Energy prices and the HSF

For the most part, Mr Imbert is correct — energy prices are no longer the biggest contributor to the country’s revenue since oil prices have been stubbornly sticking to well below US$100 per barrel from mid-2014 (see graph). To emphasize just how much the country’s fortunes can no longer depend on energy receipts, in 2014, energy revenues were $17.6 billion; in 2016, they were just $1.7 billion out of total revenue of about $41 billion. Where energy prices do matter, however, is when it comes to the country’s biggest savings plan — the Heritage and Stabilisation Fund.

As per the legislation, all the money that is contributed to the Fund comes from petroleum profits and consequent returns on investments. Specifically, Section 13 of the Heritage and Stabilization Fund Act (2007) states that for each quarter if the actual petroleum revenue exceeds the estimated revenue by more than ten percent then that (or rather, the US dollar equivalent since that is the Fund’s legal denomination) must be withdrawn from the Consolidated Fund and deposited into the HSF. During the peak oil boom years of 2002 to 2010, the country made TT$285 billion.

Yet the current value of the assets in the HSF is just over US$5.57 billion (approximately TT$37.319 billion in nominal terms). Contributions to the Fund have been less than emphatic. According to the HSF’s annual reports (published on the Ministry of Finance’s website) when the Fund was started in 2007, the value was US$1.402 billion. During that fiscal year the government contributed a further US$321.6 million. In 2008, contributions amounted to US$1.054 billion. In 2009 there were no contributions. In 2010 there was no report (at least not available). In 2011, contributions were US$451.4 million; in 2012, US$207.5 million. 2013 was the last year contributions were made, amounting to $42.5 million.

So, in total, the government has contributed just about US$3.48 billion to the fund. US$2 billion of the country’s heritage is interest payments. The law also allows for the Minister of Finance to use discretion and, even if the profits are less than the threshold ten percent, he can still direct all or part of that excess revenue to be deposited into the HSF.
Section 14 of the Act further states that at least 60 percent of the total excess revenues must be saved. Mr Imbert has pegged the oil price in this budget at between US$45 to US$48 per barrel of oil and the gas price at US$2.25 per mmbtu. It’s not out of the realm of possibility that these prices are attainable, but with the prices used in the mid-year review in April at US$35 per barrel and $2 per mmbtu and the Budget projected it be in deficit, it’s probably a safe assumption that there will be no contributions to the HSF over the next fiscal year.

For the most part, even though contributions have been if not sporadic at least not bounteous, the HSF still remained a feature in the country’s economic landscape, especially when the country needed reassurance about its ability to survive any macroeconomic fallout. Every year the country was reassured that there was a tidy little nest egg of approximately US$5 billion. That all changed when Mr Imbert made a withdrawal US$385 withdrawal (TT$2.5 billion) in April this year. The Minister has since claimed he had to make the withdrawal using his discretion in order for the country to remain solvent as it had reached its overdraft limit at the Central Bank. The Central Bank was about to refuse to extend any more credit to the Government; with no Central Bank backing commercial banks would not cash government cheques.

And if that came true, then all those people depending on the government for their income would not be able to receive their money. So, Mr Imbert decided that the best course of action would be to dip into the HSF in order to stabilize the economy. He has defended his decision, noting that that’s the reason for the fund in the first place — to stabilize the economy. The law allows him to dip into the Fund should petroleum revenues fall below estimated revenues by at least ten percent.

Estimated revenue for Fiscal 2016 was $5.45 billion, much higher than the actual $1.7 billion. Nonetheless, the resulting furore over his withdrawal has prompted him to mention in his Budget that there may be the consideration for splitting the HSF into two components — a Stabilisation Fund and a Heritage (Rainy Day) Fund. By law, there must a review of the legislation and mechanics of the Fund every five years. That’s next year. In the Budget, Mr Imbert said public consultations and a draft bill considering a split in the Fund is being prepared for next year. Among other things to consider will be increasing the rate of savings into a new HSF taking into consideration the implications of energy revenue transfers. Hopefully a revision happens before the next rainy day.