With copper and gold prices at near-record highs and oil surging on tensions in the Middle East, Latin America once again finds itself at the early stage of a bull market for its key commodities. Yet each new discovery of oil or mineral deposits seems to come up against popular opposition from citizens convinced that their politicians will syphon off the benefits. Or it sparks grumbling in the international media about the “resource curse,” or when an economy underperforms despite its abundance of natural resources.
Could it be time for the region to rethink the way its sovereign wealth funds (SWFs) collect, invest and spend their money?
“So far, Latin American nations have had an old-fashioned view of the role of SWFs,” says Victoria Barbary, director of strategy and communications at the London-based International Forum of Sovereign Wealth Funds. “With the energy transition and the rising importance of critical minerals, there is a real opportunity to do more through strategic investment funds.”
With the energy transition and the rising importance of critical minerals, there is a real opportunity to do more through strategic investment funds
Victoria Barbary,
International Forum of Sovereign Wealth Funds
There are a dozen SWFs in Latin America, but almost all of them are traditional savings and stabilization funds that have strict and conservative investment rules. Chile, for example, began in 1997 to stash away a proportion of its revenues from copper, its biggest export. Of this, $8.6 billion is held in a pension fund and a further $5.1 billion in a stabilization fund for countercyclical spending. Mexico’s fund is focused on the “Hacienda hedge,” the world’s largest oil hedge, to protect the federal budget against oil price shocks. Colombia’s fund doesn’t invest the capital it receives from hydrocarbons, it simply holds them in a savings account.
Assets under management
Sovereign wealth funds around the region, between June 2023 and April 2024
Across the region, SWFs provided a vital source of liquidity during the COVID-19 pandemic. But capital allocation restrictions and politics have slowed the growth of these funds and limited their ambitions.
Take the Fondo de Ahorro de Panamá (FAP), the Central American nation’s SWF. It was established in 2012 — a year in which GDP expanded by nearly 10% — with an initial seed capital of $1.2 billion inherited from privatization revenues. Half of any government revenues from the Panama Canal exceeding 2.25% of GDP should flow to the fund.
“We invest with a 10-year time frame,” says Abdiel Santiago, the fund’s chief investment officer. “We invest with an expectation of 5% or 6% returns and in a way that we won’t lose more than 10% in any year.”
The fund invests exclusively outside Panama. Half of the portfolio is in fixed income, around 25% in equities, 10% in cash and, most recently, 15% in alternative investments, primarily funds investing in private equity, private debt and infrastructure.
Barbary says Latin American governments are overly focused on debt, rather than equity. An idea persists that countries must run a fiscal surplus to establish a SWF, and there is a strong aversion to investment risk.
“Too many governments assume that a SWF needs to follow the Norwegian model,” Barbary says. “But there’s been a lot of innovation over the last 15 years in the global south.”
THE AFRICA EXAMPLE
Latin America could learn from Africa. The Nigeria Sovereign Investment Authority, for example, splits its investments between a savings fund, intergenerational investments and equity in local infrastructure projects. It has helped fund projects in agriculture, healthcare, motorways and power plants.
The Sovereign Wealth Fund of Senegal for Strategic Investments, or FONIS, has become the fulcrum of the country’s financial system. FONIS has supported foreign investment in local development projects and carried out the government’s social and economic policies through its strategic fund. Its most recent investment aims to bring drinking water to Senegal’s poor urban areas.
LEGAL HURDLES
For most Latin American countries, reorienting their SWFs to focus on domestic strategic investments would require a change in the law. Among the region’s fund managers, however, there are conversations about how they could step up to take on new responsibilities.
“The fund could help certain sectors of the economy by crowding in capital into water infrastructure projects, for example,” says FAP’s Santiago.
In recent years, Panama has suffered major droughts, reducing both water supply to its people and the transit of ships through the canal.
Such investments would have to generate a return for the SWF. But FAP’s start-up capital, twinned perhaps with those of other neighboring funds, could help get such projects off the ground.
“At the moment we’re expressly prohibited from investing inside the country, but I think there’s room for a change,” says Santiago. “We’d use the governance structure of the fund and its proven executive management and reputation for transparency.”
To make such a switch to more active funds, Latin America would have to tackle its perennial challenges: corruption, currency risk and a widespread lack of faith in its institutions. It took Nigeria a decade to build up public trust in its fund, says Barbary.
A NEW MODEL
But from the muddy shores of South America’s northeast coast, a new example may force governments to sit up and take notice.
Following a decade of mammoth offshore oil discoveries, Guyana leads the world in terms of oil reserves per capita. Last year its gross domestic product grew at over 43%. Since its establishment in 2019, Guyana’s Natural Resource Fund (NRF) has swelled to over $3.1 billion, earning over $143 million in interest in 2024.
The NRF’s mission is to combat the “Dutch disease,” which typically happens when the discovery of natural resources hurts the overall economy, and diversify the economy. Its expenditure has so far focused on major infrastructure projects, such as a new bridge over the Demerara River and an energy project to bring offshore natural gas to power plants, helping to reduce a dependence on higher-cost and dirtier diesel-fueled generation. Its funds have also been used to offer free tertiary education to Guyanese students. A new city powered on green energy is planned for a site 30 kilometers south of Georgetown, the crowded capital.
If Guyanese politics stay out of the fund and the locals gain trust that the Natural Resource Fund is indeed investing the nation’s revenue from its hydrocarbon wealth for their benefit, it could give oil companies a stronger social license to operate in the country.
Across Latin America many major oil and mining projects are opposed by communities partly on environmental grounds but also on the belief that funds are too often funneled away by politicians. Changing the way government’s think about SWFs would go a long way to growing and diversifying economies and ensuring that their revenues are better spent not just for immediate benefits but for the good of a country in the long term.
That may be tricky. “In young, populous countries, it’s hard to make the argument that funds should take a multigenerational approach,” says Barbary. “People want to see the money now.” LF