Wednesday, March 19, 2014

Part 23 Mongolia Fiscal Stability Fund (MFSF)--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 Mongolia Fiscal Stability Fund (MFSF).

 The Mongolia Fiscal Stability Fund (MFSF) was created, like those of other developing states with small funds and large deposits of exploitable natural resources, to promote fiscal stability, especially in the face of swings in commodity prices (principally copper and gold). In this sense, the MFSF serves as a disciplinary tool and as an anti-corruption measure. It was first conceived in 2010 with the passage of the Fiscal Stability Law. In this respect, Chile and its Pension Reserve Fund apparatus has played an important role.
As fast as the economy is growing, government spending is expanding even faster. According to the most recent update released by the World Bank, government spending was 32 percent higher in the first four months of 2012 than during the same period a year earlier; capital expenditures alone doubled. Revenue has failed to keep pace, meanwhile, growing by only 21 percent. As a result, Mongolia’s fiscal deficit rose to 4.2 percent of GDP on a rolling 12-month basis in April while the structural deficit, which discounts the ups and downs of the economic cycle, stood at 6.1 percent, according to World Bank data.
. . . . .

Mongolia is modeling its new approach on the framework established by Chile, which has used its copper earnings to create well-run stabilization and sovereign wealth funds. Implementation remains a big question mark, especially in the volatile political climate that  has followed Mongolia’s parliamentary elections in June. But if the government succeeds in carrying out its plans, it could anchor the economy for generations to come.
“The first step is to establish a really prudent fiscal policy — especially in countries like Mongolia where you are likely to see these patterns of booms and busts, driven by commodities prices and budget expenditures, unless you have a really solid fiscal structure in place,” says Eric Parrado, a former manager of Chile’s stabilization and sovereign wealth funds who is advising Mongolia. If resource-rich countries can adopt and implement a disciplined policy approach, they can accumulate “real money in a sovereign wealth fund fueled by real revenue surpluses,” he adds. Without such discipline, however, “a fund is not a sovereign wealth fund in anything but name — it is just a fiscal instrument to pay for services, preexisting commitments or ring-fence money coming from a specific economic sector.” (Loch Adamson, Press Release:Institutional Investor: Mongolia Aims to Join the SWF Ranks, Institutional Investor via Origo Partners, 2011).
Outside analysts, at the time of the creation of the MFSF were not convinced that the state was stable enough and its governance cultures deep enough to implement its plans for the MFSF.   (Ibid).  These analysts do recognize the appeal of what they call resource nationalism, and its manifestation in the techniques of sovereign wealth funds. (Ibid).  

As in many states in similar economic and resource circumstances, the Mongolian approach to SWFs produced a move toward fund specialization. "In addition to the stabilization fund, the government has been preparing legislation for the creation of a national pension reserve fund, akin to Chile’s $4 billion Pension Reserve Fund and Norway’s mammoth $612 billion Government Pension Fund Global." (Ibid). This pension fund would also derive its income from commodity derived income and then invested to ensure adequate financing of Mongolia's social programs. 

Further impetus for the establishment of an SWF came from the international Monetary Fund, which, as in the cases of its investment in other developing states, viewed with favor the establishment of such a fiscal disciplinary device.
Directors emphasized the need for a clear policy to ensure that the Development Bank of Mongolia (DBM) can help meet the long-term infrastructure needs of Mongolia in a macro-economically sustainable manner with minimal fiscal risks. In particular, public investment projects financed by the DBM should be taken into account when setting the path of fiscal policy, consistent with the new fiscal framework. Directors welcomed efforts to explore the establishment of a sovereign wealth fund, which could be an important complement to the fiscal framework. (IMF Executive Board Concludes 2012 Article IV Consultation and Third Post-Program Monitoring with Mongolia, Public Information Notice (PIN) No.12/131, Nov. 21, 2012, p. 3).

The IMF Staff report also noted "Implementation of the [2012 Social Welfare Law] should be a priority and the establishment of a sovereign wealth fund would be an important complement to the FSL’s counter cyclical fiscal policy framework." (Ibid., § 57 (Staff Appraisal)).  Indeed, in order to understand the establishment of the MFSF, one must understand the intermeshing of international financial institutions (World Bank and International Monetary Fund), their development of fiscal management principles, and their coordination of client states in the implementation of these principles across the globe. This was noted in a recent World Bank related report: "As part of its reform efforts and with the assistance of the World Bank and the International Monetary Fund (IMF), the government began an intensive south-south exchange, notably with Chile, another major copper producer, on strengthening the policy environment. The dialogue proved critical in the passage of several landmark laws within the space of a few years, including a fiscal stability law modeled after Chile, and the accompanying integrated budget and procurement and social welfare laws." (Rogier van den Brink, Arshad Sayed, Steve Barnett, Eduardo Aninat, Eric Parrado, Zahid Hasnain, and Tehmina Khan, South-South Cooperation: How Mongolia Learned from Chile on Managing a Mineral-Rich Economy, The World Bank: Economic Premise, September 2012). See also Adam B. Robbins, Case Study: World Bank Engagement with Mongolia’s Sovereign Wealth Fund, Sovereign Wealth Fund Secretariat World Bank Group, Number 85818, Feb. 2014).

