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### Viewing cable 08BRASILIA792, Brazil: "Sovereign Wealth Fund" aka "fiscal savings fund"

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08BRASILIA792 | 2008-06-10 17:23 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    VZCZCXRO5702
    PP RUEHRG
    DE RUEHBR #0792/01 1621723
    ZNR UUUUU ZZH
    P 101723Z JUN 08
    FM AMEMBASSY BRASILIA
    TO RUEHC/SECSTATE WASHDC PRIORITY 1849
    INFO RUEHBR/AMEMBASSY BRASILIA
    RUEHRI/AMCONSUL RIO DE JANEIRO 6245
    RUEHSO/AMCONSUL SAO PAULO 2193
    RUEHRG/AMCONSUL RECIFE 8123
    RUCPDOC/USDOC WASHDC
    RUEATRS/DEPT OF TREASURY WASHINGTON DC

` `

    UNCLAS SECTION 01 OF 03 BRASILIA 000792

    SENSITIVE
    SIPDIS

    STATE PASS USTR FOR DUCKWORTH
    TREASURY FOR OASIA HOEK AND TRAN
    USDOC FOR 4332/ITA/MAC/WH/OLAC/ADRISCOLL

    E.0. 12958: N/A
    TAGS: EFIN ECON EINV BR
    SUBJECT: Brazil: "Sovereign Wealth Fund" aka "fiscal savings fund"
    aka "investment fund"

    Refs: a) Sao Paulo 53 b) Sao Paulo 264

    (SBU)1. SUMMARY:  Despite its name, GOB interlocutors from Finance,
    Planning and Central Bank agree that Finance Minister Mantega's
    proposal for a "sovereign wealth fund" could more accurately be
    described as an "investment fund" or a "fiscal savings fund" of
    about 10 to 20 bn usd.  Planning and Central Bank interlocutors
    appear considerably more relaxed regarding the current formulation
    of the planned proposal to establish this fund than they were
    regarding previous iterations (reftels).  While Finance hopes
    President Lula will forward a legislative proposal to congress in
    June, exact timing remains unclear.  Mantega's June 8 press
    statements that the fund could draw on oil revenues in three to five
    years to create a 200-300 bn usd fund does not take into account
    that these fields are not expected to generate revenue in this
    timeframe and would likely if eventually formally proposed encounter
    Central Bank and congressional opposition.  END SUMMARY

    (SBU) 2. Alexandre da Rosa, Secretary for International Affairs at
    Planning Ministry, told Treasury DAS Brian O'Neill June 2 that the
    current government concept is more accurately described as a "fiscal
    fund," a countercyclical instrument. Demand is heating in Brazil and
    the government needs to reduce its own spending as a component of
    that demand.  Da Rosa stated that this leads to the idea that a fund
    that can absorb excess dollars would be helpful.  Da Rosa indicated
    that Singapore had come to Brazil and explained its sovereign wealth
    fund, and that Finance had discussed sovereign wealth fund
    structures with relevant Gulf states.  Da Rosa underlined that
    reserves were off the table as a funding source for the fund, and
    that Brazil hoped to increase the primary surplus target by 0.5% of
    GDP (or about usd 13 billion/year) to fund this mechanism.  He
    acknowledged that how the resources would be used remains undefined
    - one possibility would be to use the funds to buy down BNDES (the
    National Development Bank of Brazil) debt.

    (SBU) 3. In a separate meeting, Alvaro Vereda Oliveira, Finance
    Ministry Assistant Secretary for Financial Organizations and
    Regional Integration, noted Brazil is dealing with an issue that
    would have been inconceivable twenty years ago - how to deal with an
    excess of dollars coming into its economy.  Vereda noted that the
    structural evolution of Brazil in international trade has financial
    consequences and this is the real rationale for the "sovereign
    wealth fund" - it is a structural tool to deal with this situation.

    (SBU) 4. In a meeting with SFRC Senior Professional Staff Member
    Carl Meacham on June 4, Deputy Secretary of the Finance Ministry's
    National Treasury, Cleber Ubiratan de Oliveira noted that while the
    primary surplus target is 3.8%, as of end-April the surplus was
    4.23% (allowing the GOB to estimate that 0.5% of GDP would be
    available to stock the fund).  Describing the fund as a "key public
    policy alternative fund" given the positive fiscal environment,
    Ubiratan explained the GOB would like to propose expanding the
    primary surplus to 4.5% and use these receipts to expand the fund.
    Responding to Meecham's question, Ubiratan noted that, while
    Petrobras currently contributes about 35% of the primary surplus,
    recent finds (that will take years to exploit) are not expected to
    dramatically affect Petrobras' contributions in the short-term and
    do not figure particularly into the rationale behind proposing a
    sovereign wealth fund. He stated Brazil was unique in that the
    rationale for a sovereign wealth fund was not based on commodity
    revenues, but on its robust reserves and good fiscal position, and
    therefore was not comparable to other countries SWFs. Ubiratan
    characterized the fund as a "fiscal savings fund" using primary
    surplus funds that can be invested on more favorable terms with more
    profitable returns than reserves can generate.  He asserted the
    National Treasury would manage the fund through a financial
    institution, but acknowledged that no regulations or operating
    procedures had been drafted or "appropriate structure and apparatus"
    decided yet. Ubiratan said the fund's investment policy was not
    decided yet but that BNDES would probably "be involved."  Visibly
    nervous answering questions, Ubiratan claimed that all signs
    indicated the Congress would pass the proposal (other interlocutors
    were more realistic).  Finance confirmed the proposal was expected
    to go forward as a legislative proposal rather than as a
    "provisional measure."

