FEM – Macroeconomic Stabilization Fund

 
Summary:
In 1998 the ‘Macroeconomic Stabilization Fund,’ also known as FEM was established as a result of advice from the IMF. It receives revenues above a reference price, currently $9 per barrel, that is based on the average oil price of the last five years. Oil revenues above the reference price are transferred to the fund. If oil prices drop below the reference price, the fund transfers revenues to the treasury to substitute the revenues it would otherwise have received if oil prices had been stable. FEM, which translates to the Fund for Investment of Macroeconomic Stabilization, is a fund created by the authority of the Presidency of the Republic. The regulation of the fund by the Board of the Central Bank of Venezuela (BCV) began in December of 1999. The fund serves to hedge the fluctuation of income generated by crude oil.

Corporate Governance:
The Board of the Central Bank of Venezuela (BCV) governs FEM and ensures compliance, approves annual operating budgets, approves annual fund reports, issues internal regulations, approves expenditures, establishes policies, and ensures that the fund functions as they desire. Approved annual fund reports are submitted to congress no later than fifteen days. The leadership of the central bank is appointed by the president. The legislative has limited involvement with any decision-making regarding the fund, nor does it have an oversight role. The majority of the decision-making powers lie, if indirectly, with the president. In 1999, Hugo Chavez further increased his decision-making powers over the fund and is able to make expenditure decisions from the fund by decree. Combined with the fact that the fund receives revenues that are determined by rules that the president has the ability to regularly change, the Venezuelan SWF exhibits especially low levels of effective governance.

Strategies & Objectives:
The main resource of FEM consist of the revenue generated from Petróleos de Venezuela SA and any profits resulting from crude oil operations by Petróleos de Venezuela SA. Any contributions made by the National Executive may also be considered a resource for FEM. All countries that operate an SWF and that rely heavily on a single export commodity have the objective of using the fund to stimulate non-commodity sectors of the economy in an effort to diversify and thereby reduce reliance on the dominant export commodity. This is particularly the case in Venezuela, due to the country’s excessive reliance on oil for foreign exchange earnings. The ‘Macroeconomic Stabilization Fund’ also has the vital objective of assisting with budget planning and addresses issues such as the fluctuation of prices in international commodity markets. The fund aims to do this by halting excessive and wasteful spending during boom times and by preventing the temptation of taking on new debt in bust times (debt is often taken on in order to continue a spending binge that was started during a boom period). A further objective of all commodity-based SWFs but in particular Venezuela’s ‘Macroeconomic Stabilization Fund’ is the aim of countering the ‘Dutch Disease.’ This is achieved by sterilizing excess earnings from exports by keeping them outside the domestic economy. A final aim of the ‘Macroeconomic Stabilization Fund’ is to increase the transparency of transactions related to Venezuela’s oil wealth.