Stabilization Fund within a Stabilization Fund

Ashby Monk

Back in December, I noted that Peru was thinking about setting up a new SWF. What I didn’t realize at the time was that Peru already had a sovereign fund (at least based on the definition of a SWF put forth by the IMF ): It has the Prices Stabilization Fund, which (if I’m not mistaken) was set up in 2004 and is managed by the Dirección General de Hicrocarburos.

Still, Peru now wants a new SWF, and the process to create this fund will begin in the coming weeks. According to the Finance Minister:

“The Peruvian government is looking to create a sovereign wealth fund to help protect the economy against future downturns, he said. The fund will likely be initially created within Peru’s existing stabilization fund, and the process will likely begin within the next few weeks…”

It sounds like the objectives of the new fund are quite similar to those of the existing fund: stabilization. My hunch, however, is that the new fund will end up having a much broader mandate.

As stabilization assets grow past the point at which they may be needed in the short to medium term, a country may then decide to set up a saving fund to manage the excess reserves. In a way, this is the point at which the short-term, macroeconomic needs of the country give way to the questions of inter-generational equity, long-term saving, and development objectives.

It’s hard to know exactly what’s going on in Peru, but the country does have plenty of foreign reserves as well as some extraordinary revenues from mining exports. So perhaps it is time for the country to graduate from a stabilization fund to a savings fund.

Whatever the case, I can pretty much guarantee you that the Peruvian policymakers tasked with building this fund will be spending quite a bit of time in Santiago in the coming months.

1 Response to “Stabilization Fund within a Stabilization Fund”

  1. 1 When (Not) to Set Up a Heritage Fund « Oxford SWF Project Trackback on April 27, 2011 at 11:25 am

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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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