Oil, Gov­ern­ment Take & Spend­ing: Nav­i­gat­ing Guyana’s De­vel­op­ment Chal­lenges - 17

Stabroek News Sunday - - REGIONAL NEWS -


Hav­ing pre­vi­ously dealt with 1) as­pects of the or­ga­ni­za­tional and le­gal frame­work of Guyana’s in­tended Nat­u­ral Re­sources Fund (NRF) (Oc­to­ber 7, 2018) and 2) the fis­cal rules gov­ern­ing its op­er­a­tions, to­day’s col­umn turns to its over­all as­sess­ment and eval­u­a­tion. But, be­cause of the amount of ma­te­rial, I shall con­clude this as­sess­ment next week. There are sev­eral is­sues re­main­ing to be raised, and for brevity, I con­cen­trate on the most cru­cial.

SWFs: State Cap­i­tal and Global Cap­i­tal­ism

My first ob­ser­va­tion arises from my ear­lier as­ser­tion that, col­lec­tively, sov­er­eign wealth funds (SWFs), as pro­posed for Guyana with the NRF, com­prise state ac­tors/own­ers op­er­at­ing in a largely pri­vate global cap­i­tal­ist econ­omy. This cir­cum­stance is ag­gra­vated by their re­ported size (re­call: col­lec­tively SWFs con­trol US$8.1 tril­lion in as­sets, of which petroleum-based SWFs con­trol US$4.4 tril­lion, or 54 per­cent). Such enor­mous state cap­i­tal gen­er­ates ten­sion in the uni­verse of pri­vate in­vestors, ac­cu­mu­lat­ing cap­i­tal and in­vest­ing this in pri­vate fi­nan­cial mar­kets, where pri­vate risk-re­turn in­cen­tives pre­vail!

I had in­di­cated fur­ther that one of the most im­por­tant con­se­quences of petroleum-based (or in­deed other nat­u­ral re­sources) SWFs in economies like ours is that these be­come, in ef­fect, con­duits for re­dis­tribut­ing sur­pluses gen­er­ated by their coun­tries’ ex­port earn­ings to fi­nance non-do­mes­tic based in­come-gen­er­at­ing ac­tiv­i­ties! As the Guyana Green Pa­per unam­bigu­ously as­serts: “in­vest­ment in over­seas mar­kets is nec­es­sary (my em­pha­sis) to min­i­mize risk of lo­cal in­sta­bil­ity.”

How­ever, although this is a pri­mary con­se­quence of the NRF, so far it has been its least dis­cussed and as­sessed fea­ture.

San­ti­ago Prin­ci­ples

In re­sponse to the ob­vi­ous state cap­i­tal-pri­vate in­vestor con­tra­dic­tion, SWFs have over the years sought to le­git­imize them­selves by de­vel­op­ing a set of Gen­er­ally Ac­cepted Prin­ci­ples and Prac­tices (GAPPs) for their op­er­a­tions. These GAPPs seek to re­move any sem­blance of a SWF seek­ing to op­er­ate out­side of pri­vate, profit-cen­tred in­cen­tives. To this end, the col­lec­tive body of SWFs has cre­ated what are known as the 24 San­ti­ago Prin­ci­ples. The Green Pa­per in­di­cates the Gov­ern­ment of Guyana (GoG) in­tends to sub­scribe to each and ev­ery one of the 24 GAPPs. These 24 San­ti­ago Prin­ci­ples have been vol­un­tar­ily agreed to in a com­pact shared with most of the roughly 50 coun­tries that have SWFs. This arose a decade ago (2008) as a con­se­quence of con­cerns aris­ing in the early years of the Great Re­ces­sion and its as­so­ci­ated fi­nan­cial cri­sis (2007-2008). Be­cause of their state-own­er­ship, SWFs had gen­er­ated strong con­cerns about their eco­nomic and po­lit­i­cal mo­ti­va­tions; in­cen­tives frame­work; ma­nip­u­la­tion of pri­vate mar­kets; opac­ity; and, typ­i­cally, their broad avoid­ance of the “dis­ci­plines” of pri­vate mar­kets “risk-re­turn in­cen­tives”. The IMF has played a lead­ing role in bring­ing to­gether the key stake­hold­ers: SWFs, the global pri­vate fi­nan­cial com­mu­nity, and De­vel­oped Coun­tries’ Gov­ern­ments.

The Green Pa­per lists the 24 prin­ci­ples and sub-prin­ci­ples in some de­tail. Space does not al­low for repetition here. How­ever, it is gen­er­ally ac­cepted that these prin­ci­ples form three ma­jor group­ings. One is the set of prin­ci­ples gov­ern­ing the le­gal frame­work, pol­icy pur­pose, funding, and with­drawal ar­range­ments of SWFs (pri­mar­ily GAPP 1, 2, 4). Sec­ond, there are prin­ci­ples gov­ern­ing the in­sti­tu­tional frame­work and gov­er­nance ar­range­ments. The main thrust of these GAPPs is to sep­a­rate the owner (Gov­ern­ments/politi­cians) from man­age­ment of the NRF (pri­mar­ily GAPP 6, 7, 8, 9). The fi­nal part is fo­cused on in­vest­ment and risk-man­age­ment. The dis­clo­sure of

Last Up­date: 481.18 Cur­rent Up­date: 483.51 in­vest­ment poli­cies, es­pe­cially ob­jec­tives, themes, hori­zons, bench­marks, and strate­gic as­set al­lo­ca­tion aims, is manda­tory. In­vest­ment goals of the SWF that are con­sid­ered to be “non-eco­nomic or non-fi­nan­cial” should be re­vealed (pri­mar­ily GAPP 18, 19, 21).

