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By Rennie Parris, CFA
In April of 2019, as a guest speaker at the University of Guyana’s Sovereign Wealth Fund: For Our Prosperity and Our Posterity event, I presented on Guyana’s Natural Resource Fund – the name of Guyana’s Sovereign Wealth Fund. We explored the requirements for creating a robust Sovereign Wealth Fund.
What are those requirements and why are they relevant to Guyana? Over the next several weeks, I will explain the requirements for creating a well-managed Sovereign Wealth Fund. A Sovereign Wealth Fund is a state-owned fund that consists of a pool of money that is invested for the benefit of the state’s citizens and its economy. Many governments create Sovereign Wealth Funds when they receive a windfall.
Oil is a non-renewable commodity and its price fluctuates with global supply and demand. Since December of 2019, Guyana has been an oil producing nation. Therefore, it is prudent to establish a Sovereign Wealth Fund to invest in assets with low or negative correlation to the price of oil. Establishing a Sovereign Wealth Fund will help protect Guyana’s current and future oil revenues from any decrease in oil prices.
The case study of Venezuela highlights the stunning effects of a country that did not establish a Sovereign Wealth Fund. In 2008, oil prices peaked at around $148 dollars per barrel, resulting in the Government of Venezuelan raking in over US$60 billion in annual oil revenues. The Venezuelan Government used most of the oil revenues to fund social programs and other government expenditures. However, the government failed to invest any of the oil revenues for the future benefit of its citizens and its economy. By 2015, oil accounted for 95% of the country’s exports. Moreover, the Venezuelan Government established its budget on the premise that oil prices would not fall below $60 per barrel. By the end of 2015, oil prices fell below $40 per barrel. Since the government had no Sovereign Wealth Fund to withdraw funds from to stabilize the economy, the Venezuelan economy went into a recession.
Establishing a Sovereign Wealth Fund coupled with an effective management strategy could insulate Guyana’s economy from commodity shocks and could ensure that its citizens benefit from the oil windfall. In this regard, what factors are needed to ensure that Guyana’s Natural Resource Fund is well-managed? In subsequent articles, I will explain what are these necessary factors.
Word of The Day:
Correlation (In financial terms): when two or more asset values move in relation to one another. These assets can range from a correlation of -1 to a correlation of +1. If assets have correlation of -1 it means that the value of those assets move in complete opposite directions. If assets have a correlation of 0 it means that the value of these assets do not have any established pattern of movement in relation to one another. If assets have a correlation of +1 it means that the value of those assets move in the absolute same direction.
About the Author
Rennie Parris has over 15 years’ experience in the financial industry. He led a team at APG Asset Management that was responsible for developing innovative investment strategies and products for the company. He worked at S&P Global where he analyzed investment risk factors for insurance companies. He was responsible for assigning financial strength ratings to these companies and counterparty credit ratings to their fixed-income instruments. Rennie was an Investment Advisor at JP Morgan Chase where he managed multi-million-dollar investment portfolios. He earned a BBA in Finance and a MSc with Honors in Real Estate from The Zicklin School of Business. He is currently pursuing an MBA at The Wharton School and is a Chartered Financial Analyst (CFA) Charterholder.
