Sovereign wealth funds in Latin America and the Caribbean: Stabilization and opportunities. | ECONOMY

Profesor Asociado y Director, Sovereign Wealth Research, Center for the Governance of Change, IE University

Head, Funding Department & LATAM Desk, ICEX-Invest in Spain

The effects of the pandemic in Latin America will be long-lasting and profound. In March 2020, when SARS-CoV-2 infections reached the region, in Latin America and the Caribbean only a quarter of the population could work from home. The policies of distancing applied throughout the world brought the Latin economies to a standstill. 45% of jobs in the region require close contact between people, compared to 30% for the average in emerging markets. In April 2021, a third of the population is living in poverty: 22 million more people than in 2019. In addition, half of the population lacks medical coverage, according to ECLAC data. The region is the hardest hit in the developing world and is suffering its hardest economic crisis in 120 years, with a 7% contraction of GDP in 2020 and an insufficient expected recovery of 4.6% in 2021.

The need to work to survive, given the low social coverage and the informality of the economy, caused infections to skyrocket in many countries. In relative terms, Latin America is home to 7% of the world’s population, but accounts for 27% of those killed by Covid-19. Some countries, such as Peru, Brazil or Mexico, have death rates (per 100,000 inhabitants) among the highest in the world, similar to those of the United States although lower than the United Kingdom or members of the EU such as Italy, the Czech Republic, Hungary or Belgium. At the same time, and showing the inequalities so evident in the region, Uruguay and, above all, Chile, lead the world in vaccination with 36 and 66 doses per 100 inhabitants. While heavyweights such as Brazil, Mexico, Argentina or Colombia drop with figures that range between 15 and 7 injections per 100 inhabitants.

Faced with the bleak outlook left by the pandemic, the efforts of governments to alleviate the health, economic and social crisis, found in sovereign wealth funds an ally perhaps unexpected for many. Sovereign funds are investment vehicles controlled by governments that fulfill different missions (stabilization, savings, development) and have a long-term horizon. Well, at least 13.2 billion dollars accumulated in these stabilization and investment funds were used by governments to face the multiple needs that the virus generated.

Sovereign wealth funds, as in so many other dimensions, also show the region’s inequalities. There are currently ten sovereign wealth funds in Latin America and the Caribbean, although two are not operational — Venezuela’s has been frozen since 2011 and Suriname’s has not yet been launched. In total, the funds managed $ 42 billion before the pandemic. As of March 2021, there are 29,000 million sovereign coffers, after the commitment or use that has been made of these stabilization vehicles. Peru, Colombia and Chile represented 92% of the sovereign effort during the crisis in the region.

With their stabilizing role, sovereign wealth funds have strengthened the message of macroeconomic prudence of these same Andean countries. In the most uncertain part of the crisis, Peru issued ultra-long-term debt at historically low costs: investors tripled the supply of bonds, supported by the stability and responsibility linked to the Fiscal Stabilization Fund, which then had almost US $ 5,500 million, which were used to support the growing expenses of the health system and provide direct assistance to families. Similarly, almost 90% of the Savings and Stabilization Fund in Colombia, US $ 3,230 million, was used to finance the FOME, the emergency vehicle created to resist the crisis. It is urgent to recapitalize the funds as soon as possible and, above all, to maintain future fiscal prudence when this period of extraordinary necessary public spending passes.

Sovereign wealth funds that have a stabilization mission (the majority in the region) tend to have limited financial returns due to their exposure to low-risk assets. But they help their countries in two dimensions: first, to build and maintain the reputation that fiscal prudence brings in developing economies; and, second, to mitigate the adverse effects of fiscal imbalances produced by financial, climatic or social shocks. To be able to count on the liquidity accumulated in the boom years to deploy the sovereign umbrella when the storm rages.

As we have seen during the pandemic, funds from Latin America have been used primarily as fiscal buffers. However, there is a window of opportunity for the region in developing a more ambitious strategy for its sovereign wealth funds. First, that it combines fiscal objectives with development objectives. Progress towards this strategy requires important changes in the mission, mandates, structure and functioning of the sovereign wealth funds that currently operate in the region. In fact, the large sovereign wealth funds in other geographies have been key in financing the economic development strategy of their countries, incorporating it as one of their main mandates. This is the case of the Emirati Mubadala, a key piece in the strategy of industrial development and sectoral diversification and less dependence on hydrocarbons carried out by the Government of Abu Dhabi. It is also the case of the Singapore sovereign wealth fund Temasek, which has been key in the development of numerous industries through the financial support of public companies in sectors such as telecommunications, transport or the air sector, participating in companies such as Singapore Telecommunications Limited, Singapore Technologies Engineering or Singapore Airlines, respectively.

Second, Latin America has traditionally had a low level of investment, which has impaired its capacity for growth and development. The region’s annual average in investment over GDP in the last 30 years is 15 points lower than that of the “Emerging Asia” region. This investment gap can be partly covered by attracting foreign investment, to which sovereign wealth funds can contribute. In recent years, these institutional vehicles have incorporated co-investment into their strategy, which has allowed them to generate drag on other international investors to carry out local operations in a syndicated manner. These structures are produced when the funds share a long-term vision and generate notable advantages for international investors by allowing them to execute a strategy of geographic diversification and type of assets; Furthermore, it is possible to gain scale (and negotiation capacity) in operations, increase knowledge of the local industry by reducing country risk, and can raise the reputation of consortium members.

Local sovereign wealth funds typically co-invest with sovereign wealth funds or pension funds from other countries, as well as with major players in the investment industry. private equity. Examples abound, in both developed and developing markets. Among the latter, the schemes followed by the Nigeria Sovereign Investment Authority, the Russian Direct Investment Fund or the National Infrastructure Investment Fund of India stand out.

In addition, these development funds and joint investment structures regularly operate in sectors and types of assets where Latin America has significant gaps for its development. Thus, investment in infrastructure or in innovative companies with high growth capacity are preferred by this type of joint venture vehicle. For example, NSIA participates in a natural gas project together with the Moroccan sovereign fund Ithmar Capital, with the ultimate objective of bringing gas not only to West Africa but also to Europe. Another example is Senegal’s sovereign wealth fund (Fonds Souverain d’Investissements Stratégiques, “FONSIS”), which has financed residential infrastructure projects or special economic zones in the west of the country, also with the help of international investors and multilateral banks. We could imagine similar schemes in multiple countries in Latin America and the Caribbean. Sovereign stabilization and strategic funds that activate sustainable development levers and benefit present and future generations.

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