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No lucky dip

Monday, March 20 2017

The Ministry of Finance announced last week an approved drawdown from the Heritage and Stabilisation Fund (HSF) of TT$1,712,200,000.00 (US$251 million). This is the second drawdown (in ten years) since May 13 last year when the first drawdown of US$375.05 million was made. In both cases this was to fill a recurrent budget deficit. This is equivalent to selling the family assets to meet one’s personal expenditure.

Of course, this is not as simple as it appears. We must acknowledge that to bridge a fiscal gap of US$16 billion is difficult especially if a country’s debt to GDP ratio is already over 60 percent. While saying that selling assets to fund a recurrent budget gap is a bad idea we need to acknowledge the arguments of the government.

The Minister of Finance in his budget statement indicated that a turnaround in the economy is expected later this year based mainly on the improvement in the fortunes of the energy sector.

First off, the coming on stream of the Juniper field will increase the output of the sector.

Second the increase in oil prices over US50 a barrel would have gone a long way to improving energy sector revenues. Third, later this year the 100 percent write-off of investment in the year they were made would no longer be in effect and this should improve energy sector revenues.

It must be admitted that the Juniper fields may be inadequate to fully replace lost output from aging fields. Secondly, we have seen a movement in the price of oil from US$54 a barrel in February to US48 in March of this year. This newspaper last week ran an article on March 16 in which it identified factors accounting for a possible dampening effect on oil prices going forward. The general idea conveyed was that the probability for lower oil prices were more than even.

Against this backdrop one wonders if the gamble by the Government for withdrawing from the HSF and borrowing from the local and international markets would prove to be a bad decision. This is difficult we all must admit. The government has indicated that too dramatic a cut in expenditure could stall the economy which is why they kept the cuts to seven percent.

There are two issues that arise from the March 17 press announcement.

First the HSF board needs to be complimented on achieving a growth between May 2016 (first withdrawal) and March 2017, of US$274 Million which is a five percent increase.

This we must note is not reflective of the current interest rate environment or reflective of the yield from high rated bonds. The question that arises is, has there been any rebalancing of the HSF portfolio to permit the investment in riskier assets? Has there been a change in the investment policy of the HSF to allow for a change in the asset allocation? The rating agencies had asked for a plan for effective debt management of which use of the HSF was to be outlined. Has this been done? Is there need for further fiscal consolidation? Certainly, the contraction in 2016 was more than in 2015.

Where is our stabilisation plan? If after 2017 energy prices and output does not allow revenues to recover and close or eliminate the fiscal gap what is our plan going forward? Should we consider restructuring the HSF to allow increases in the fund from alternate sources? Surely, this latest withdrawal demands answers to these questions since it is no lucky dip.



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