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ANALYSIS-Sovereigns raid rainy day funds for $100 bln after COVID-19 storm

Published 14/09/2020, 08:00
Updated 14/09/2020, 08:00

* Around $137 bln in planned withdrawals
* Small slice of $9 trillion in total SWF assets
* But cash-strapped govts likely to draw down more
* Peru, Colombia funds set for exhaustion
* Mongolia, Ghana running out of fiscal space -analyst

By Tom Arnold
LONDON, Sept 14 (Reuters) - Countries coping with the
coronavirus crisis and a slump in commodities prices are dipping
into sovereign wealth funds for more than $100 billion, and that
figure could swell as budget pressures mount for some emerging
markets.
Governments from Angola to East Timor have built up "rainy
day" savings to help stabilise their economies and support their
citizens in the event of a shock. Some funds -- especially
derived from commodities wealth -- are worth multiples of
national economic output.
The twin blow of the commodities collapse and the pandemic,
which stalled much economic activity for months, is likely to
drain stabilisation funds in countries like Peru and Colombia,
according to Global SWF, which tracks such funds.
Big chunks of similar funds in Ghana and Nigeria are likely
to be spent, it said, while 24 withdrawals totalling about $137
billion include heavy drawdowns of savings or development funds
in Bahrain, Kuwait, Iran and Angola.
That is still fairly small compared to the roughly $9
trillion in total assets managed across all funds. Some
governments have opted to slash spending rather than dip into
their sovereign funds and others are unable to because of
regulations.
But the scale of the crisis means there is likely to be
pressure for more withdrawals, even as questions arise about how
and when such funds might be replenished.
"Some countries are running out of fiscal space, mainly the
oil- and mineral-rich emerging markets and low-income
countries," said Andrew Bauer, a consultant to the independent,
non-profit Natural Resource Governance Institute.
"Mongolia is running out of fiscal space, Ghana is running
out of fiscal space, so in countries like these there's really
nothing more they can draw down on."
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% of GDP.
With some sovereign funds earning only low single-digit
returns on their own investments, it could make more sense for
governments which face high borrowing costs to rely on these
savings rather than raise debt, said Bauer.
Higher-rated governments like Qatar, which sold $10 billion
in bonds at the peak of the pandemic in April, have less need to
tap into their SWFs -- worth $300 billion, in its case.
The finances of Norway and Singapore are secure despite
plans to withdraw around $73 billion in total from two of their
funds -- single-digit percentages of their total assets.
"A number of sovereign funds entered the year with a buffer,
in view of what was then seen as equity markets looking
expensive, so have had liquid resources to meet immediate calls
for funding from their respective governments," said Rod
Ringrow, head of official institutions at asset manager Invesco.
Russia has indicated it could draw down as much as one-third
of its $130 billion National Welfare Fund this year, while
Kazakhstan, another big oil exporter, has liquidated $1.1
billion in assets from its $60 billion fund.
Other funds such as Brunei Investment Agency, the Investment
Corporation of Dubai and Abu Dhabi Investment Authority do not
publish withdrawals data.

ESCAPE CLAUSES
Some countries have very little left in their sovereign
funds, having already lent on them heavily, said Bauer, citing
Algeria, Nigeria and Venezuela.
And even with public finances strained, not all governments
are drawing down.
Kuwait, which last week cut $3 billion from its budget, has
held off tapping its $530 billion Future Generations Fund
because of legal restrictions. Withdrawals have meanwhile been restricted to the
stabilisation portion of some funds, said Global SWF managing
director Diego López, such as the Nigeria Sovereign Investment
Authority, whose savings and infrastructure funds are still
receiving payments. Ghana has 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, said
Bauer, or by tweaking the funds' rules.
One pressing question is how funds will be replenished,
especially if current demands on them persist.
Legislative changes could be required in some countries if
budgeted flows to sovereign funds slow or decline beyond the
short term, said Ringrow.
"Now the game has changed for all, but it's too early to
gauge if it is transitory or a longer lasting shift in emphasis
for the funds," said Ringrow.
Danae Kyriakopoulou, chief economist at the Official
Monetary and Financial Institutions Forum, a think-tank, said
current and future use depended largely on how countries view
their sovereign funds, few of which have much history.
"On the one hand, they're future generation funds, so
they're being saved for the future to maintain that wealth," she
said.
"But on the other hand, they're rainy day funds -- and if
you don't use them now, when you have a storm, when are you
going to use them?"

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(Editing by Catherine Evans)

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