In­vest­ment Man­age­ment

The pre­ced­ing com­ment con­cern­ing the in­vest­ment frame­work leads into the sec­ond sig­nif­i­cant is­sue posed by the Green Pa­per. As can be in­ter­preted from the above de­scrip­tion, the San­ti­ago Prin­ci­ples put enor­mous pres­sure on SWFs to de­clare their in­vest­ment man­date, man­age­ment, and strat­egy frame­work. This is clearly the rea­son why Guyana’s Green Pa­per is so forth­com­ing with de­tails. This is not about lo­cal trans­parency. It is all about in­ter­na­tional pres­sure. The Green Pa­per makes clear the pri­mary roles of Par­lia­ment (pas­sage of the NRF Act, pro­cess­ing An­nual Bud­get) and the Min­istry of Fi­nance (ap­point­ment of In­vest­ment Com­mit­tee, In­vest­ment Ad­viser and An­a­lyst). The Cen­tral Bank (Bank of Guyana) is named as the Op­er­a­tional Man­ager of the Fund.

How­ever, in keep­ing with the aim of cre­at­ing “dis­tance/space” be­tween the


po­lit­i­cal class, as own­ers, and the NRF man­age­ment, it is clearly stated: “Pri­vate Man­agers would man­age the over­all in­vest­ment port­fo­lio.” The Green Pa­per goes on to make it clear that the In­vest­ment Man­date fixes the al­lo­ca­tion of Fund in­vest­ments. And, with this in mind the Green Pa­per iden­ti­fies the “el­i­gi­ble as­set classes” to be held by the NRF and their floor and ceil­ing lim­its.

The Green Pa­per iden­ti­fies the de­signed as­set classes as: el­i­gi­ble bank de­posits; el­i­gi­ble trea­sury bills; el­i­gi­ble eq­ui­ties; el­i­gi­ble sov­er­eign bonds; el­i­gi­ble de­riv­a­tives; and, gold. The ceil­ings and floors of these el­i­gi­ble classes are re­pro­duced be­low (Ta­ble 1).

As noted last week, the NRF is tar­geted to earn a three per­cent re­turn. This is not spec­i­fied ei­ther as a gross or net fig­ure. Fur­ther­more, it is not in­di­cated whether Move­ment: 0.48% YTD Move­ment: 64.29%

The Lu­cas Stock In­dex (LSI) rose 0.48 per­cent dur­ing the third pe­riod of trad­ing in Oc­to­ber 2018. The stocks of five com­pa­nies were traded with 127,522 shares chang­ing hands. There were two Climbers and two Tum­blers. The stocks of Repub­lic Bank Lim­ited (RBL) rose 4.33 per­cent on the sale of 86,908 shares. The stocks of the Guyana Bank for Trade & In­dus­try (BTI) also rose 0.35 per­cent on the sale of 1,000 shares. On the other hand, the stocks of the De­mer­ara To­bacco Com­pany (DTC) de­clined 2.50 per­cent on the sale of 613 shares. The stocks of the De­mer­ara Dis­tillers Lim­ited (DDL) also de­clined 1.41 per­cent on the sale of 1,574 shares. In the mean­while, the stocks of Banks DIH (DIH) re­mained un­changed on the sale of 37,427 shares. The LSI closed at 483.51.

this is a nom­i­nal or real re­turn or, for that mat­ter, which mar­ket prices will be used to ad­just nom­i­nal to real val­ues. Read­ers would ap­pre­ci­ate the po­ten­tially sig­nif­i­cant vari­a­tion in the mon­e­tary out­come for the nu­meric val­ues of these tar­gets. I had noted last week that, on its face, a three per­cent re­turn seems modest.

In­ter­net searches re­veal that the SWF Institute’s web­site ad­mits to dif­fi­cul­ties in find­ing re­li­able com­par­a­tive data ag­gre­gates. They do sug­gest, how­ever, that by 2015, there had been over the pre­vi­ous 20 years an an­nu­al­ized re­turn of 6.5 per­cent for SWFs. And, for the pre­vi­ous 30 years their an­nu­al­ized re­turn has been 7.5 per­cent. Av­er­age port­fo­lio al­lo­ca­tions also re­veal: 1) De­vel­oped coun­try eq­ui­ties (3242 per­cent); 2) Gov­ern­ment bonds (10-20 per­cent) 3) Real es­tate (5-10 per­cent) and 4) Cash (10 per­cent).


The two ob­ser­va­tions treated above are the most im­por­tant I wish to make in my over­all eval­u­a­tion of the pro­posed NRF. Lesser im­por­tant but still vi­tal fea­tures of the Green Pa­per, about which I re­main con­cerned, will be dis­cussed next week.

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