Commodity Prices, Sovereign Wealth Funds, and
Fiscal Policy: Lessons from Chile and Norway
Klaus Schmidt-Hebbel
Catholic University of Chile
kschmidt-hebbel@uc.cl
Getúlio Vargas Foundation and VALE Conference on
“The Economics and Econometrics of Commodity
Prices”, Rio de Janeiro, Brazil, 16-17 August 2012
Key Issues
• Resource-rich economies (RREs) at critical juncture:
•
•
•
•
Decade of high commodity prices – resource boom
Most RREs lack appropriate fiscal institutions
Fiscal stance: often weak and ineffective in promoting
macro-financial stability, growth, and equity
Fiscal position vulnerable to commodity price reversal
• Chile and Norway: two RREs with decade-long
experience of fiscal reform and good performance
• They show the way forward in four key fiscal policy
areas
Outline
1. Chile’s Fiscal Institutions and Policy
2. Norway’s Fiscal Institutions and Policy
3. International Evidence on Fiscal Policy and
Macroeconomic Performance in RREs
4. Lessons on Fiscal Institutions for RREs
5. Conclusion
1. Chile’s Fiscal Institutions and Policy
Chile’s Fiscal Policy Institutions in
International Comparison (1)
Institution
Marks
Fiscal Responsibility Law
√
Financial Management of Budget
√
Budget Horizon
X
Fiscal Rule
√√
Sovereign Wealth Funds
√√
Chile’s Fiscal Policy Institutions in
International Comparison (2)
Institution
Management of Gov. Balance Sheet
Marks
X
Budget Accountability + Transparency √√
External Control and Auditing
√
Fiscal Ad hoc Committees
√√
Fiscal Council
X
Chile’s Fiscal Rule
• Cyclically adjusted government balance rule –
implies a-cyclical government spending (automatic
tax stabilizers are still counter-cyclical)
• Unique: targets government spending to cyclicallyadjusted revenue, adjusting for cyclical revenue
due to cycles in GDP and mineral prices
• Has been in place since 2001
• Strong governance and political economy / support
• Has generally worked well
• Except in 2009-10: rule was overruled because of
insufficient counter-cyclicality; reestablished 2011
• Yet requires technical and institutional refinements
A Simple Rule (1)
Cyclical net saving (cyclically adjusted balance minus
actual balance) is determined by cyclical revenue
(c.a. revenue minus actual revenue):
B*t - Bt = (Rt* -Gt )- (Rt - Gt ) =
= NMTRt* - NMTRt + MTRt* - MTRt + CRt* - CRt + MRt* - MRt
Non-mining Tax Rev* = NMTR* = f (output gap)
Mining Tax Rev* = MTR* = f (trend mineral prices)
Mining Transfers* = CR*+MR* = f (trend min prices)
A Simple Rule (2)
• Actual overall government spending equals trend
structural revenue net of structural balance:
G = R* - B*
• Hence government spending G is a-cyclical
• Government sets target for c.a. balance B* (net
c.a. saving)
• Committees project trend GDP and mineral prices
required for estimating c.a. revenue R* (strong
political economy)
GDP Growth: Committee Forecasts and Actual Growth (%)
6%
5%
4%
3%
2%
1%
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-1%
-2%
GDP Growth
Commi ee's Projected Average Trend GDP Growth
Average Actual Future Growth
Copper Prices: Committee Forecasts and Actual Prices ($/lb)
4.5
4.0
US$/Copper pound
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2001
PCu
2002
2003
2004
2005
2006
2007
Commi ee's Long Run PCu Projec on
2008
2009
2010
2011
Average Actual Future PCu
Chile: Actual and cyclically-adjusted Gov. Balance (% of GDP)
9%
7%
Ra o to GDP
5%
3%
1%
-1% 1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
-3%
-5%
Cyclical Balance Component
Actual Balance
Cyclically Adjusted Balance
2010
Chile: Gov. Revenue and Expenditure Growth Rates (%)
25%
Real rate of growth
15%
5%
1991
1993
1995
1997
1999
2001
2003
2005
2007
-5%
-15%
-25%
Central Government Revenue
Central Government Expenditure
2009
Chile: Gross Assets, Gross Liabilities, and Net Assets of the
Government, 1990-2010 (% of GDP)
30%
20%
Ra o to GDP
10%
0%
1991
1993
1995
1997
1999
2001
2003
2005
-10%
-20%
-30%
-40%
Gross Assets
Gross Liabili es
Net Assets
2007
2009
Chile: International Country Risk Guide Index (0-100) and
EMBI Spread (in bp), 1990-2010
85
250
83
230
81
210
79
190
77
170
75
150
73
130
71
110
69
90
67
70
65
50
1990
1992
1994
1996
1998
EMBI Chile
2000
2002
2004
ICRG Composite
2006
2008
2010
Chile: Assets held in SWFs, 2001-2010 (% of GDP)
Rule’s Fiscal and Macroeconomic Effects
Reviews and research suggest Chile’s fiscal rule has:
• Lowered pro-cyclical bias of fiscal policy
• Contributed to fiscal sustainability and credibility,
lowering the sovereign risk premium
• Reduced macroeconomic uncertainty
• Lowered volatility of GDP, interest rates, and
exchange rate
• Reduced dependence on foreign financing during
downturns
• Improved protection of social programs during
cyclical downturns
2. Norway’s Fiscal Institutions and
Policy
Norway’s Fiscal Policy Framework
• Oil production peaked in 2005 and is projected to
decline significantly in coming years
• 2001: Norway adopted new fiscal framework
aiming at macro stability, fiscal sustainability, intergenerational equity, and resource use efficiency
• Three institutional pillars:
(i) Structural fiscal rule
(ii) Sovereign wealth fund
(iii) Full integration of SWF into government budget
Norway’s Past and Projected Oil Production, 1970-2030
Norway’s Fiscal Rule (1)
• Oil rents are transferred to SWF
• Cyclically-adjusted non-oil budget deficit financed
by average transfer from the SWF at an (imputed)
4% real return on SWF investments
• Annual deviations of the latter transfer are allowed
for further discretionary government spending
geared at counter-cyclical stabilization and
expenditure smoothing
Norway’s Fiscal Rule (2)
• Therefore government spending is equal to:
• trend values of government tax revenue and excise duty
revenue and of Norges Bank transfers
• minus: trend values of unemployment benefit payments and of
net interest payments and transfers
• plus: 4% real return on SWF investments
• plus or minus: discretionary spending adjustment for cyclical
stabilization and to avoid excessive spending volatility
• Hence Norway’s fiscal rule:
1.
