Social and Economic Stabilization Fund

Chile Social and Economic Stabilization Fund

Chile US$ 15.0 Billion
Established: 2007
(1987 Copper Stabilization Fund)
Transparency Rating: 10
View Sovereign Fund Transaction Data
View Asset Allocation		 Origin: Copper
Firm Investment Style: Index
Entity Structure: Fund
Population Est.: 17.2 million – 2013
Wealth Per Capita Est.: $871.
Summary
On March 6, 2007, the Economic and Social Stabilization Fund (ESSF) was created with an initial contribution of US$2.58 billion. It replaced the old Copper Stabilization Fund.

Background
The Copper Stabilization Fund was created in 1985 and in 2006 Chile passed the Fiscal Responsibility Law which involved the creation of two new sovereign wealth funds. The first of these is the Pension Reserve Fund (PRF) which is essentially a Savings Fund (no withdrawals are allowed to be made from the fund for a minimum of ten years). This fund receives between 0.2% and 0.5% of GDP depending on the size of Chile’s overall budget surplus each year, and initially received a one-off sum of $600 million in 2006 to kick-start the fund.

In 2007, the Chilean Government created the second fund, the Economic and Social Stabilization Fund (ESSF). This fund replaced the original Copper Stabilization Fund. It receives fiscal surpluses which are above 1% of GDP and came into existence with a one-off payment of approximately $5 billion (as a result of the closure of the original Copper Stabilization Fund. Through the ministry of finance of Chile, the financial committee proposed investment policy on the social and economic stabilization fund to the minister of finance during March of 2007. The investment strategy intends to diversify assets in the fund, putting 15% of the portfolio into variable income assets, 20% in corporate fixed income papers, gradually adjusting assets currently held, and especially liquid assets.

 Strategy & Objectives
The Economic and Social Stabilization Fund, on the other hand, has macroeconomic stabilization objectives. It has the aim of accumulating excess copper revenues when the price of copper is high in order to channel revenues into the budget when the price of copper is low, thereby smoothing out government expenditure. As a Stabilization Fund, it has a lower risk profile in terms of its investments because it must take a short-term view due to liquidity concerns. The strategy is to be gradually implemented and external managers will be responsible for part of the fund. The fund primarily invests in currencies and foreign government agency bonds & financial institution bonds.

Governance
According to the Fiscal Responsibility Law, the ESSF receives each year the positive balance resulting from the difference between the effective fiscal surplus and the contributions to the Pension Reserve Fund and to the Central Bank of Chile, discounting the payment of public debt and advances made the year before.

*The Chilean sovereign wealth funds were historically aggregated into one profile.

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