By Jerome Kuseh
Ghana’s Petroleum Funds consist of the Ghana Stabilisation Fund (GSF) and the Ghana Heritage Fund (GHF). Both funds receive portions of the oil revenue each year.
Section 9 (1) of the Petroleum Revenue Management Act (PRMA), 2011 (Act 815) establishes the GSF which is supposed to cushion the country when there is an unanticipated shortfall in petroleum revenue.
Section 10 (1) of the PRMA establishes the GHF which is supposed to serve as an endowment for future generations and which cannot be touched unless after 15 years of its establishment.
The PRMA also establishes an Investment Advisory Committee to advise on the instruments which the GHF can be invested in.
Funds from the GSF have been withdrawn regularly within the last three years as the country has faced fiscal pressures. Because of this, I consider the GSF a short-term holding fund rather than a fund with a long-term focus.
The objective behind the establishment of the GHF is commendable. Our petroleum resources will eventually run out or become obsolete and it makes sense to have a sovereign wealth fund which will help ensure that our finances do not take too much of a hit when the oil revenue runs out.
The GHF is an investment with a long-term focus. Short-term returns should not be the measure of performance. But after 6 years of the fund being in operation, we can certainly review its performance and compare with a benchmark.
Methodology and Limitations
After sifting through several reports from the Bank of Ghana (BoG), Ministry of Finance (MOF) and the Public Interest and Accountability Committee (PIAC) I was able to get figures of the performance of the Petroleum Funds or get enough data to estimate the returns.
For 2011, 2013 and 2016, I divided the investment income from the account over the average amount in the fund. I defined the average amount in the fund each year as the sum of the opening and closing balances divided by two. The results for these years are therefore fair instead of accurate. However, I believe this is the best publicly available information at the moment and I will revise them if my attention is drawn to better information.
Apart from that, the benchmarks chosen to compare the performance of the Petroleum Funds to are not net of fees and tax. Yet, I do not think that significantly hampers the comparison given the significant differences recorded in returns.
Performance of the Funds
Figure 1.1 below is a chart showing the performance of the GSF and the GHF from 2011 to 2016. The average return of the GSF over the period is 0.53% while that of the GHF is 1.77%.
Figure 1.1: Annual Returns of Ghana’s Petroleum Funds (2011-2016)
Because the GSF is a short-term fund, I am comparing its returns to that of the three-month US treasury bill. And with its average return of 0.53% beating the average t-bill yield of 0.15% over the period, we see that the GSF is performing quite well as shown in Figure 1.2.
Figure 1.2: Annual Returns of Ghana Stabilisation Fund and 3-Month US T-bill (2011-2016)
We should note though that the stabilisation fund currently has a cap of $100 million and is therefore not fully a short-term fund. But judging by how easy it has been to lower the cap over the years from $250m to the current $100m, treating it as short-term is reasonable.
Because of the long-term focus of the GHF, the benchmarks I chose for it are the S&P 500 and a 60/40 Portfolio i.e. 60% US 10-year bonds and 40% US stocks represented by the S&P 500. Owning stocks only is not out of place for a fund which is long-term. And the average return of 10.54% of the S&P 500 since 2011 handily beats the 1.77% return of the GSF and the 6.48% return of the 60/40 portfolio. Nevertheless, it is prudent to use a 60/40 portfolio in order to manage risk. We see the comparison of the GHF to the S&P 500 and 60/40 portfolio below.
Figure 1.3: Annual Returns of Ghana Heritage Fund, S&P 500 and 60/40 Bond-Stock Portfolio (2011-2016)
- The BoG or MOF should provide a simple database of the performance of the Ghana Petroleum Funds to allow Ghanaians to easily track how well they are doing.
- The performance of the GHF could be better. It is not beating stocks or a traditional 60/40 bond-stock portfolio. The managers of the fund should consider indexing to these if they are not currently doing so.
Bank of Ghana: Petroleum Holding Fund (PHF) & GPFs Semi-Annual Report (2013, 2014, 2015, 2016)
Ministry of Finance: Reconciliation Report on the Petroleum Holding Fund (2013, 2014, 2015)
Public Interest and Accountability Committee: Report on Management of Petroleum Revenues (2013, 2014, 2015)
1stock1.com: S&P 500 Index Yearly Returns
Aswath Damodaran, http://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html: Historical returns: Stocks, T.Bonds & T.Bills with premiums