. Yet the Act provides for savings only if you have a budgeting error or prices surge unexpectedly. One way to reduce the transfer to the HSF is to overestimate the current revenues. That is one of the reasons why transfers to HSF in the 2010-15 period were minimal.
If we are serious about creating stabilisation or heritage reserves for future use, then we must align and prioritise recurrent expenditure and the development budget accordingly. This requires fiscal discipline and multiyear budgeting. Such changes need not be constitutional but in a land where conventions are neither practiced nor recognised, prudence would suggest a more rigorous approach to planning our financial future and the imposition of legal limits. Politicians would argue against such constraints. The reality is an ageing population, volatile energy prices, and unfunded state pensions of over TT$35 billion.
A national dialogue is now required.