DILI, 1 April, 2020 (TATOLI) – Timor’s oil fund has lost US $1.8 billion – or more than 10 per cent of its value – amid global uncertainty triggered by Covid-19, the central bank informed Parliament on 27 March.
Following a meeting of parliament’s Commission C last week, BCTL Governor Abrãao de Vasconcelos pointed to volatility on Wall Street, with the benchmark S&P 500 index falling 25 per cent from mid-February to March 20.
“There has been a very significant fall in the value of the fund… caused by the international market,” he said.
The most recent balance sheet shows the fund fell $343 million in February to $17.5 billion on February 29.
But since then, the S&P 500 experienced its worst month since the Global Financial Crisis, falling a further 12.5 per cent, while oil prices and yields on government bonds – which make up the majority of the fund – have fallen to historic lows.
A market rally in late March, after the Governor addressed parliament, reduced the fund’s losses. Amid the volatility, Mr Vasconcelos said it was important the fund managers exercised discipline.
“Our option now is we don’t want to make the decision [to sell] just because the market is in decline,” he said.
Withdrawals from the fund, including carry-over funds, comprised 82 per cent of the government’s projected revenue in the proposed 2020 budget.
Dili-based research group La’o Hamutuk estimates the write-down could reduce the interest the country’s government can sustainably withdraw each year by $51 million dollars — about twice the entire agriculture budget.
In an analysis published earlier this month, La’o Hamutuk predicted the steep decline could accelerate the depletion of the fund altogether.
“Last year [we] projected that the Petroleum Fund could be empty by 2028, even if it is not used to pay capital costs of the Tasi Mane project. If current global trends persist, this will happen several years sooner,” the group wrote.
And La’o Hamutuk researcher Charles Scheiner said the fund was more vulnerable than it was during the 2008 Global Financial Crisis.
“Timor-Leste’s Petroleum Fund was the only one in the world which didn’t lose money during , because we were not invested in stocks,” he said, adding that Norway’s oil fund lost about $90 billion.
In 2010, Timor’s government passed changes to the petroleum fund allowing more investment in equities, or shares. It now has 35 per cent invested in equities, 60 per cent in various government bonds and the rest in private capital. But Mr Scheiner’s analysis concludes that earnings on the $7.9 billion held in US Treasury bonds are also vulnerable.
“The Petroleum Fund received $420 million last year in interest and dividends [from bonds and stocks], and this could drop below $150 million if rates stay where they are,” he told TATOLI.
“If they fall further – in response to COVID-19 and the slowdown in global economic activity – Timor-Leste will receive even less,” he said.
The result, he predicts, is a net loss of $1.9 billion by year’s end – $2.5 billion dollars lower than the $640 million gain the Ministry of Finance estimated in the proposed 2020 General State Budget (OJE).
But Pedro Martins, Senior Country Economist for World Bank, said the fund is well-poised to weather a possible global recession.
“Timor-Leste should be commended for the creation and design of its Petroleum Fund. The fund provides a valuable buffer to deal with external shocks. We continue to recommend a prudent management of these resources and for withdrawals to be invested in efficient and productive projects to modernise the economy and enhance human capital,” Dr Martins said.
The Bank, he adds, stands “ready to assist” Timor-Leste deal with the economic impacts of the global pandemic.
Over and above the ‘sustainable’ withdrawals
The 2020 OJE was rejected by the National Parliament in January, leading the Prime Minister to resign and Xanana Gusmão to position himself as the country’s new leader. President Francisco Guterres Lú-Olo has yet to accept the resignation, deepening a long-running political impasse.
However, the Covid-19 crisis appears to have pushed partisan issues aside, and Taur Matan Ruak is spearheading the government’s response as Prime Minister.
The budget – which had been significantly reduced from the version proposed last October – would have authorised $460 million in withdrawals above Estimated Sustainable Income (ESI) for basic government expenditure.
The Taur Matan Ruak government has requested a further $250 million for general expenditures and $150 million to deal with coronavirus.
Governor Abrãao said the Central Bank would table a report in parliament on the PF’s performance on April 10.
UPDATE: On Wednesday (April 1), the National Parliament approved $250 million in funding that the Taur Matan Ruak government had requested to finance the duodesimal budget.
Journalist: Evaristo Soares Martins
Editor: Robert Baird; Cancio Ximenes
Translation: Nelia Borges