Latin America Lags in Establishing Sovereign Funds, Report Finds

A recent report from the International Forum of Sovereign Wealth Funds investigated why Latin America lags behind other emerging markets in developing sovereign wealth funds beyond stabilization funds.

“It is striking that, in Latin America today, there are 12 sovereign wealth funds, nearly all of which are traditional stabilization funds,” the report stated.

Unlike most sovereign wealth funds, stabilization funds can be drawn on by governments to reduce the impact of volatile revenue on the economy. Because the assets in the funds might be needed on short notice, stabilization funds typically invest in liquid, low-risk assets and are usually managed by a county’s central bank or finance ministry.

“While most governments in the region have implemented stabilization mechanisms to mitigate the adverse effects of both fiscal and currency crises,” the report stated, “these have not facilitated the accumulation of sufficient excess reserves to serve as a store of savings for future generations.”

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The report suggested that Latin American countries should learn from “other emerging regions,” including leading African countries, whose sovereign investment vehicles are “much more heterogeneous, as governments have innovated on the traditional sovereign wealth fund models to help drive development in their home economies.” According to data from the IFSWF, of the 18 sovereign wealth funds in Africa, 11 have some form of strategic or domestic development mandate.

“The African experience points to the potential for strategic investment funds to pioneer innovations in development finance that can promote improved financial stability,” the report stated.

However, the report noted that unlike Africa, Latin America has yet to show the “requisite economic conditions, political will, or skills to establish strategic investment funds.”

The report stated that Latin America could also look to oil-rich countries, such as Norway and Saudi Arabia, that have used their natural resources to establish sovereign wealth funds. It described Latin America as “rich in natural resources,” including oil and gas; metals; and minerals used for electric vehicle batteries.

“Countries like Venezuela, Colombia, Brazil, and Mexico collectively account for nearly one-fifth of global oil reserves,” according to the report. “Bolivia, Argentina, and Chile have over half of the world’s lithium, and Chile has the world’s largest deposits of copper.”

The report suggested funds buoyed by resource revenues could “play a complementary, if not more effective … than development banks[, role] in mobilizing private international capital into the region.”