Part 16 Brazil Sovereign Wealth Fund--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Fundo Soberano do Brasil (Brazil Sovereign Wealth Fund).

(Pix (c) Larry Catá Backer 2014)

The Brazilian Sovereign Wealth Fund, Fundo Soberano do Brasil (FSB)) was created by Lei No. 11,887, of December 24, 2008 (in Portuguese). In an important article by Arthur Oscar Guimarães, Fundo Soberano, Revista de Conjuntura 23-27 (July 2009), a similar pattern of external unity masking significant internal contests can be discerned involving the central bank (Banco Central e Tesouro Nacional) and the ministry of finance (ministerio da fazenda). As in China, it appears that the Finance Ministry was able to assert authority over the opposition of the Central Bank in the construction and construction of the Brazilian version of this investment vehicle.

[N]o final de 2007 o debate sobre a constituição de um “fundo soberano” brasileiro se fazia presente na mídia. . . . Naquele momento a falta de consenso quanto ao papel destinado a um fundo desta natureza já se explicitiva no seio do governo e mesmo entre outros especialistas. Para alguns membros do governo o acúmulo de reservas internacionais tendência crescente seria usado (essa era a expectativa de então) na criação de um fundo soberano, que serviria para o governo investir recursos na eventualidade de uma crise financeira de grandes proporções. Entretanto, a falta de consenso alcançava até mesmo o objetivo do fundo. O presidente do Banco Central, Henmrique Meirelles, refutava a idéia de que o fundo poderia fazer um uso alternativo das reservas do país. Id., at 23-24. (At the end of 2007 the debate on the creation of a Brazilian "sovereign fund" was reported in the media. . . . At that time the lack of consensus about the role intended for such a fund had been already pointed out within the government as well as other specialists. For some members of the government the accumulation of upward trending international reserves would be used (this was the expectation at the time) to create a sovereign fund, which would provide the government with resources to invest in the event of a financial crisis of major proportions. However, the lack of consensus even included the goal of the fund. The chairman of the Central Bank, Henrique Meirelles, refuted the idea that the fund serve as an alternative use of nation’s reserves.)

Nonetheless, a SWF of some kind was in the offing. The critical question was reduced to one of control—whether the fund would come under the control of the Central Bank or the Ministry of Finance. And that question subsumed within it the question of funding. In other words, if the Central Bank was opposed to the idea of the SWF and unwilling to allow funds under its control to be used for that purpose, could the Ministry of Finance go forward with the fund and without the Brazilian reserves controlled by the Central Bank?

Em maio de 2008, ganhava relevo a criacão de um fundo de poupança fiscal, denominação então utilizada pelo ministro da fazenda para o fundo soberano brasileiro, cujos recursos, aplicados em dólar, seriam usados para financiar, a taxas subsidiadas, empresas brasileiras com atuação no exterior. A proposta do ministro Guido Mantega estava praticamente formatado e aprovada faltando fechar uma questão importante: quem iria administrar esse fundo, se a Fazenda ou o Banco Central. A mídia noticiava que o BC permanecia não muito entusiasmado com a proposta, particularmente porque temia influências indevidas na formaçã da taxa de câmbio. Por isso, no caso de criação do fundo, defendia que a administração ficasse com a diretoria da autoridade monetária. Id., at 24. (In May 2008, the creation of a tax savings fund gained prominence, [the tax savings fund being] then the name used by the finance minister for the Brazilian sovereign wealth fund, whose resources were to be applied in dollars, to be used to finance, at subsidized rates, Brazilian companies with operations abroad. The proposal of the Finance Minister Guido Mantega was essentially structured and approved except with respect to an important issue: who would manage this fund, the Finance Ministry or the Central Bank. The media reported that the Central Bank was still not very enthusiastic about the proposal, particularly because of the fear of undue influence in setting the exchange rate. Therefore, in the case of creation of the fund, the Central Bank insisted that administration stay with the board of the monetary authority.).

The essence of the contest was thus both simple and complex—at one level the issue was about the use of Brazilian reserves. At another level, the issue was the power to control those reserves and the scope of permissible investment of those funds. This was not merely a matter of monetary policy, or of a refined analysis of the legitimacy of national authorities projecting financial power in private markets abroad. Rather, the more important issue was on the division of authority over those funds (and the direction of investment) between two coordinate sectors of the state government apparatus.

As in China, the ultimate decision favored the Finance Ministry over the Central Bank apparatus. But in the case of Brazil, there was a twist.

A decisão então tomada seria a de criação de um fundo soberano de US $10 bilhões para atender à demanda de financiamento de BNDES [the Brazilian Development Bank, see http://inter.bndes.gov.br/english/] para 2008. Tratava-se, portanto, de um fundo que seria alimentado pela “aquisição de dólares que estão sobrando no Mercado. . . . O BNDES tinha a intenção de captar pelo menos R$ 25 Bilhões, metade dos recursos já disponíveis. Id., at 24. (The decision taken would be to create a sovereign fund with $ 10 billion to meet the demand for financing from BNDES [the Brazilian Development Bank] for 2008. It was, therefore, a fund that would be powered by the "acquisition of additional dollars from the market. . . . BNDES intended to raise at least $ 25 Billion, half of the resources already available.)

