State-owned investors funded by mineral and metals mining
revenue are suffering as prices fall. Fiscal prudence may see
As petroleum prices tumble, the world's attention
is focused on those sovereign wealth funds associated with
hydrocarbons. People are paying less heed to government-owned
asset pools funded by revenue from nonoil commodities, such as
metals, coal and diamonds. Prices for many of these exports
have also declined over the past year, though less sharply than
oil. Copper prices have fallen by 18 percent since crude
started to tank last July, to their lowest value since
mid-2009, according to NASDAQ data. Thermal coal has dropped 13
percent over the same period, and is also hovering near
six-year lows, according to data provider InvestmentMine.
The state-owned investors coping with these
downdrafts are much smaller than the oil-fueled giants like the
Abu Dhabi Investment Authority , with
about $600 billion under management, or even the $37.1 billion
State Oil Fund of the Republic of
Azerbaijan . The largest of the mineral-fueled state-owned
asset pools are Chile's twin stabilization and pension reserve
funds, with total assets of almost $23 billion.
The minerals cohort is is a highly diverse group
— geographically, in their countries' stages of
economic development, and the particular sources of their
wealth. Members stretch from Chile and Peru, with its $9.2
billion Fiscal Stabilization Fund, to the Western U.S., where
the $7.1 billion Permanent Wyoming Mineral Trust Fund and the
$20.2 billion New Mexico State Investment Council are
domiciled. And from Botswana, with its $5.5 billion
Pula Fund , to Mongolia's Fiscal Stability Fund with some
$250 million in assets by a recent count.
Most such vehicles, like that of Peru, fall under
the category of so-called stabilization funds — which
are designed to insulate government spending from commodity
price gyrations — and so don't necessarily fit the
definition that qualifies a fund for inclusion in the Sovereign
Wealth Center's roster.
Notably, Australia's $95.4 billion Future Fund isn't funded by revenues
generated by mineral mining. It was seeded in 2006 and with a
A$18 billion (then $13 billion) lump sum, cash from government
fiscal surpluses, as well as proceeds and shares from the
then-recently privatized telecommunications operator Telstra.
But coal and metals account for some 45 percent of Australia's
exports and during the mining boom there was political debate
about establishing a fund to saving mining revenues for future
generations. The Labour government refused, resulting in states
like Western Australia setting up their own funds: the
coal-fueled Western Australian Future Fund amounts to
Mineral-based funds and the governments that
control them have less room for error than the petrostates,
experts say. Failure to exercise fiscal caution during this
downturn could leave them depleted if not wiped out by the time
prices rebound. Chile has cut its teeth on these matters
before, particularly during the 2008-'09 financial
But the countries involved are largely rising to
this challenge, according to experts. Chile and Peru in
particular have been models of fiscal discipline for more than
a decade, piling up enough savings to get them through the
current downturn. Both governments will probably manage without
large-scale withdrawals from the national savings, says Edward
Glossop, an emerging markets economist at Capital Economics in
London. "These are the two stars of Latin America with tight
deficits and very, very low debt levels," he says. "They should
be able to borrow what they need without drawing down the
sovereign wealth funds."
two sovereign investment vehicles are among the most
transparently governed sovereign wealth funds. The government
established the Economic and Social Stabilization Fund, known
as ESSF, and Pension Reserve Fund in 2007, to offset the
nation's dependence on copper exports. Chile, with a population
of 18 million, is the world's dominant producer of the metal,
with more than triple the output of its nearest rival, China.
Chile depends on copper sales for one-third of government
revenue, according to Glossop.
That's a powerful argument for a counter-cyclical
fiscal stability fund. The proof: Copper prices plunged by more
than 60 percent during the 2008-'09 financial crisis, and did
not return to pre-crash levels until late 2010. The Chilean
government withdrew $9.3 billion from the ESSF in two
installments during 2009, one of the largest post crisis
stimulus programs in the world on a relative basis.
The capital injection limited the shrinkage in the
the nation's GDP to just 1 percent. Chile returned to nearly 6
percent growth in 2010, and the ESSF accrued another $3.6
billion between 2010 and 2013.
"The ESSF withdrew money and refurbished it
later," says Sven Behrendt, founder of consulting firm
GeoEconomica in Geneva. "That's exactly what they were set up
In 2014, Chile withdrew a more modest $499 million
from the ESSF. Economists expect any withdrawals this year to
be similar in scope, leaving the roughly $15 billion buffer
intact. The recent decline in copper prices has been much more
gradual than the 2008 crash, and with sovereign credit ratings
as good as China's, AA- by Standard & Poor's, Chile can
easily borrow to fund budgetary shortfalls.
Chile has inspired funds in other mining-dependent
economies, most notably its larger but poorer neighbor Peru.
Fully 69 percent of that country's exports are metals and
minerals, against Chile's 58 percent, according to a paper last
year by Luis Felipe Céspedes, Eric Parrado and
Andrés Velasco, though Peru's mining industry is more
diversified, including gold, silver and lead as well as copper.
Peru formed a stabilization vehicle, the Fiscal Stability Fund
(FSF), in 2011, depositing $5.6 billion that had accumulated in
other pools, switching its focus to budgetary prudence away
from intergenerational wealth transfer.