Intermeshing is an important notion in the construction of "cultures" of sovereign wealth funds common to states understood as occupying similar socio-economic sovereign space. The concept was developed by the German academic, Gunther Teubner in the context of theorizing the development of governance systems in globalization. (Gunther Teubner, "The Corporate Codes of Multinationals: Company Constitutions Beyond Corporate Governance and Co-Determination," in Conflict of laws and Laws of Conflict in Europe and Beyond: Patterns of Supranational and Transnational Juridification (Rainer Nickel, ed., Oxford: Hart, 2009).) For Teubner, intermeshing involves the Europeanization of multinational regulatory enterprises. Just as the Member States of the European Union together might create broader and more powerfully effective cross state norms, so too might multinational "states" do the same within cooperative regulatory communities. Thus he notes "the emergence of inter-company networks as an extension of the corporate code onto an entire production network. Global commodity chains have developed, which constitute neither market relationships nor integrated multinationals." (Id., at 9). These are "networks of independent companies, which have generated their own governance structures." (Id). In the context of SWFs, intermeshing involves the internationalization of sovereign investing through the nexus institutions of the IMF and World Bank. These serve to create regulatory communities bound together through the economic power of the IFIs.

It is in this context that one can understand the inter-connectedness, the intermeshing, of the Mongolian Fiscal Stability Law of 2010, the IFIs and the establishment of the MFSF under the tutelage of the Chilean SWF managers. "Mongolia passed it Fiscal Stability Law in 2010 as part of its Stand By Agreement with the IMF which expired on the 30th of September 2010." (Richard Dutu, Managing Mongolia's Wealth: Constructing and Stimulating a Formula for the Fiscal Stability Fund, 2nd Report, 5-8-2012 § 4.4.1). "The World Bank has been supporting the Mongolian government to improve the design of their Sovereign Wealth Fund. The MTAP and Governance Partnership Facility provided funds to support the Ministry of Finance with this task. Central to support has been involvement of experts from Chile and in organizing an international conference on SWFs. . . . Policy dialogue was extended to discussion of the objectivesof the fund and its governance. . . .  Panama, Colombia, and other countries have also adopted rule based fiscal policies with integrated SWFs that perform counter-cyclical functions." (Adam B. Robbins, Case Study: World Bank Engagement with Mongolia’s Sovereign Wealth Fund, Sovereign Wealth Fund Secretariat World Bank Group, Number 85818, Feb. 2014, p. 3, 4 ("Beginning in 2008, the World Bank and Mongolia have worked together to improve the country’s mineral revenue management framework, drafted and passed a rule-based fiscal policy law, maintained dialogue of fiscal policy, and pursued the design of an effective Sovereign Wealth Fund (SWF)." p.1)).

But internal development in Mongolia is also meant to be funded through its recently established Development Bank. 
In 2011 the Mongolian government created a state-owned development bank with a mandate to finance railroads, roads, power plants, and water supply. The inventory of possible projects is large by any standard. Mongolia scores 118 out of 142 countries in quality of infrastructure, as rated by the Global Competitiveness Report 2011–2012 (in comparison, other countries with large mining sectors like Chile rank 41st, Peru 88th, and Botswana 92nd). The majority of roads are unpaved. The funding requirements for rail lines alone run in the multibillion dollar range, in comparison to Mongolian GDP of $3 billion in 2010. The government guarantees the debt issued by the development bank, which is now a contingent liability that will have to be backed by future mining revenues. (Theodore H. Moran, Avoiding the "Resource Curse" in Mongolia, Policy Brief, Peterson Institute for International Economics, July 2013, p.3)
The MSFS is among the smaller SWFs.  It was reported in 2012 that "Mongolia’s Fiscal Stability fund, is believed to have less than $10m after being founded last year."(William Hutchings,  Sovereign wealth firepower tops $5 trillion, Financial News, May 8, 2012).
The money accumulation to the Fund has been reducing year after year since 2012, due to mining sector's hardship and coal's lowering prices.

In 2012, when the fund was set up by the law on Budget stability, a total of 94.7 billion togrog was accumulated, but this sum reduced to 49 billion in 2013. The money, accumulated so far in the fund, has not been used yet. (Stabilization fund to receive 29.8 billion togrog, Montsame, Jan. 17, 2014).

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