Sovereigns plunder Rainy Day Funds for $100 billion after COVID-19 storm

LONDON (Reuters) – Countries dealing with the coronavirus crisis and falling commodity prices are tapping into sovereign wealth funds for more than $100 billion, and that figure could swell as fiscal pressures mount for some markets emerging.

FILE PHOTO: Clay piggy banks are displayed at a shop in the central market in San Jose, Costa Rica March 13, 2019. REUTERS/Juan Carlos Ulate/File Photo

Governments from Angola to East Timor have been building up rainy day savings to help stabilize their economies and support their citizens in times of shock. Some funds – especially from commodity wealth – are worth multiples of national economic output.

The double whammy of the commodity slump and the pandemic, which has stalled much economic activity for months, is likely to drain stabilization funds in countries like Peru and Colombia, according to Global SWF, which tracks these funds.

Large chunks of similar funds in Ghana and Nigeria are likely to be spent, he said, while 24 withdrawals totaling around $137 billion include heavy draws on savings or development funds in Bahrain , Kuwait, Iran and Angola.

This is still quite small compared to the roughly $9 trillion in total assets under management across all funds. Some governments have chosen to cut spending rather than dipping into their sovereign wealth funds and others are unable to do so due to regulations.

But the scale of the crisis means there will likely be pressure for more withdrawals, although questions arise over how and when those funds could be replenished.

(Graph: planned withdrawals from the sovereign wealth fund, )

“Some countries lack fiscal space, primarily oil- and mineral-rich emerging markets and low-income countries,” said Andrew Bauer, a consultant with the Natural Resource Governance Institute, an independent nonprofit.

“Mongolia is running out of fiscal space, Ghana is running out of fiscal space, so in countries like these, there really isn’t anything more they can tap into.”

Mongolia has an external financing gap of $840 million this year, Citi said in a recent research note, while Ghana expects a fiscal deficit of 11.4 percent of GDP.

With some sovereign wealth funds earning low single-digit returns on their own investments, it might make more sense for governments facing high borrowing costs to draw on those savings rather than go into debt, said Bauer.

Higher-rated governments like Qatar, which sold $10 billion in bonds at the height of the pandemic in April, have less need to dip into their sovereign wealth funds — worth $300 billion, in its case. .

Norway and Singapore’s finances are secure despite plans to withdraw about $73 billion in total from two of their funds – single-digit percentages of their total assets.

“A number of sovereign wealth funds entered the year with a buffer, given what were then considered expensive looking stock markets, so they had liquid resources to meet immediate funding calls from their respective governments. “, said Rod Ringrow, head of the official office. institutions to the asset manager Invesco.

Russia has indicated it could withdraw up to a third of its $130 billion national social protection fund this year, while Kazakhstan, another major oil exporter, liquidated $1.1 billion in assets of his $60 billion fund.

Other funds such as Brunei Investment Agency, Investment Corporation of Dubai and Abu Dhabi Investment Authority do not publish withdrawal data.


Some countries have very little money in their sovereign wealth funds, having already lent a lot on it, Bauer said, citing Algeria, Nigeria and Venezuela.

And even with tight public finances, not all governments are stepping down.

Kuwait, which last week cut $3 billion from its budget, delayed drawing from its Future Generations Fund by $530 billion due to legal restrictions.

Withdrawals have meanwhile been limited to the stabilization part of some funds, Global SWF chief executive Diego López said, such as the Nigeria Sovereign Investment Authority, whose savings and infrastructure funds are still receiving payouts. Ghana used money from its Petroleum Fund but left its Heritage Fund intact, he noted.

Ghana and Nigeria could withdraw more by using “escape clauses” to maintain spending or curb debt accumulation, Bauer said, or by changing fund rules.

A pressing question is how the funds will be replenished, especially if current demands on them persist.

Legislative changes may be needed in some countries if budgeted flows to sovereign wealth funds slow or decline beyond the short term, Ringrow said.

“Now the game has changed for everyone, but it’s too early to assess whether this is a transitional change or a more lasting shift in focus for funds,” Ringrow said.

Danae Kyriakopoulou, chief economist at the Official Forum for Monetary and Financial Institutions, a think tank, said current and future use largely depends on how countries view their sovereign wealth funds, of which few have much use. story.

“On the one hand, these are future generation funds, so they are saved for the future in order to maintain this wealth,” she said.

“But on the other hand, these are rainy day funds – and if you don’t use them now, when you have a storm, when are you going to use them?”

Editing by Catherine Evans

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