    ¶5. (SBU) Alexandre Tombini, the Central Bank's Deputy Governor for
    Financial System Regulation and Organization, told Treasury DAS
    O'Neill that the Central Bank buying reserves (around 200 bn usd at
    present) helps "soften" the effects of the floating exchange rate,

    BRASILIA 00000792  002 OF 003

    and no major foreign exchange shocks are foreseen for 2008.  He
    considered the Finance Ministry announcement proposing to request an
    increase in the primary surplus target would have a positive effect
    in controlling exchange rates.  He believed that the Finance
    Minister's proposal "as it is now" is fine from the Central Bank's
    perspective.  Noting this is a "fiscal fund" or an "investment fund"
    rather than a classic "sovereign wealth fund" proposal, Tombini felt
    the fund might help Brazil control demand if funds were invested
    abroad, although it would be costly as a demand management tool.

    (SBU) 6. In a separate discussion with econoff June 4, Alexandre
    Pundek, senior Advisor to the Central Bank board, noted Mantega had
    wanted the fund as a tool to control the foreign exchange rate - to
    help FIESP and to provide additional funding for BNDES beyond the
    FAT (the workers' fund that is the primary revenue source for
    BNDES).  He said Central Bank at this point is not worried about
    Mantega's fund and feels more comfortable supporting the proposal
    because: 1) the level of the 2009/2010 primary surplus is set in the
    2008 budget law and Finance can not change at this point - they set
    0.5 percent of GDP as the funding target because they can not raise
    more now; 2) Mantega envisions between ten billion and twenty
    billion usd going to this fund.  From Central Bank's perspective,
    the Finance-controlled fund would only be an important player if the
    fund were bigger than the Central-Bank managed reserves (200 bn usd)
    - otherwise, any foreign exchange intervention Finance attempts
    could be immediately countered by Central Bank reserve activity if
    necessary; and 3) any attempt to raise the primary surplus above the
    current 3.8 percent in order to fund the mechanism is highly
    unlikely to survive Congress.  In an election year, Congress will
    not agree to a proposal that decreases public spending at a time
    they want to fund programs popular with the electorate.  He added
    that Central Bank head Meirelles thinks the fund is a good proposal
    in the sense that it would prevent the government from spending at
    even higher levels now that in-coming revenues are higher.

    (SBU) 7. Officials at Brazil's National Treasury (Otavio Ladeira,
    Director of Public Debt Strategic Management, and Lena Oliveira,
    Director of Research) strongly defended the establishment of the
    Wealth Fund in a meeting with the Treasury Financial Attache on June
    ¶3. They stated that the Fund's overriding purpose was to provide the
    Finance Ministry with room to intervene in Brazil's foreign exchange
    market, helping to manage appreciation of the Brazilian real.
    However, they do not believe this objective will conflict with the
    Brazilian Central Bank's mandate to target inflation at 4.5%. A
    secondary purpose of the Fund is to help finance large Brazilian
    export firms via BNDES credit lines and BNDES purchases of debt
    issued by these firms. The firms that will receive this support will
    be selected by an intra-governmental committee that will include the
    Finance Ministry, Planning Ministry, Ministry of Industry and
    development, and BNDES. Participation by the Central Bank is
    uncertain. The Fund will initially be financed by fiscal resources.
    Ladeira, however, stated that it is possible the Fund will borrow in
    the future to help increase the size of its asset base. Assets will
    consist of foreign currency instruments. Details about the specific
    instruments that might be purchased, however, remains under internal
    discussion.
    (SBU) 8. COMMENT:  While variously presented as a tool to cut
    government spending as a factor in heating demand and as a way to
    maximize return on government investment, GOB interlocutors clearly
    view this fund as a tool to manage foreign exchange rates.  Although
    the timing for putting any legislative proposal forward remains
    unclear (Mantega has said publicly the proposal could go forward by
    mid-June), the sovereign wealth fund is likely to meet with
    congressional opposition, both for inserting Finance Ministry into
    monetary policy and because it would decrease government spending in
    an election year.  Meanwhile, Senator Renato Casagrande (PSB -
    government alliance) announced May 29 that, when the Government
    forwards its proposal to the House for its consideration, the Senate
    will begin to simultaneously consider the SWF proposal he drafted in
    February which proposes that if Brazil's international reserves pass
    ten percent of GNP, the amount over that ten percent should be used
    to establish a fund that would invest in the international market to
    obtain returns higher than US Treasury bonds.  The government
    proposal is expected to rely on primary surplus funds to buy
    dollars, without recourse to reserves.  Behind the scenes
    negotiations among Ministries and with the Central Bank appear to be
    moving GOB toward a proposal that satisfies both Mantega's desire
    for a central role and Central Bank's ultimate control over monetary
    policy.   Mantega's statements to the press June 8 that the fund
    will start small but in three to five years be able to draw on new
    oil field revenues to provide a fund of 200 to 300 billion usd is

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    not realistic given these fields are not expected to begin producing
    in this timeframe.   Any proposal to expand the fund to that size in
    the future would likely encounter renewed Central Bank opposition
    and experience difficulty in the congress.  END COMMENT.

    This message was drafted with input from FinAtt Sao Paulo.

    SOBEL

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