The Ministry of Finance held mini seminars from 29 June to 1 July to Members of the Government and National Parliament as well as Civil Society with key speaker from Towers Watson, the Ministry of Finance’s external consultant on Petroleum Fund matters.
The purpose of the seminars is to provide more detailed and technical explanation to key stakeholders in order to achieve a solid national consensus regarding key issues surrounding the Petroleum Fund law changes. To this end, the Government, through the Ministry of Finance, has for the past few years conducted in-depth analysis and research on the current Petroleum Fund Law, its overconcentration of risk and potential investment return. This has led to proposed changes, which has been presented to the National Parliament in late June 2011 for discussions and approval.
Amongst other proposed changes to the PF Law, the Government proposed to increase equity exposure up to maximum 50% and at least 50% should be invested in bonds, removal of currency constraint, applied principle of diversification and increased accountability and reporting requirement (Article 14 & 15), increase flexibility for operational management (Article 2(i)), provide more scope for Timorese involvement in future management of Petroleum Fund (Article 12.3) and enable the encumbering of no more than 10% of the Fund’s assets for future government’s borrowing (Article 20).
The Petroleum Fund has pursued a prudent and successful strategy since its inception in 2005. A successful investment strategy in the past, however, is not the right strategy for the future. Towers Watson provided historical evidence that the current investment strategy is not sufficient to achieve the long term investment objective – 3% real rate of return on the investments – and showed that even their forward looking analysis requires a change in the current strategy. TW believes that a minimum of 40% of the Funds are required to be invested in equities with the remaining 60% in bonds to meet the implied return target of 3% real (with a relatively high probability). Equity exposure adds materially to the risk (volatility) of the Fund and equity exposure above 50% is not recommended.
It was noted that the rationale for the proposal to use 10% of the Fund’s asset as “security” for future government loans is to enable better terms and conditions on any borrowing, such that the cost of any borrowed amount would be lower. However, some participants saw borrowing and encumbering some of the Fund’s asset, unjustifiable, bearing in mind that TL has sufficient capital and that the “implementation” has been unsatisfiable”.
Towers Watson also presented their recent work on the roadmap for the future strategic asset allocations. The report shows that by far the most important policy decision is the split between bonds and equities to meet the investment objective and there should be a mechanism to create ability which is a combination of having adequate capacity (hands/feet), resources (bodies) and capacity (brain).
Minister of Finance, H. E. Emilia Pires reminded that the amendment of Petroleum Fund law – which will affect the future investment strategy of the Fund – is a small part of the Government’s overall strategy to move away from oil economy to a more sustainable diversified economy driven by private sector. “What matters in the future is to have a productive labor force and productive capital,” said Minister Pires. END