ewart s williams : understanding the heritage and stabilisation fund feature address by mr ewart s williams, governor of the central bank of trinidad and tobago, to the south trinidad chamber of commerce annual general meeting, port - of - spain, 20 september 2007. * * * let me thank the south chamber for inviting me to speak at your annual general meeting. as the chairman indicated, my theme is the heritage and stabilization fund and what i would like to do is not only discuss the underpinnings and the specifics of the fund …. in addition i see this as the launch of a communication initiative geared to convince the stakeholders, like you and the public at large, that this is their fund over which they should show the same interest and vigilance that they exercise over their pensions or their personal savings. the public must have an interest in how much money is placed in the fund : how it is invested and what returns are being generated. the hsf is a reserve for the people of trinidad and tobago, their children and hopefully their children ’ s children. in the economic literature, funds like our heritage and stabilization fund are called sovereign wealth funds and their distinguishing characteristic is that these are national savings that are invested actively with the purpose of earning high returns – returns that would provide an important source of revenue to the government later. these sovereign funds are different in nature and in purpose from the country ’ s official reserves. every country holds official reserves that are managed by the central bank. however, invariably rate of return is not the primary objective for holding reserves. central banks hold reserves for prudential purposes, for example, for meeting government external debt payments ; to finance payments for imports and to be available for intervention in the foreign exchange market, as needed. countries like ours, that are heavily dependent on primary products, also hold reserves for precautionary purposes – so that we could avoid any disruption to international trade if there is a sudden fall in oil and gas prices. given these objectives, liquidity is perhaps the most important consideration in the foreign reserve management policy of central banks. consequently, central bank reserves are invested in short to medium term low risk financial assets. sovereign wealth funds have assumed heightened popularity in the last few years, as many emerging countries have seen a phenomenal increase in their international reserve holdings. most of these funds belong to commodity exporting countries that have benefited from the increase in the international prices of oil and gas ( as in the case of norway and the

tapering off will help to keep in check any overheating in these sectors of the economy. while the longer - run inflationary trend ( or core inflation ) remained subdued with the inflation rate for 2000 registering 3. 6 per cent compared with 3. 4 per cent in 1999, short run supply shocks continue to impact the level of retail prices. in 1998 floods and drought contributed to a spike in the annual inflation rate. a similar situation occurred in 2000 as flood damage adversely affected the supply of fruits and vegetables in november and as a consequence prices rose sharply towards the end of the year. since then average consumer prices have fallen in january and march with the inflation rate for the first quarter set at 1. 5 per cent compared with 2. 7 per cent in the fourth quarter of 2000. the improvement in the country ’ s terms of trade in 2000 was reflected in the fiscal accounts as buoyant oil prices contributed to an almost balanced budget for the fiscal year 1999 / 2000. the trend of higher than budgeted oil prices continued into 2001 and into the new fiscal year. preliminary evidence suggests that for fiscal 2000 / 2001 the central government will achieve an overall surplus of just under 0. 5 per cent of gdp. indeed for the first six months of the fiscal year, the government recorded an overall surplus of $ 473 million as actual oil prices averaged around us $ 30 well above the budget estimates. despite this performance there are some downside risks to the fiscal position. the downside risks arise from the possibility of a sharp reversal in the terms of trade with oil prices falling well below us $ 20 as well as the inability of the central government to keep the reins on the transfers and subsidies element of the budget – especially transfers to public enterprises and utilities. preliminary estimates show that transfers are projected to rise from 7. 8 per cent of gdp in fiscal 1998 / 1999 to 9. 2 per cent in the current fiscal year. while the central government may achieve an overall budget balance in the current fiscal year we at the central bank continue to focus on the high level of fiscal injections associated with these activities as there are implications for liquidity management. during fiscal 1999 / 2000 the central government established a revenue stabilisation fund in which it is estimated that two thirds of the excess of actual oil revenues over budgeted revenues will be placed. at the end of the fiscal year just over tt $ 400 million was placed into this fund and given the general trend in oil prices for the current fiscal year a