Monday, March 03, 2014

Part 19 Venezuela SWFs (Stabilization (FEM) and Development (Fonden))--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 Venezuela Macroeconomic Stabilization Fund (Fondo para la Estabilización Económics (FEM) and the National Development Fund (Fonden).

The Venezuela Macroeconomic Stabilization Fund (Fondo para la Estabilización Económics (FEM)) is one of the most opaque funds in Latin America. Its genesis and evolution are tied closely to the substantial political transformations and economic shocks that have roiled Venezuela in the first decades of the 21th century, and especially its move toward a fairly unique blend of socialist regionalism centered on Cuban-Venezuelan relations (Backer, Larry Catá and Molina, Augusto, Cuba and the Construction of Alternative Global Trade Systems: ALBA and Free Trade in the Americas (May 20, 2009). University of Pennsylvania Journal of International Economic Law, Vol. 31, No. 3, 2010).

The FEM was established as a tool of International Monetary Fund financial reforms for Venezuela, similar to those that resulted in the establishment of the Angolan SWF in 2012 (Backer Angola SWF). 
In 1998 the ‘Macroeconomic Stabilization Fund,’ also known as FEM was established as a result of advice from the IMF. It receives revenues above a reference price, currently $9 per barrel, that is based on the average oil price of the last five years. Oil revenues above the reference price are transferred to the fund. If oil prices drop below the reference price, the fund transfers revenues to the treasury to substitute the revenues it would otherwise have received if oil prices had been stable. FEM, which translates to the Fund for Investment of Macroeconomic Stabilization, is a fund created by the authority of the Presidency of the Republic. The regulation of the fund by the Board of the Central Bank of Venezuela - BCV began in December of 1999. The fund serves to hedge the fluctuation of income generated by crude oil. (SWF Investiguide, Venezuela).

The FEM has been inward looking. It is governed by the board of the Central Bank of Venezuela (Sovereign Wealth Fund Institute, Venezuela). The President of the Republic has a substantial role in the governance of the FEM but the legislature does not (Ibid).  FEM does not have a substantial autonomy from the government, nor are its funds well protected from use by government as it needs them for short term projects or to make up budgetary shortfalls.

 Its role as a stabilization fund, however, was substantially transformed during the first decade of the 21st century, when it was redirected toward contributing toward national development goals in lone with the socialist character of his administration.In 2003 the original objectives of the FEM were attempted to be reformed by the Parliament, though these efforts were unsuccessful (Gobierno venezolano utiliza últimos recursos del FEM, América Económica, Nov. 1, 2011).  By 2005, however, change came when it was determined to set the annual contribution to the FEM of about 20% of petroleum net revenues.  But this contribution level was abandoned in 2006 and the government of Hugo Chavez attempted to eliminate the FEM via constitutional change, but that was rejected by voters in 2007. never achieved (Ibid). . 
El Ejecutivo Venezolano modificó en el año 2005 la Ley del Fondo de Estabilización Macroeconómica (FEM) con el fin de no realizar más depósitos en este esquema. De US$6.227 millones que llegó a tener en 2001 y luego de varios retiros, bajó a US$832 millones al cierre del año pasado. [In 2005, the Venezuelan President modified the  Macroeconomic Stabilization Fund (FEM) Act in order terminate the obligation to make more deposits in this scheme. From U.S. a high point of $ 6,227 million in 2001 FEM deposits fell to U.S. $ 832 million at the end of last year after a series of withdrawls. ]

Sin embargo, este último monto aún resulta necesario para las finanzas públicas, ya que el pasado domingo, el presidente Hugo Chávez solicitó US$500 millones del FEM para ser utilizados en proyectos que atenderán la emergencia generada por las lluvias y específicamente para la construcción de viviendas. [However, this latter amount is still necessary for public finances since last Sunday, President Hugo Chavez requested U.S. $ 500 million from the FEM accounts in order to finance projects that will respond to the emergency caused by the rains and specifically for housing construction .] (Gobierno venezolano utiliza últimos recursos del FEM, América Económica, Nov. 1, 2011)

Thus the FEM in recent years has both suffered substantial depletion, and also a substantial change in its objectives as a rainy day and development fund.

And, indeed, much about the use and fate of the FEM is tied to the socialist policies of the current Venezuelan regime that has produced a substantial decrease in come inequality but at the cost of very high inflation and unsustainable spending practices that divert oil revenues to current spending.

Where does Venezuela go from here? There are certainly strange things happening with Venezuela’s balance of payments, some of which help explain why per capita GDP growth has stalled since 2008. The net foreign asset position of the private sector has been growing, most likely a function of rapid capital flight, a process which diverts resources away from domestic investment and infrastructure. The public sector net foreign asset position, on the other hand, has been shrinking. One would expect it to be rising at a time of current account surpluses and high oil prices. Its decline suggests that the public sector has been spending its accumulated riches to sustain growth, something that it might not be able to do forever. Venezuela stands out unfavorably compared to other oil exporters by having both fewer foreign exchange reserves, and higher external government debt. We tried to get an assessment of Venezuela’s total national wealth including its sovereign wealth fund Fonden (the National Development Fund), but the accounting is very opaque; the Sovereign Wealth Fund Institute gives Venezuela its lowest transparency score, along with Libya, Algeria and Mauritania. (Michael Cembalest CIO JP Morgan, What's Next for Venezuela,, March 8, 2013 ("Despite all the challenges, Venezuela’s economic model may well survive given how high oil prices are. The budget deficit and growth in domestic debt in Bolivars is explosively high, but so is inflation")).
But these are political choices with which outsiders need not quibble, but which have effects on the use and viability of the FEM for purposes other than as a conduit for national spending.  At its extreme, it suggests that the Venezuelan funds have been transformed from SWF classic funds to something else--more akin to the Palestine fund, as a conduit for internal development based on political goals, than as an investment vehicle for the outward projection trough private markets of internal wealth.

