DILI – A-two-day seminar on the petroleum fund management organized by the Ministry of Finance at the Dili Convention Center (Ex Mercado Lama) on 10 – 11 of May, has raised questions from many people concerning on how the fund is managed.
Speakers at the seminar
were the people who represented all competent parties in charge of TL oil fund management, Norway, New Zealand, Australia and Timor-Leste.
Speaking at the seminar, Alex Joia, Senior Asset Management
Specialist at the Bank for International Settlements
(BIS) confirmed the importance of using external managers to manage the fund before it is settled into the US Federal Bank.
Alex also said that TL is now using the service of BIS due to lack of human resources capacity, system and the location or international
market proximity.
Another reason is that, the BIS play a very important role in fostering cooperation among central banks and other agencies in pursuit of monetary and financial stability.
And it also serves as the bank for central banks. Responding to the question of why TL has chosen the BIS, Alex said, “Trust is essential.”
Commenting on the investment
strategy shortly after
the seminar, Peter Ryan-Kane, Tower Watson’s Head of Portfolio Advisory said that the way the fund has been managed is appropriate for the risk profile and the early stages of the fund.
According to Peter, the structure that has been put together that separates the collection of petroleum revenues
from taxes, and royalties
and the deposit that are directed into the New York Trade. And then the management
of the fund separating that from the budgetary process
and the transfer of revenues
into the budget via the ESI or sustainable income calculation is the appropriate way to do it.
“It’s beginning to take more risks to in order to generate more return,” Peter said. He also added that in order to earn more return, it is sufficient to fund the ESI or sustainable income calculation.
Tower Watson has also suggested that, besides investing
the fund into the US Treasury Market, at least, 25 % could also be invested into the global equities.
“The main reason for that is to generate a return profile that’s high enough to fund the ongoing sustainable income withdrawals from the bank,” added Peter.
Meanwhile, commenting on the investment strategy, Peter Ryan-Kane said that there are two choices for TL, it can choose whether a more conservative investment
strategy and live with a lower amount of money being available from the fund each year, or TL can target a higher amount of money but it needs to earn a higher risk-return to do that.
As the petroleum fund law stipulates that each year 3 % of the fund needs to be removed or taken, and if that remains the case, the fund needs to take more risks in order to generate an appropriate
level of return. So, in order to fund that, the fund itself needs to earn high return.
That 3 % drawdown is effectively drawing on both returns from past production into the fund and also future production.
“So, you are actually front loading already your cash flow into the budget which I think is appropriate for an economy like this one that has the infrastructure and development needs,” Peter added.
Closing the seminar, Jose Luis Guterres affirmed that this is an important step for young Timorese to understand the use and the function of TL’s oil fund and be able to manage it in the future when the old generation
is gone.
(The War)
Speakers at the seminar
were the people who represented all competent parties in charge of TL oil fund management, Norway, New Zealand, Australia and Timor-Leste.
Speaking at the seminar, Alex Joia, Senior Asset Management
Specialist at the Bank for International Settlements
(BIS) confirmed the importance of using external managers to manage the fund before it is settled into the US Federal Bank.
Alex also said that TL is now using the service of BIS due to lack of human resources capacity, system and the location or international
market proximity.
Another reason is that, the BIS play a very important role in fostering cooperation among central banks and other agencies in pursuit of monetary and financial stability.
And it also serves as the bank for central banks. Responding to the question of why TL has chosen the BIS, Alex said, “Trust is essential.”
Commenting on the investment
strategy shortly after
the seminar, Peter Ryan-Kane, Tower Watson’s Head of Portfolio Advisory said that the way the fund has been managed is appropriate for the risk profile and the early stages of the fund.
According to Peter, the structure that has been put together that separates the collection of petroleum revenues
from taxes, and royalties
and the deposit that are directed into the New York Trade. And then the management
of the fund separating that from the budgetary process
and the transfer of revenues
into the budget via the ESI or sustainable income calculation is the appropriate way to do it.
“It’s beginning to take more risks to in order to generate more return,” Peter said. He also added that in order to earn more return, it is sufficient to fund the ESI or sustainable income calculation.
Tower Watson has also suggested that, besides investing
the fund into the US Treasury Market, at least, 25 % could also be invested into the global equities.
“The main reason for that is to generate a return profile that’s high enough to fund the ongoing sustainable income withdrawals from the bank,” added Peter.
Meanwhile, commenting on the investment strategy, Peter Ryan-Kane said that there are two choices for TL, it can choose whether a more conservative investment
strategy and live with a lower amount of money being available from the fund each year, or TL can target a higher amount of money but it needs to earn a higher risk-return to do that.
As the petroleum fund law stipulates that each year 3 % of the fund needs to be removed or taken, and if that remains the case, the fund needs to take more risks in order to generate an appropriate
level of return. So, in order to fund that, the fund itself needs to earn high return.
That 3 % drawdown is effectively drawing on both returns from past production into the fund and also future production.
“So, you are actually front loading already your cash flow into the budget which I think is appropriate for an economy like this one that has the infrastructure and development needs,” Peter added.
Closing the seminar, Jose Luis Guterres affirmed that this is an important step for young Timorese to understand the use and the function of TL’s oil fund and be able to manage it in the future when the old generation
is gone.
(The War)
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