2.
3.
4.
is consistent with c.a. balance measure (like Chile)
is consistent with inter-generational rent sharing (not Chile)
allows for additional counter-cyclical spending (not Chile)
allows for additional spending smoothing (not Chile)
• Hence Norway has an outstanding rule in place with
outstanding results since 2001
Norway’s Sovereign Wealth Fund
• Norway established Gov Petroleum Fund in 1990,
renamed Gov Pension Fund Global (GPFG) in 2006
• GPFG is managed by Norges Bank Investment
Management, under investment guidelines issued
by MoF
• GPFG investments are highly diversified
internationally with 56% equity share of
outstanding total investments valued at 275% of
mainland GDP in 2010
• Actual government surplus – the consolidated
surplus of GPFG and the non-oil government
budget – are transferred to GPFG, at the tune of
circa 20% since 2005
Norway: Government Budget
Fiscal and
policy Pension Fund Performance
A. Expected rea l return on the Government
Pension Fund a nd structura l non-oil deficit.
Bn. NOK (consta nt 2012 prices)
B. Rea l underlying expenditure growth in the
Fiscal Budget. Percent
175
6
6
150
5
5
125
125
4
4
100
100
3
3
75
75
2
2
50
50
1
1
25
25
0
0
175
Structural deficit
150
4 p ct. real return
0
0
2001 2003 2005 2007 2009
2012
-1
2015
0,5
Increased expenditure on o ld-age an d
disability p ensions
0,3
1995
2000
2005
2012
40
40
Co n solidated surplus in th e
fiscal bud get and the
Government Pension Fund
Increased use o f oil revenues
0,4
1990
D. Consolida ted surplus in the fiscal budget a nd
the Government Pension Fund. Percent of
ma inla nd GDP
C. Avera ge a nnua l cha nge in use of oil revenues
and pension expenditures. Per cent of
ma inla nd trend GDP.
0,5
-1
1985
0,4
30
30
No n -oil bud get surplus
20
20
10
10
0,3
0,2
0,2
0
0,1
0,1
0,0
0,0
2001-2012
2012-2025
0
-10
-10
-20
-20
1986
1991
1996
2001
2006
2012
Norway: Government Pension Fund Global (GPFG)
Investment Portfolio, 1997-2011 (ratio to GDP, %)
300%
250%
200%
150%
100%
50%
0%
Equity
Fixed Income
Real Estate
3. Fiscal Policy and Macroeconomic
Performance in RREs
Findings on Fiscal Policy and Outcomes in RREs
1. Natural resources: curse or blessing?
• curse where initial institutions are weak (Robinson et al.)
• curse where taxes on non-resource sectors are low,
corrupting institutions (Salti; Bornhorst et al.)
2. Fiscal pro-cyclicality
• World evidence: fiscal policy is pro-cyclical (deepening cycles)
when governance and institutions are weak, corruption is
widespread, fiscal credibility is low, financial markets are
under-developed, and international financial integration is
weak (Végh et al., Calderón and Schmidt-Hebbel, others)
• Oil-producing countries: high fiscal pro-cyclicality in 20032009 (Villafuerte and Lopez-Murphy)
• GCC countries: spending follows resource rents, hence fiscal
policy is pro-cyclical with a lag (Fasano and Wang)
Findings on Fiscal Policy and Outcomes in RREs
3. Weak fiscal sustainability
• Fiscal positions weakened in oil-producing countries duirng
2003-08 oil boom (V and L-M)
4. Fiscal vulnerability to commodity price reversals
• Fiscal positions are highly vulnerable to oil-price reversal in
oil-producing countries (V and LM)
5. Macroeconomic volatility and Dutch Disease
• Fiscal policy pro-cyclicality has amplified business cycles in
oil-producing countries (V and L-M, Abdih et al.)
