The Kaombo Norte floating oil platform operates off the coast of Angola on Nov. 8, 2018. Angola's oil production helps support the Fundo Soberano de Angola, the country's wealth fund.Stephen Eisenhammer/Reuters
Countries coping with the coronavirus crisis and a slump in commodities prices are dipping into sovereign wealth funds for more than US$100-billion, and that figure could swell as budget pressures mount for some emerging markets.
Governments from Angola to East Timor have built up “rainy day” savings to help stabilize their economies and support their citizens in the event of a shock. Some funds – especially derived from commodities wealth – are worth multiples of national economic output.
The twin blow of the commodities collapse and the pandemic, which stalled much economic activity for months, is likely to drain stabilization funds in countries such as Peru and Colombia, according to Global SWF, which tracks such funds.
Big chunks of similar funds in Ghana and Nigeria are likely to be spent, it said, while 24 withdrawals totalling about US$137-billion include heavy drawdowns of savings or development funds in Bahrain, Kuwait, Iran and Angola.
That is still fairly small compared with the roughly US$9-trillion in total assets managed across all funds. Some governments have opted to slash spending rather than dip into their sovereign funds and others are unable to because of regulations.
But the scale of the crisis means there is likely to be pressure for more withdrawals, even as questions arise about how and when such funds might be replenished.
“Some countries are running out of fiscal space, mainly the oil- and mineral-rich emerging markets and low-income countries,” said Andrew Bauer, a consultant to the independent, non-profit Natural Resource Governance Institute.
“Mongolia is running out of fiscal space, Ghana is running out of fiscal space, so in countries like these there’s really nothing more they can draw down on.”
Mongolia has an external financing gap of US$840-million this year, Citi said in a recent research note, while Ghana expects a fiscal deficit of 11.4 per cent of gross domestic product.
With some sovereign funds earning only low single-digit returns on their own investments, it could make more sense for governments facing high borrowing costs to rely on these savings rather than raise debt, Mr. Bauer said.
Higher-rated governments such as Qatar, which sold US$10-billion in bonds at the peak of the pandemic in April, have less need to tap into their SWFs – worth US$300-billion, in its case.
The finances of Norway and Singapore are secure despite plans to withdraw around US$73-billion in total from two of their funds – single-digit percentages of their total assets.
“A number of sovereign funds entered the year with a buffer, in view of what was then seen as equity markets looking expensive, so have had liquid resources to meet immediate calls for funding from their respective governments,” said Rod Ringrow, head of official institutions at asset manager Invesco.
Russia has indicated it could draw down as much as one-third of its US$130-billion National Welfare Fund this year, while Kazakhstan, another big oil exporter, has liquidated US$1.1-billion in assets from its US$60-billion fund.
Other funds such as Brunei Investment Agency, the Investment Corporation of Dubai and Abu Dhabi Investment Authority do not publish withdrawals data.
ESCAPE CLAUSES
Some countries have very little left in their sovereign funds, having already lent on them heavily, Mr. Bauer said, citing Algeria, Nigeria and Venezuela.
And even with public finances strained, not all governments are drawing down.
Kuwait, which last week cut US$3-billion from its budget, has held off tapping its US$530-billion Future Generations Fund because of legal restrictions.
Withdrawals have meanwhile been restricted to the stabilization portion of some funds, said Global SWF managing director Diego Lopez, such as the Nigeria Sovereign Investment Authority, whose savings and infrastructure funds are still receiving payments. Ghana has used money from its Petroleum Fund, but left its Heritage Fund intact, he noted.
Ghana and Nigeria could withdraw more by using “escape clauses” to maintain spending or curb debt accumulation, Mr. Bauer said, or by tweaking the funds' rules.
One pressing question is how funds will be replenished, especially if current demands on them persist.
Legislative changes could be required in some countries if budgeted flows to sovereign funds slow or decline beyond the short term, Mr. Ringrow said.
“Now the game has changed for all, but it’s too early to gauge if it is transitory or a longer lasting shift in emphasis for the funds,” Mr. Ringrow said.
Danae Kyriakopoulou, chief economist at the Official Monetary and Financial Institutions Forum, a think-tank, said current and future use depended largely on how countries view their sovereign funds, few of which have much history.
“On the one hand, they’re future generation funds, so they’re being saved for the future to maintain that wealth,” she said.
“But on the other hand, they’re rainy day funds – and if you don’t use them now, when you have a storm, when are you going to use them?”
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