Colombia Creating New SWF

Ashby Monk

Colombia’s new Finance Minister Juan Carlos Echeverry — an economist with a PhD from New York University – wants a new sovereign wealth fund to help manage the country’s rapidly growing commodity revenues. Indeed, you may not be aware, but Colombia’s oil industry has actually been flourishing in the increasingly safe and secure operating environment created by Álvaro Uribe’s presidency:

“A few years ago, rebel groups bombed pipelines almost daily but the army now has a strong presence in many oil-producing areas.”

Accordingly, Colombia has become Latin America’s fourth largest crude producer. And the country has 1.36 billion barrels of proven crude oil reserves (as of 2010), which is the fifth-largest in South America. Moreover, oil consumption is a fraction (roughly 1/3) the country’s production, which means that Colombia is now a significant oil exporter (most of it going to the United States).

This presents the country with some of the classic problems faced by commodity rich countries, such as how to avoid Dutch Disease; how to prevent inflation (which ravaged the country in the 1990s); how to ensure the money is used for the benefit of all of the country’s citizens; how to prevent corruption and political mismanagement; and how to ensure inter-generational equity.

As Echeverry apparently understands, a well-governed SWF can be quite useful in managing these problems. But, all that being said, Colombia would be wise to retire some of its sovereign debt before focusing all of its attention (and resources) on a new SWF. Indeed, the chances of making the SWF’s returns high enough to justify not retiring debt are low (and the investment risks required to do so are high). Especially if the country has a high debt burden and high borrowing costs.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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