Petroleum Fund balance declines

PETROLEUM FUND QUARTERLY REPORT GIVES REASON FOR CAUTION

By La’o Hamutuk, 12 February 2010

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 complete
report is available at
http://www.laohamutuk.org/Oil/PetFund/Reports/PFQR09q4en.pdf, and the
BPA press release summarizing it is below.

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.

=========================================

Autoridade Bankária & Pagamentu Timor-Leste nian (ABP)
Banking and Payments Authority of Timor-Leste

Petroleum Fund Quarterly Report
Quarter ended 31 December 2009

PRESS RELEASE

The Banking & Payments Authority (BPA) today released the Quarterly
Report ended 31 December 2009 of the Petroleum Fund of Timor-Leste
showing that the Capital of the fund as of 31 December 2009 was
$5,376.63 million compared to $5,301.57 million at the end of September
2009.

The report shows that the gross capital inflows during the quarter were
$394.03 million, consisting of US$ 155.30 million as contributions of
taxpayer to the Fund, royalty contributions from the NPA (National
Petroleum Authority) of US$ 233.49 million and other receipt was US$ 5,
24 million.

The investment income of the Fund was -5.63 million of which the coupon
and interest received was $43.64 million and the change in the market
valuation was $-49.30 million. This resulted in a portfolio return of
the Fund for the quarter of -0.10%, while the benchmark return for the
period was -0.10%. The portfolio return was exactly the same with the
benchmark return and within the mandate.

The Petroleum Fund law specifies that the BPA, as the future central
bank of Timor-Leste, is the agent responsible for the operational
management of the Fund. The Ministry of Finance is responsible for
setting the overall investment strategy for the Fund.

The mandate given to the BPA has not changed, namely to manage the fund
closely to the Merrill Lynch 0-5 years US Government Bond Index, while
the mandate given to the BIS is to manage a diversified bond portfolio
in an enhanced return manner with the objective of outperforming the
Benchmark while maintaining an ex ante tracking error within 100 basis
points.

The BPA has managed the portfolio close to the benchmark over the first
18 quarters. The difference in return between the portfolio and the
benchmark since the inception
of the fund in 2005 is -0.06 basis points

Highlights of the XVIII Quarterly Report, which covers the period from 1
October to 31 December 2009, include:

• The opening balance was $5,301.57million.

• Net receipts during the quarter were $394.03 million which consisted
of taxpayer receipts of $155.30 million, royalty receipts of $233.49
million and other receipt was $5.24 million. The fund outflows were
$313.43 million which compose of $312 million was transferred to the
State Budget while $1.34 million was to cover the operational management
costs. The net capital flow was $80.69 million.

• The portfolio return was -0.10 % for the quarter while the benchmark
return was -0.10 %. The excess return was 0 (zero) basis point.
Investment income during the quarter was $-5.63 million consisting of
interest income was $43.64 million and market revaluations of -$49.30
million.

• The closing balance was $ 5,376.63 million.

The quarterly reports, as well as the Petroleum Fund law and Management
Agreement, are available from the Banking & Payments Authority’s
websitewww.bancocentral.tl.

Further information may be obtained from:
Venancio Alves Maria
Executive Director
Petroleum Fund Management,
Banking & Payments Authority of Timor-Leste
Email:venancio.maria@bancocentral.tl
Telephone: (670) 3313718
Dili, 8 February 2010.

***********************************************************
Charles Scheiner
La’o Hamutuk (The Timor-Leste Institute for Development Monitoring and
Analysis)
P.O. Box 340, Dili, Timor-Leste (East Timor)
Telephone: +670-3325013 or +670-734-0965 mobile
email: cscheiner@igc.org website: http://www.laohamutuk.org skype:
cscheiner

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