The FEM is one of two funds maintained by Venezuela.  The other is a National Development Fund.  But these have been utilized interchangeably under the presidency of Hugo Chavez and his successors.
More than five years after Chavez first hailed state-owned Pulpa y Papel CA as a vanguard "socialist business," there is little else to show here in rural southeastern Venezuela for the more than half a billion dollars that state investment fund Fonden set aside for the project.
As with many Fonden investments, tracking the money sent to Pulpaca, as the project is known, is difficult. A Pulpaca annual report for 2011 said the project was stalled for lack of funding. A manager at the dusty gates of the compound declined to comment. So did contractors involved. Requests for interviews with the industry ministry, charged with disbursing Fonden money for such projects, went unanswered.
Fonden is the largest of a handful of secretive funds that put decisions on how to spend tens of billions of dollars in the hands of Chavez, who has vowed to turn the OPEC nation's economy into a model of oil-financed socialism. Since its founding seven years ago, Fonden has been funneling cash into hundreds of projects personally approved by Chavez but not reviewed by Congress -- from swimming-pool renovations for soldiers, to purchases of Russian fighter jets, to public housing and other projects with broad popular appeal.
The fund now accounts for nearly a third of all investment in Venezuela and half of public investment, and last year received 25 percent of government revenue from the oil industry. All told, it has taken in close to $100 billion of Venezuela's oil revenue in the past seven years. (Brian Ellsworth and Eyanir Chinea, Special Report: Chavez's oil-fed fund obscures Venezuela money trail, Reuters, Sept. 26, 2012)
The Venezuelan state paints Fonden differently:
The National Development Fund (FONDEN) has invested over 100 billion dollars since its creation in 2005, Temir Porras, the executive secretary of the state-run institution announced. "GDP is 350 billion dollars. Since its creation, this fund has invested about a third of Venezuela's economy in one year. It has had a very great impact," Porras said. FONDEN is a national savings fund that’s goal is to bolster productive economy and increase social investment.
. . . . .
"FONDEN's resources are in bolivares and foreign currency and it is at the service of the Executive for what the Bolivarian Government decides to. So, if the Bolivarian Government wants to give contributions from FONDEN to SICAD [Complementary System for Administration of Foreign Currency] to offer them to productive sectors which need to import supplies, then we will do it when we are empowered to do it and we are ready to do it," said the Executive Secretary.

FONDEN funds several projects, including part of the new national iron and steel company Abreu e Lima, in the southern state of Bolivar. "It is a very significant project and it needs plenty of investment." In addition, together with Ministry of Industry, FONDEN funds projects carried out by the Venezuelan company of intermediate industries CORPIVENSA. (Venezuelan Embassy to the UK and Ireland, Venezuelan National Development Fund has invested over $100 billion since 2005).

Two principal points are relevant here.  The first is that the NDF is meant to serve internal investment administered by the Venezuelan government.  The second is that the NDF is neither autonomous from the state nor are its operations transparent. This later point has raised issues of accountability.  "About two weeks ago, I told the story of Deputy Carlos Ramos of the National Assembly who provided us with an Excel spreadsheet of the projects financed by Fonden – the “development” fund that President Hugo Chávez created and uses as his sort of petty cash fund for immediate needs – after I wrote to him. " (Miguel Octavio, Is $29 billion missing from Hugo Chavez'sFonden development fund?, Christian Science Monitor, Aug. 30, 2011).   This does not make it unique but it does suggest that the fund will have limited reach in private global markets except perhaps indirectly.  Yet this is consonant with the moves to embrace a state to state ideology of trade that is reflected in the construction of the ALBA regional trade association.

And indeed, even as the Venezuelan state has starved FEM, it has continued to fund  NDF for local development (abandoning in effect the stabilization function of the FEM--which is viewed ideologically as contrary to the socialist ideology of the current government). "Despite a fitful US dollar flow, the Venezuelan government has instructed both the Central Bank of Venezuelan (BCV) and oil giant Pdvsa to transfer USD 11.7 billion to the National Development Fund (Fonden) this year." (Mayela Armas H., Central Bank of Venezuela to transfer USD 3.7 billion to Fonden, El Universal, Jan. 24, 2014 "The move may have an impact on Venezuela's international reserves, currently at USD 20.8 billion, a level that is not sufficient to meet the country's economic needs." Ibid).

This suggests that Venezuela has also joined the growing number of states that have functionally differentiated their SWFs among stabilization, development, investment and other functions, but also that in Venezuela's case these funds appear to be operated more as facilities for budgeting than as investment vehicles. For purists, the question then becomes, is this a SWF? And if so what does that tell us about the evolution of the concept, or has it become so broad that it ceases to have meaning? 

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