The result was a significant shift in monetary policy from the Central Bank to the Finance Ministry. 

Portanto, qualquer posicionamento definitivo sobre o erro ou acerto a respeito da criação do FSB, parece hoje precipitado, mas a título de conclusão ficamos com a afirmação do próprio Paulo Nogueira Batista: “Por que então a barulho na imprensa e a indignação da turma da bufunfa? Arrisco uma hipótese: a criação de um fundo soberano com parte das reservas, ou com reservas adicionais a serem adquiridas no mercado pelo Tesouro, resultaria em uma certa redistribuição de poder dentro do governo. Perderia o Banco Central, ganhariam o Tesouro e o BNDES.” Id., at 27 (Therefore, any definitive statements about the error or arrangement concerning the creation of the SWF, now seems premature, but in conclusion we get the affirmation of the very Paulo Nogueira Batista, "Why then the fuss in the press and the indignation of the monied classes? I venture a hypothesis: the creation of a sovereign wealth fund with part of the reserves, or with additional reserves to be acquired by the Finance Ministry in the market would result in the certain redistribution of power within the government. The central bank’s loss would be the gain of the Finance Ministry and BNDES).

In this Brazil and China appear to be going down similar paths. And in both cases, internal contests for control of the direction of the investment of national wealth appears to be a significant factor in the formation and deployment of sovereign wealth vehicles. The movement of control of reserves, or other form as of national wealth, from the Central Banks to the Ministries of Finance signals a global move toward more aggressive interventions in both public finance and private markets. SWFs are here to stay because as a consequence of globalization, global private markets are a far more lucrative method for managing national wealth, and a more potent arena for effectuating national policy. Central Banks are, by the reality of the traditional limiting cultures of their operation, less capable of exploiting these new methods of government operation.  Central Banks  may be capable of engaging in the regulation of global markets, but appear less willing to participate in those markets. Such market participatory activities are more likely to be taken up by the more entrepreneurial Ministries of Finance.  This seems to be the case in Brazil.

The activities and operations of the FSB has tended to bear this out, creating a SWF that is both an instrument of state policy and a means of disciplining spending instrumentally through this facility. Unlike other large find, the FSB is not a member of the International Forum of Sovereign Wealth Funds, a curious decision, and thus not obligated (morally or legally) to undertake the  constraints of the Santiago Principles.  That might well serve the FSB well, since it appears to have taken on the role of a spending ministry rather than of an investment vehicle. 

The FSB was initially funded at the very end of 2008 by the allocation of  R$ 14,243,999,592.36  obtained through the issuance of 10,201,373 domestic binds issued by the Tesouro Nacional. (Tesouro Nacional FSB, About; Sovereign Wealth Fund Institute, Brazil). At the  same time, the funds contributed were invested by the FSB in an investment and stabilization account as required by the law establishing the FSB (the Fundo Fiscal de Investimento e Estabilizaçao (Fiscal Fund for Investment and Stabilization) (Ibid). The FFIE is organized as a nutual fund registered under Brazilian securities law whose sole investor is the FSB.

Objectives. The principal purpose of the FSB  is to serve as a development fund.

•Mitigar os efeitos dos ciclos econômicos;
• Formar poupança pública;
• Promover investimentos em ativos no Brasil e no exterior; e
• Fomentar projetos de interesse estratégico do País localizados no exterior. (FSB, About)

Its mission and vision reinforce these development based objectives:

Missão
“Gerir poupança pública de longo prazo, que possibilite ao FSB atuar, de forma eficaz, como instrumento de política econômica, visando à mitigação dos efeitos dos ciclos econômicos no Brasil” ["Managing public long-term savings, which allows the FSB to act, effectively, as an instrument of economic policy aimed at mitigating the effects of economic cycles in Brazil"]
Visão estratégica
“Consolidar-se, até 2023, como instrumento eficaz de gestão de riqueza soberana e de mitigação dos efeitos dos ciclos econômicos no Brasil” [Strengthen its role through 2012 as an effective tool for managing sovereign wealth and mitigate the effects of economic cycles in Brazi] (FSB, About)

However it appears to be used as well to cover budgetary shortfalls of the state. "The Treasury will withdraw 8.85 billion reais ($4.3 billion) from its sovereign wealth fund and 4.7 billion reais in dividends from state-owned bank Caixa Economica Federal, according to a Dec. 31 decision published in today’s official gazette." (Armando Galvao, Brazil Taps Into Sovereign Fund to Meet 2012 Fiscal Target, Bloomberg News Jan 3, 2013). The functioning of the FSB has been harshly criticized:

Of course there is no reason for Brazil to have such a fund, which should be better denominated as a “Sovereign Debt Fund”. SWF are instruments to manage the flow of foreign exchange for countries with large current account surplus. Brazil, as everyone knows, has a large and growing current account deficit of around 2.25% of GDP. It’s SWF then becomes just a mechanism to shift around imaginary fiscal surpluses, which also only exist in the questionable way the so-called primary surplus target is calculated, since the country runs a nominal deficit of 3.3% of GDP. With nominal and current account deficits, the SWF only concrete purpose is to give the Ministry of Finance a way to interfere in the foreign exchange market without having to go through the Central Bank (BCB). (Jonathan Wheatley, The rising BRL: Brazil’s sovereign debt, sorry, wealth fund to the rescue,  Financial Times, Sept. 21, 2010 (quoting Tony Volpon at Nomura)).

