Oil fund reserves shed £45m as banking crisis hits home

By NEIL RIDDELL

SHETLAND’S oil fund investments have lost almost £45m in value in the past six months, prompting the council’s finance chief to call for calm and warn against any knee-jerk reaction to the latest drastic downturn in the stock market.

Councillors this week voiced their “shock and horror” at news of the UK’s biggest eight banks being bailed out by the government after share prices tumbled again week and sought reassurances over the status of the oil reserves and that their current budgets and plans would not be thrown askew by the turmoil.

The council’s investments have lost £26.5m since the beginning of April, while Shetland Charitable Trust’s stock market portfolios have declined in value by £18.4m since the start of the financial year.

Head of finance Graham Johnston said that although recent goings-on in the financial markets were “pretty unprecedented” and that we are living in “chaotic and anxious” times, the SIC’s strategy remained a long-term one which has served it well in the past.

“We’re going to have to ride out this particular storm,” he told members of the audit and scrutiny committee on Wednesday. He said any drastic action would serve to “realise losses which we do not have to realise” when stocks are at a low ebb.

The total value of the council’s reserves stood at £288m at the end of March this year when the total value of the capital fund, repairs and renewals fund and the reserve fund stood at £253.9m. That figure had dropped dramatically by £26.5m to £227.4m as of last Friday but Mr Johnston said he was confident the overall value of the reserves, which will not be calculated until the end of the current financial year, would not break the SIC’s policy threshold of £250m.

Meanwhile, the value of Shetland Charitable Trust’s stock market investments has also plummeted and stood at £166m as of last Friday. That is a drop of some £27.4m since the turn of the financial year, although £9m of that was withdrawn by the trust to spend on its funding plans during 2008/9.

But Mr Johnston pointed out that the movement in the markets had been much more sustained during the equity crisis of 2002-3, when the FTSE fell to around 3,600 points; as of yesterday lunchtime the index stood at 4,427.37 points. “I believe our spending plans are about the long term, based on a judgement on long term returns,” he said.

Any rash response to the crisis would “risk destabilising the Shetland economy” when the council has a duty to provide stability in a time of financial upheaval, he said. Mr Johnston admitted his strategy might prove flawed in the event of a total collapse of the UK economy but that in such an event there would be little the council could do anyway.

Councillor Jonathan Wills said it was “inconceivable” that there would be no effect on next year’s budget and that the council would have to look at protecting its reserves through safer investments and less exposure to the stock market in the future. That, though, will mean lower income and the people of Shetland would have to get used to lower spending, he noted.