Peru’s government has confirmed that it plans to create a sovereign wealth fund before President Alan Garcia ends his five-year term this coming July.
Economy and finance minister Ismael Benavides told Emerging Markets that the fund would start with between $5 and $6 billion and would be modeled on a similar fund in Chile.
The fund will be used as a “rainy-day fund” to protect the country’s fast-growing economy in the case of future downturns or in other emergency situations.
“We are working on it [the fund] and it should be ready before July. It will help protect Peru from the impacts of global instability,” Benavides said.
The fund would be in addition to the existing stabilization fund, created early in the last decade. This stands at about $2 billion and has not been added to under Garcia’s administration.
Julio Velarde, president of Peru’s Central Bank, said adding to the existing stabilization fund would be a more manageable option than creating a wealth fund.
“I would start with the stabilization fund, which we already have in place”, Velarde said. “The high price of minerals is not going to last forever, so a fiscal stability fund would give the government room in downturns so as not to affect fiscal spending.
“If revenue continues to increase, we could then think of a sovereign wealth fund that would be used for contingencies, such as earthquakes or El Niño.”
But both Benavides and Velarde disagree with ideas for a fund to bankroll near-term investment, floated by some of principal candidates vying for president in the April 10 elections.
Two of five leading candidates in the extremely close race, former President Alejandro Toledo and former economy and finance minister Pedro Pablo Kuczynski, have said they would create such a “wealth fund”, using Peru’s foreign exchange reserves.
Benavides said: “Reserves do not belong to the government, but to all Peruvians. They should not be used for a wealth fund or any other kind of fund,” Benavides said.
Peru’s foreign reserves stand at around $46 billion, equivalent to one-third of GDP. Kuczynski told Emerging Markets that once reserves reach $50 billion it would make sense to use a proportion of them for a fund much broader in scope than that proposed by Benavides.
“We need to create a sovereign wealth fund that would be used to import technology, promote scientific research,” Kuczynski said.
His economics team, headed by former deputy finance minister Pablo Secada, are working on the idea and would be ready to launch at the end of the year.
Toledo favours a more traditional sovereign wealth fund, to be accumulated at times of high minerals prices, to protect the country if and when they fall.
“Peru is at a point when it can create a sovereign wealth fund for when times are not good. We need to be prepared so that we are less vulnerable to international price fluctuations or policy changes,” he told Emerging Markets.