12 February 2010

Petroleum Fund Quarterly Report gives reasons for caution

This week, the Timor-Leste Banking and Payments Authority (BPA) reported on the Petroleum Fund for the last quarter of 2009, showing a fund balance at the end of the year of USD $5,376,625,558. The report is available at http://www.laohamutuk.org/Oil/PetFund/Reports/PFQR09q4en.pdf, and the BPA press release which summarizes it is at http://www.laohamutuk.org/Oil/PetFund/Reports/PFQRPR09q4en.pdf.

At the end of September 2009, the balance had been $5,301,568,442. During the fourth quarter, the Government transferred $312 million from the Fund to the State operating account, more than the $207 million discussed in the 2010 State Budget proposal (see http://www.laohamutuk.org/econ/OGE10/sub/KartaLHTilman10Nov09en.pdf). The total amount taken out of the Petroleum Fund during 2009 was $512 million, $104 million more than the 2009 Estimated Sustainable Income (ESI). Although this was authorized by the 2009 State Budget, it does not appear to have been necessary in order to pay for programs in that budget.

According to Petroleum Fund monthly reports (available at http://www.bancocentral.tl/PF/Reports.asp) the Fund's balance at the end of October 2009 was $5,380 million. It rose to $5,464 million one month later, but dropped to $5,377 million at the end of December.  This is the first time in the Fund's history that its balance has fallen, and should remind all of us that petroleum revenues cannot keep pace with increasing withdrawals.

During the fourth quarter, the return on Fund investments was negative, losing $7 million. During the entire year 2009, the Fund's rate of return was 0.6%, far lower than the goal of a 3% rate of return (above inflation) which is the basis for calculating the Estimated Sustainable Income. The low rate of return reflects the global financial market. It is another reminder: Timor-Leste needs to strengthen its non-oil domestic economy (the part not powered by government spending) because investment income is not dependable.

For the last six months, 20% of the Fund's investments have been managed by the Bank of International Settlements, which invests them in a broader range of bonds than the short-term U.S. Government bonds where the 80% managed by the BPA remains. During the fourth quarter, the BIS investments earned $0.5 million less than the would have if managed by the BPA (although both had negative returns). These short-term differences may not continue over longer periods, but they show that more diverse investments may not produce better results.

The Ministry of Finance will review the investment strategy of the Fund during the next few months, and will revise the Petroleum Fund Law.  As we look for ways to increase the rate of return, we hope the Ministry will be cautious about more risky investments which promise higher rates of return.  During 2009, the Fund paid more than twice as much in "management fees" ($2.6 million) as it did in 2008, but the new management has not increased the Fund's income.

For more historical and current information on Timor-Leste's Petroleum Fund, with links to other documents, see http://www.laohamutuk.org/Oil/PetFund/05PFIndex.htm.

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