Selected Issues

Abstract

Selected Issues

The Heritage and Stabilization Fund: Key Issues1

Trinidad and Tobago is one of the very few Caribbean countries with a natural-resource-revenue fund. The Heritage and Stabilization Fund (HSF) has well-defined objectives, a sound governance structure, and a relatively conservative investment portfolio. Nonetheless, inflow and outflows rules are not directly linked to fiscal indicator(s) or the sovereign balance sheet. Such rules need to be reassessed and more closely linked to a medium-term fiscal framework, improving its potential as a countercyclical tool. The fund should be considered within a sovereign asset-liability management framework.

A. Objectives

1. The Heritage and Stabilization Fund (HSF) aims to save and invest energy revenue in excess of budgetary projections. In March 2007, the Parliament passed the Heritage and Stabilization Fund Act (hereafter the Act) replacing the Revenue Stabilization Fund (IRSF) with the HSF. The IRSF was set up in 2000 to promote fiscal discipline, cushion the impact on the budget and the economy of unexpected drops in oil prices, and strengthen public sector savings.2 Further, the HSF is separate from the overall foreign exchange reserves of Trinidad and Tobago.

2. The HSF has stabilization and long-term savings objectives. In terms of stabilization, the fund aims to cushion the impact of revenue downturns caused by falls in the prices of oil or natural gas, and help sustain expenditure during such periods. In terms of savings, the fund aims to generate a store of wealth that will generate income to support expenditure when revenue declines as a result of the depletion of petroleum resources. It also aims at providing a heritage for future generations.

B. Governance and Transparency

3. The governance structure is well defined, with clear roles and responsibilities of the different governing bodies.

  • The Minister of Finance approves deposits and withdrawals from the fund in accordance with the Act, and provides audited annual financial statements to parliament.

  • The Board of Governors for the HSF, comprising five members, decides on the fund’s investment objectives and determines the fund’s operational and investment guidelines. It also reviews the performance of the fund and submits quarterly and annual investment report on the operation and performance of the fund to the Minister of Finance.

  • The Central Bank of Trinidad and Tobago (CBTT) is the operational manager, in charge of investing the HSF’s assets consistent with a Strategic Asset Allocation (SAA). It also provides reports on the assets and investment performance of the HSF on a regular basis to the Board of Governors.

  • Parliament has the ultimate oversight of the fund, which it exercises through the review of annual reports and audited financial statements.

4. The review of the HSF legislation has not been finalized. The Act requires the Minister of Finance to review the HSF legislation and submit a report to Parliament every five years. The first review was due by 2012 but so far has not been completed.3 The 2017 review has been initiated.

5. The reporting by the HSF on its operations and performance has been transparent. This include the public disclosure of financial information on a quarterly basis. The HSF’s annual financial statements are externally audited and published. Also, as a member of the International Forum of Sovereign Wealth Funds (IFSWF) since 2012, the HSF produced a self-assessment against the Santiago Principles.4

C. Inflow and Outflow Rules

6. Inflow rules into the HSF are open to interpretation. The Act sets out the mechanism for deposits from the budget to the HSF. Section 13 stipulates for any quarter of the financial year that petroleum revenues exceeding the estimated petroleum revenue (EPR) by more than 10 percent shall be deposited into the HSF.5 If the quarterly excess is less than 10 percent, deposits are made at the discretion of the Finance Minister. On the other hand, Section 14 states that a minimum of 60 percent of the aggregate excess revenues must be deposited in a financial year.

7. Outflow rules are related to petroleum revenue shortfalls, and can only take place the year after the shortfall. Section 15 of the Act states that when the petroleum revenues collected in any financial year are less than the EPR for that year by at least 10 percent, withdrawals can be made from the fund, up to the lesser of: 60 percent of the shortfall; or 25 percent of the fund’s balance at the beginning of that year. However, no withdrawal can be made that would cause the fund’s assets to fall below US$1 billion. Since the period considered is the financial year, withdrawals are only permitted in the year following the shortfall in revenue. The Act does not require parliamentary approval for withdrawals.

D. Assets and Performance

8. The resources of the HSF comprise the initial transfers from the IRSF and the budget, and returns on the fund’s assets. Following the initial capital injection with assets of the IRSF, four of the six transfers from the Budget to the fund since its inception in 2007 were made despite the deficit in the overall fiscal balance (i.e., resulting in borrowing to save). There were two withdrawals from the fund in 2016 and 2017, amounting to US$628 million (equivalent to about 3 percent of GDP).

