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 Marks Management of Gov. Balance Sheet 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 cyclically- adjusted 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): * - G t ) - ( R t - B t = ( R t - G t ) = * B t * - NMTR * - MTR * - CR * - MR = NMTR t + MTR t + CR t + MR t t t t t 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 ($/lb) 4.5� 4.0� 3.5� pound� 3.0� 2.5� US$/Copper� 2.0� 1.5� 1.0� 0.5� 0.0� 2001� 2002� 2003� 2004� 2005� 2006� 2007� 2008� 2009� 2010� 2011� PCu� Commi ee's� Long� Run� PCu� Projec on� Average� Actual� Future� PCu�
Chile: Actual and cyclically-adjusted Gov. Balance (% of GDP) 9%� 7%� 5%� GDP� 3%� to� Ra o� 1%� 1990� 1992� 1994� 1996� 1998� 2000� 2002� 2004� 2006� 2008� 2010� -1%� -3%� -5%� Cyclical� Balance� Component� Actual� Balance� Cyclically� Adjusted� Balance�
Chile: Gov. Revenue and Expenditure Growth Rates (%) 25%� 15%� � growth� of� 5%� rate� Real� 1991� 1993� 1995� 1997� 1999� 2001� 2003� 2005� 2007� 2009� -5%� -15%� -25%� Central� Government� Revenue� Central� Government� Expenditure�
Chile: Gross Assets, Gross Liabilities, and Net Assets of the Government, 1990-2010 (% of GDP) 30%� 20%� 10%� GDP� 0%� to� 1991� 1993� 1995� 1997� 1999� 2001� 2003� 2005� 2007� 2009� Ra o� -10%� -20%� -30%� -40%� Gross� Assets� Gross� Liabili es� Net� Assets�
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� 2000� 2002� 2004� 2006� 2008� 2010� EMBI� Chile� ICRG� Composite�
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, inter- generational 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. is consistent with c.a. balance measure (like Chile) 2. is consistent with inter-generational rent sharing (not Chile) 3. allows for additional counter-cyclical spending (not Chile) 4. 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 and Pension Fund Performance A. Expected real return on the Government B. Real underlying expenditure growth in the Pension Fund and structural non-oil deficit. Fiscal Budget. Percent Bn. NOK (constant 2012 prices) 175 175 6 6 Structural deficit 150 150 5 5 4 pct. real return 125 125 4 4 100 100 3 3 75 75 2 2 50 50 1 1 25 25 0 0 0 0 -1 -1 2012 2015 2001 2003 2005 2007 2009 1985 1990 1995 2000 2005 2012 D. Consolidated surplus in the fiscal budget and C. Average annual change in use of oil revenues the Government Pension Fund. Percent of and pension expenditures. Per cent of mainland GDP mainland trend GDP. 40 40 0,5 0,5 Consolidated surplus in the Increased use of oil revenues fiscal budget and the 30 30 Increased expenditure on old-age and Government Pension Fund 0,4 0,4 disability pensions Non-oil budget surplus 20 20 0,3 0,3 10 10 0,2 0,2 0 0 0,1 0,1 -10 -10 -20 -20 0,0 0,0 2001-2012 2012-2025 1986 1991 1996 2001 2006 2012 ¼ ¼
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
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