Chilean finance minister Andres Velasco has confirmed that the country’s sovereign wealth funds, now worth $17 billion, will be invested in equities and corporate bonds as well as treasury bonds. The announcement came as Brazilian finance minister Guido Mantega told Emerging Markets that the issue remains under consideration in his country.
In Chile, finance ministry officials are preparing to select private asset managers, domestic or foreign, to manage a portion of the wealth funds, Velasco said in an interview. The proportion of the funds to be turned over to the private managers is not yet determined, he said. Chile seeks to “diversify [the portfolio], gain knowledge transfer and financial and knowledge gains,” Velasco said.
Chile’s sovereign wealth funds are invested abroad, in foreign currency. “This is the contribution that fiscal policy makes to keeping the Chilean peso competitive,” Velasco said. The Chilean funds, which have grown four-fold in a year from $3.5 billion to $17 billion, will not be used to invest in troubled assets in the US financial sector.
“Unlike sovereign funds elsewhere, these funds are not to be invested in any assets not publicly traded [and] it is not our intention to purchase and be involved in the management of companies,” Velasco told Emerging Markets. He added that the Chilean funds follow the model of the Norwegian government pension fund. In the past, Chile’s two sovereign wealth funds – the $1.6 billion Pension Fund (FRP) and the $15.5 billion Social and Economic Stabilisation Fund (FEES) – have focused on holdings in sovereign debt.
By the end of this year, Chile will put about 15% of their combined portfolios in equities and about 20% in corporate bonds by the end of this year, finance officials have said. There is ample room for the funds to grow, especially as Chile expects a robust fiscal surplus of 4.8% of GDP this year. This level of surplus would allow the government to channel $750 million to the pension guarantee fund this year, and would direct more than $5 billion to the economic and social stabilization fund.
In Brazil, whose foreign exchange reserves total nearly $200 billion, the issue of establishing a sovereign wealth fund has been reconsidered as a consequence of global financial turmoil, but it has not been abandoned. “We did not give up the project of setting up a sovereign wealth fund”, Mantega told Emerging Markets. “Today all the main emerging countries or oil producing countries have created sovereign wealth funds.
“Brazil now has a high level of international reserves. Why couldn’t it create a sovereign fund with the same features of these countries?” He added, though that while officials “have been working on the project”, there is “nothing concrete [to expect] in the near future”.
John Welch, senior managing director and emerging markets analyst at Bear Stearns, pointed out dilemmas that would face Brazil. “The [Brazilian] Treasury would have to buy reserves, and they will have to replace them with domestic debt, which may be more expensive eventually”, he said.