9. The HSFs’ assets rose quickly following the establishment of the fund, and have stabilized in recent years. Since its inception 10 years ago, total assets increased from about US$1.8 billion at end-September 2007 to US$5.9 billion at end-December 2017. The ratio of HSF assets to GDP has been rising since 2014 despite relative stability in the U.S. value of the fund, mainly because of the decline of GDP in U.S. dollars.

uA02fig01

Central Government Balance and Transfers to HSF

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: MoF; and IMF staff calculations.
uA02fig02

HSF Balance

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: MoF; and IMF staff calculations.

10. The HSF portfolio is diversified. The HSF portfolio was highly concentrated in short-term assets up to August 2009, reflecting a conservative investment strategy in the face of global financial market turmoil. The HSF’s investments are guided by the SAA, with the aim to maintain sufficient liquidity for potential withdrawals, while also preserving and augmenting its long-term real value. The SAA consists of a portfolio of 65 percent fixed-income securities and 35 percent equities.

uA02fig03

Evolution of the HSF Portfolio

(In percent)

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: MoF; and IMF staff calculations.
uA02fig04

The HSF Strategic Asset Allocation

(In percent)

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: MoF; and IMF staff calculations.

11. The return on HSF assets have largely tracked, or been higher than, the corresponding return on the benchmark portfolio. As of December 2017, the annualized rate of return since inception was 5.72 percent, which was higher than the annualized rate of return on the benchmark portfolio by 61 basis points. Annual rates of return have ranged from 0.8 percent (2011) to 10.7 percent (2012). The standard deviation of the annual rates of return was 3.1 percent.

uA02fig05

HSF Annualized Return Since Inception

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: MoF; and IMF staff calculations.
uA02fig06

HSF Portfolio Performance Against Benchmark

(Annualized Returns, in percent)

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: MoF; and IMF staff calculations.

E. Issues and Recommendations

12. The HSF needs to be considered in the context of sovereign assets and liabilities management. The HSF, as an instrument for savings, is only one element of government finances and the sovereign balance sheet, and its role should be assessed in the broader context of the sovereign asset and liability management. Given declining energy reserves, the medium-term fiscal framework (MTFF) will need to specify an appropriate balance between saving, consuming, and investing energy revenue, including in the HSF. The evolution of other items on the sovereign balance sheet, such as official foreign reserves and public debt, will also need to be considered in developing a comprehensive approach to building savings for future generations.

13. The HSF operations should be rooted within the MTFF to guide fiscal policy implementation through commodity cycles. While the HSF provides financial buffers to draw on in periods of adverse shocks, the rules governing inflows and outflows are neither linked to fiscal indicators (e.g., overall balance, non-energy balance) nor based on assessments of longer-term fiscal sustainability, limiting its potential as a countercyclical tool. This has resulted in building up assets in the HSF and accumulating debt at the same time. Therefore, transfers to the HSF should be derived from rules that would ensure: the accumulation of assets in the HSF reflect actual improvements in the sovereign balance sheet; and limit situations where saving in the fund can possibly result in a buildup of expensive debt relative to the return from fund investments. Table 1 presents different inflow/outflow rules for SWFs that are tailor made to reflect the appropriate fiscal policy strategies of each individual country.1

uA02fig07

HSF Portfolio Annual Return vs Implied Interest Rate of CG debt

(in percent)

Citation: IMF Staff Country Reports 2018, 286; 10.5089/9781484378182.002.A002

Sources: Ministry of Finance; and IMF staff calculations.

14. Accordingly, the HSF should be fully integrated with the MTFF along with formal fiscal targets that guide policy, with transfers to/from the HSF linked to an appropriate fiscal rule. Tailored TA could determine a specific rule that ensures fiscal sustainability and implementation of countercyclical fiscal policy. Further, the authorities should also consider adopting an asset-liability management framework. Public debt and the HSF need to be managed in an integrated framework, to limit situations where the authorities may need to borrow to save into the HSF (e.g., when running a fiscal deficit).

Table 1.

Inflow and Outflow Rules of Selected Sovereign Wealth Funds

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1

Prepared by Abdullah AlHassan.

2

Trinidad and Tobago—Selected Issues, “The Heritage and Stabilization Fund: Key Issues for the 2012 Review.” March 2012.

3

In late 2012, the Board reviewed the Act and delivered a report to the MoF “Policy Proposal Document on the HSF with Suggested Amendments to the HSF Act (2007),” and submitted an updated proposal in late 2014.

4

Santiago Principles self-assessment: http://www.ifswf.org/assessment/tt

5

The EPR is calculated on the basis of an 11-year centered moving average of crude oil and gas prices, with 5 years of history and 5 years of projections in addition to prices for the current year.

1

See Al Hassan et al. (2018). “Commodity-based Sovereign Wealth Funds: Managing Financial Flows in the Context of the Sovereign Balance Sheet.” IMF WP 18/26.

Trinidad and Tobago: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.