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Atlantic LNG in Point Fortin – File photo by Jeff K Mayers
UWI economist Dr Vaalmiki Arjoon says the increase in the net asset value (NAV) of the Heritage and Stabilisation Fund (HSF) comes at an interesting time for TT, economically and politically.
He made this comment on September 6, the day after Finance Minister Colm Imbert announced the HSF’s NAV stood at US$6 billion.
In a post on X (Twitter) on September 5, Imbert said in June 2022, the value of the HSF was US$4.7 billion. He added this was attributed to instability in the international financial system at that time.
“Now two years later, because of prudent management, the NAV of the HSF has increased to (US) $6 billion, an increase of US$1.3 billion.”
In a statement, Arjoon said, “This is indeed positive news, consistent with global equity market fundamentals.”
He recalled the last time the HSF’s NAV was over this figure was in December 2019, just before the covid19 pandemic began.
Arjoon said changes in the market fundamentals because of the pandemic and withdrawals from the HSF for budgetary support during this period caused the HSF’s NAV to decline.
In 2022, he continued, pandemic-induced inflation pushed major central banks globally to increase interest rates, causing bond prices to fall.
Arjoon said this also created market panic and uncertainty in the equity markets, leading to lower stock prices.
“From December 2021-October 2022, the S&P 500 index fell by approximately 23 per cent. These would have negatively affected the HSF balance, together with withdrawals of over US$1.8 billion during the pandemic, resulting in the fund balance declining to $4.77 billion by June 2022.”
He said this represented a 27 per cent decline in the HSF’s NAV from December 2019-September 2022.
In the second half of 2023, Arjoon, continued, there was meaningful recovery in the capital markets, especially the stock markets, when the US Federal Reserve (Fed) paused its rate hikes.
He said this pause stabilised borrowing costs for businesses and consumers. This had the effect of boosting spending and investment activities and enhanced corporate profitability.
Arjoon said, “This caused a bullish outlook for investors and increased equity purchases, which pushed prices upward.”
The Fed’s signal to lower rates by September “also caught up with market prices, as it induced more positive investor sentiment and reduced uncertainty, which pushed equity prices up further.”
This had benefits for the HSF’s NAV.
Arjoon said from December 2022-March 2024, the equity and fixed-income portfolio values of the HSF increased by 40 and 14 per cent respectively.
He added that whenever the Fed decides to lower interest rates, “This will drive up bond prices, and therefore increase the value of the fixed income portfolio of the HSF.”
Arjoon anticipated this decision should come soon.
He also predicted there will be some volatility in capital markets going forward due to events such as the US presidential election in November and other geopolitical developments.
From a political perspective, Arjoon said the increase in the HSF’s NAV comes at a time when the new fiscal year falls within an election period.
The next general election is constitutionally due by next August, with the law giving a three-month period after that in which to call the election.
Arjoon said, “The government will be keen to avoid undermining further economic activity and may look to increase expenditure, especially capital expenditure, social programmes etc.”
He added this raises the possibility of government “tapping into the HSF for budgetary spending, especially if our petroleum revenues fall at least ten per cent below the budgeted revenue.”
Under the HSF Act, 60 per cent of the excess tax revenue from oil and gas (the difference between the actual and the budget estimate) must be transferred into the HSF annually.
The oil and gas prices used for the budget estimate must take into account the recent price history as well as projected prices obtained from defined international sources.
Arjoon observed that energy production has taken a hit, with natural gas and crude oil output falling by 32 and nine per cent respectively over the last five years.
Should the upcoming budget be based on overestimated oil and natural gas prices, Arjoon said there is a possibility of actual petroleum revenues falling below the figures in the budget.
He added this could trigger a scenario where government could make a withdrawal from the HSF if the actual petroleum revenues are lower than the budgeted revenues by at least ten per cent.