• Pro-cyclical government spending leads to Dutch Disease
during revenue booms -- hence RER misalignment, loss of
competitiveness, and large non-resource curr. account deficits
Findings on Fiscal Policy and Outcomes in RREs
• Weak fiscal-policy institutions have adverse effects
beyond policy pro-cyclicality and Dutch disease
• Opaque budgetary management and external
control, lack of transparent fiscal policies and
budgets, and poor budgetary accountability lead to
ineffective and inefficient government spending,
misuse of government resources, and corruption
• Adoption of modern institutional framework for
fiscal policy makes major contribution to lessen
adverse impact of commodity bubbles and
strengthen good use of government resources
4. Lessons on Fiscal Institutions in RREs
Lessons on Fiscal Institutions in RREs
• Frontier fiscal framework is key for the triple goal of
fiscal policy:
• fiscal solvency (or budgetary sustainability)
• macroeconomic stability
• inter-generational equity
• International experience in general and successful
development of sound fiscal policy frameworks in
Chile and Norway since 2001 suggest lessons in four
key policy areas to strengthen fiscal policy
institutions and conduct in RREs
1. Strengthen Fiscal Institutions
• Adopt / reform Fiscal Responsibility Laws
• Strengthen government’s budget initiative and mgmt
• Extend budget horizon from 1 year to multi-year planning
• Maximize fiscal policy transparency and accountability
• Strengthen external control and auditing of budget
execution and government accounts
• Strengthen fiscal analysis and monitoring by relying on
richer set of key fiscal indicators
Government Budget Transparency in
International Comparison, 2010
South Africa
New Zealand
UK
France
Norway
Sweden
US
Chile
Brazil
South Korea
Germany
Peru
Spain
Colombia
Portugal
Argen ne
Mexico
92
90
87
87
83
83
82
72
71
71
68
65
63
61
58
56
52
2. Adopt a Fiscal Rule
• Adopt a fiscal rule based on cyclically-adjusted
balance of the government
• Adjust for both domestic GDP cycles and
commodity price cycles – key budget variables
• Make rule consistent with a-cyclical or, preferably,
counter-cyclical spending and spending smoothing
• Preferably based on assumptions and forecasts of
key variables provided by independent committees
• Possibly anchored in Fiscal Responsibility Law
3. Start/develop a Sovereign Wealth Fund
• Key complement of cyclically-adjusted balance rule
• Effective and transparent corporate governance
• Transparent information of transfers between
budget and SWF
• Investment portfolio composition set by maturity
preference (length of commodity-price and GDP
cycles, inter-generational sharing), and risk aversion
• Investment management bound by transparent
guidelines and close public monitoring
Transparency of Sovereign Wealth Funds in
International Comparison, 2011
4. Adopt Committees and Fiscal Council
• Special Independent Committees: focus on narrow
tasks, like key budget forecasts or fiscal reforms
• Independent Fiscal Councils: based on ad hoc law,
Board members voted by Congress. Responsible for
following tasks and recommendations:
•
•
•
•
•
Budget assumptions, projections, monitoring, and
recommendation of corrective actions
Medium and long-term fiscal projections and assessment
of fiscal sustainability and corrective actions
Assessment of macro-financial effects of fiscal policy
Assessment and recommendations on government asset
and liability management
Technical advice and public hearings (Congress) on
budget management and fiscal reforms
5. Conclusion
Conclusion
• The world has made much progress in some areas of
macro-financial institutions and policies – e.g.,
independent central banks and the conduct of
(conventional) monetary policy
• Yet fiscal institutions and fiscal policies face major
challenges to strengthen sustainability of fiscal policy, its
counter-cyclicality, and its transparency – in industrial
and emerging economies alike
• RREs face a particularly serious challenge to break out of
the vicious circle between fiscal policy weaknesses and
commodity cycles
• It can be done.
Commodity Prices, Sovereign Wealth Funds, and
Fiscal Policy: Lessons from Chile and Norway
Klaus Schmidt-Hebbel
Catholic University of Chile
kschmidt-hebbel@uc.cl
Getúlio Vargas Foundation and VALE Conference on
“The Economics and Econometrics of Commodity
Prices”, Rio de Janeiro, Brazil, 16-17 August 2012
Rule’s Fiscal and Macro Effects: New Findings
• Which is the response of government saving and
Chile’s macroeconomy to a copper price shock
under the rule (since 2001-2010) – compared to
before the rule (1990-2000)?
• I use impulse responses from VAR estimations to
simulate the response to a 10% copper price shock
• Before the rule: no effects on fiscal balance and
EMBI, while RER appreciates and growth declines
• After the rule: fiscal balance improves, EMBI
declines, RER appreciates, and growth rises
Response to a Copper Price before the Fiscal Rule (1990-2000)
Figura 2: Impulse Response pre-Fiscal Rule
Response to a Copper Price under the Fiscal Rule (2001-10)
Figura 3: Impulse Response post -Fiscal Rule