The trigger mechanisms of the Peruvian fund are
not strictly objective. It simply accumulates excess budgetary
funds, and can be tapped when state revenues fall by more than
0.3 percent, relative to gross domestic product (GDP), from an
average of the preceding three years. The Peruvian government
can draw down a maximum of 40 percent of the FSF, and must use
the money for social welfare programs. The fund also has its
own ceiling of 4 percent of GDP, or $13.6 billion. (It
currently stands at about half that level.)
But similarities in the two economies outweigh the
differences in their funds, analysts say. Like Chile, Peru has
secured an investment-grade credit rating, and should make up
an expected 2 percent-of-GDP deficit this year in bond markets
rather than raiding its wealth fund.
Peru, with population around 30 million and gross
domestic product of $340 billion, has increased its
stabilization fund's assets to $9.2 billion. Neighboring
Brazil's Fondo Soberano do Brasil (FSB), it should be pointed
out, isn't a resource fund at all. The
National Treasury issued debt of $6.1 billion to fund it in
2008. Brazil, whose 202 million citizens produce $2.4 trillion
in annual output, is of course a big exporter of iron ore, oil
and agricultural products.
It helps that Chile, Peru and other mineral
exporters are also big oil importers. Cheaper hydrocarbons help
offset falling metals and mining sales and ease the financial
squeeze. The U.S. state funds are bolstered by a somewhat
different dynamic: Oil production has risen in Wyoming
and particularly New Mexico thanks to shale drilling, filling
the coffers despite falling oil prices.
At the other end of the spectrum come tiny
developing nations like Botswana (population 2.0 million) and
Mongolia (2.8 million), which are trying to reap the benefits
of their natural resources. Botswana is the world's largest
producer of diamonds and exports large quantities of copper and
nickel. Mongolia draws one-third of its export income from
coal, another third from copper and iron.
Both countries have saved less and on less
transparent terms than advocates would like. Assets at
Botswana's Pula Fund, are down sharply and are basically offset
by increased government debt, says Keith Jefferis, director of
Gaborone, Botswana-based economics analyst Econsult.
Mongolia had saved just $250 million in its Fiscal
Stability Fund as of May 2013, according to a March 2014 International
Monetary Fund Country Report , despite booming commodities
output. "The government has basically been spending most of the
windfalls from mining in recent years, with very much a
pro-cyclical spending pattern," according to Dorjdari
Namkhaijantsan, who represents the New York-based Natural Resources
Governance Institute in Mongolia.
Both show improvement. Botswana proposed a fiscal
rule that would channel 40 percent of mineral revenue directly
to future-generations savings. And Mongolia is cutting its
budget to protect the Stability Fund. "The new decline in
revenues presents an opportunity for some governments to learn
from mistakes made in the past," says Andrew Bauer, the NRGI's
senior economic analyst.
Indeed, echoes of the Chilean sovereign wealth
fund model can be found in Mongolia. Mongolian authorities
created several vehicles for windfall revenues after the price
shocks of 2008-'09. The Mongolian FSF, launched in 2011, which
gets a share of mineral export earnings when prices move above
long-term projections. Governing legislation forbids active
management of the fund until it reaches 10 percent of GDP,
according to the IMF report. Its 2013 assets of $250 million
comes to just 2 percent, the report added.
Unfortunately, according to Namkhaijanstan, the
FSF is only second in line for Mongolia's raw material
receipts. Seventy percent of mining revenue goes into a Human
Development Fund, which spent it all on cash transfers to the
population during prosperous years, 2010-'14, and has borrowed
money too. "Mongolia's revenue distribution system is complex
and has not yet obtained a stable form," Namkhaijanstan
Still, the circumstances of a new minerals slump
may be forcing longer-term thinking in Mongolia, he says, and
may yet enable the Central Asian country to develop a
substantial fiscal buffer. With its credit already strained by
past borrowing, the government is looking to shrink its budget
by 15 percent.
Botswana, an unlikely early example for the rest
of the world, established its Pula Fund in 1994. But its
savings and transparency practices deteriorated, and the fund
only now seems to be trying to catch up, local economist
The Pula Fund has been heavily raided twice in its
20-year history — first in 2001, to create a public
employee pension facility, then in 2008-'09 to counteract
plunging state revenue. As a result, the fund shrank from 89
percent of GDP in 1998 to 20 percent in 2011, according to an
Botswana's net national savings shrank to less
than 3 percent of annual output as the Southern African country
took on new debt during this time period. "The current
situation is that the financial assets accumulated by
government are insufficient to fulfil the intergenerational
savings objective that SWFs in mineral economies are often
designed to achieve," the 2013 report concludes.
One bright facet for Botswana is that the value of
its key export — diamonds — is holding up
well compared to other minerals. Raw diamond prices rose by 7
percent last year, according to De Beers Group. Longer term,
the government has begun discussing a new fiscal rule that
would funnel 40 percent of mining revenues directly into a new
intergenerational savings vehicle, forcing the budget to rely
more on domestic tax collections.
But this new rule did not make it into the 2015
budget, passed last month. "The budget did not include any
details of the new fund, which seems to have been postponed for
a while," Econsult's Jefferis says.
For the most part metals- and minerals-backed
sovereign wealth funds proved their mettle in the 2008-'09
crisis, and are prepared for the current commodities downturn.
Smallness has benefits. The minerals-related funds spring more
from policy choices and discipline than their oil-fueled
cousins, and so tend to display more fiscal responsibility.
NRGI's Bauer points out another virtue. "Almost all the
minerals funds are connected with stable democracies," he