Investment Strategy. Its investment strategy is not unlike other SWFs--long term wealth maximizing investment strategies across markets and forms of financial investment instruments. (Ibid).

The Decree 7,055/2009 has brought the following rules for the FSB:

1) the benchmark for foreign investments is the six-month LIBOR;
2) the benchmark for domestic investments is the TJLP (a long run rate as determined by the National Monetary Council);
3) financial statements shall be published twice a year; and
4) financial assets are required to be rated as investment grade by at least two rating agencies. (FSB ABout).

The FSB presents an interesting contrast to the Chilean SWF, discussed earlier., with which it shares some similarities Much of the FSB's investments are internal, and based on fiscal policy and targeted development aims of the state. Thus, for example, through the FFIE, in 2010, the FSB participated in the Public Offering of Offering of Common Shares issued by Banco do Brazil SA , through the subscription of 62,500,000 shares totaling R $ 1,540,625,000.00. This was made possible by Act No. 487, (April, 2010) a measure amending Law No. 12,096 , 2009 , authorized capital increases in state enterprises, through the transfer of rights arising from advances for future capital increases. On May 27, 2010 , was issued Decree No. 7,184 , of 2010 authorizing the capital increase of Banco do Brazil SA , with the issuance of up to 286,000,000 common shares through a public offering of primary distribution of shares. (FSB Investments).

In a similar set of transactions, Decree No. 7295 of 2010 in its Article 2 authorized the National Bank for Economic and Social Development SA - (BNDES) and Caixa Economica Federal (CEF) to sell or exchange up to 217,395,982 common shares issued by Petrobras , to FFIE. FFIE then acquired, on September 10, 2010, 77,641,422 common shares (PETR3), equivalent to 0.60 % of the share capital of Petrobras. (Ibid).

Another significant transaction was the partial redemption of the shares 11,579,306,053.645 FFIE by the FSB , in the amount of R $ 12.4 billion , occurred in late 2012 . This transaction was approved by referendum ad CDFSB the decision of the President , pursuant to art . 3 of Resolution No. 1 , 2010. The resources were rescued applied in specific sub FSB on Treasury Single Account ( CTU ) , pursuant to § 1 of Article 4 of Law No. 11,887 , 2008 . (Ibid).

Besides applications in Brazil , carried out exclusively through the FFIE , the FSB can apply their resources through the application of special interest-bearing deposits in federal financial institution or directly by the Treasury foreign financial assets . The application of resources FSB abroad will occur from strategic decision of the Deliberative Council and in line with its investment policy . (Ibid).

Governance. FSB governance is founded on a number of provisions, the principle ones of which include Law No. 11,887 , 2008 , Decree No. 7055 , 2009 and No. 7113 , 2010 , Internal Rules of the Board of the Sovereign Fund of Brazil - CDFSB , approved by Resolution No. 1 , 2010 , and the Investment Policy , approved by Resolution No. 11 of 2013 , as well as other resolutions CDFSB. (FSB Governance)

FSB strategic decisions are taken by the FSB deliberative council, CDFSB, established by Decree No. 7113 , 2010. This Council is composed of the Minister of Finance , who presides , by the Minister of Planning, Budget and Management and the Governor of the Central Bank of Brazil. (Ibid).

The work of the FSB is undertaken by two organs established under Resolution No. 11 , 2013. The first is the Technical Advisory Board of the FSB - CCT , which acts in compliance with the art. 6 of Decree No. 7,113 , of 2010. The second is the Board of Investment Planning - CPLIN , which aims to guide the decision making process relating to the powers described in art. 2, II , Decree No. 7055 , 2009 . In general , it is the CCT advise, discuss and propose relevant to CDFSB resolutions , while competing CPLIN to discuss the tactical and operational issues related to the implementation of the Investment Policy of the FSB , as well as other determinations of CDFSB. (Ibid)

A National Treasury Secretariat - STN has been established as the body responsible for implementing CDFSB actions and for the management of the FSB . Pursuant to Decree No. 7,055 , 2009 , it is the STN which is charged with the investment work of the FSB to acquire and dispose of the securities . Moreover, the STN plays the role of the Executive Secretariat CDFSB and performs the activities related to the monitoring of the management of FFIE. Within the STN , the activities related to the management of the FSB and the Executive Secretariat of the CDFSB are the responsibility of the Secretariat for Planning and Fiscal Statistics , implemented through the General Coordination Management Sovereign Fund of Brazil - COFSB / STN under Decree No. 7,482 , of 2011 and the Internal Rules of the STN. (Ibid).