Following the SWF Trend, Mongolia Jumps in

(September 17, 2009) – Absent the financial crises, the financial story of the last two years is likely to be the rise of sovereign wealth funds (SWFs). As if to cement this fact, Mongolia—a landlocked country of 2.5 million—has become the latest country to lay the groundwork for such an investment vehicle.

According to Bloomberg, the government of Mongolia will set up a fund using mining royalties and tax revenues with the aim of alleviating poverty in the country with a GDP per capita of just $3,500, according to the International Monetary Fund.

“The fund, to be run by professional managers from 2013, will disburse part of its annual income to every Mongolian in cash or non-cash securities to let them own stakes in the country’s mining wealth,” Mongolian Finance Minister Sangajav Bayartsogt told Bloomberg. Initial capital will be taken from mining royalties and the taxes that mining companies pay the government. The government is looking at other SWFs—the Alaska Permanent Fund and the Alberta Heritage Fund are being noted as models—as it works its way through the planning stages, and likely will build a structure that both pays dividends to citizens and invests for the long term.

Mongolia has stated that it wishes also to avoid Dutch Disease—where currency appreciates due to demand for one export product, making other industries less competitive internationally—which might result from its reliance on mining. “If mining is booming, the rest of the sectors will slow down because people are expecting to receive work and revenue from mining,” Bayartsogt told Bloomberg. “We will use revenue from mining to develop the processing industry, invest in outsourcing, education, science, and technology to move up the value chain and transform the economy.”

The fact that Mongolia—one of the world’s poorest nations—is embracing the SWF model lends credence to the idea that long-term investment of resource wealth is taking hold worldwide. Other funds established in the last two years alone include France’s Strategic Investment Fund, The Sovereign Fund of Brazil, Malaysia’s Terengganu Investment Authority, the China Investment Corporation, Saudi Arabia’s Public Investment Fund, the China-Africa Development Fund, and the Emirates Investment Authority.