Brazil: Sovereign wealth fund?

The Brazilian government is about to send a bill to Congress, to be approved or rejected within 45 days, to create a sovereign wealth fund.  

The fund, which will initially involve about $8.6 billion, or 0.5% of GDP, will be managed by the National Treasury and will not make investments abroad, at least at first, but rather will serve as a 'counter-cyclical savings account'. It would also invest in real-denominated debt, reducing the public debt held by the private sector. With this move, the official primary surplus target of 3.8% of GDP would rise, unofficially, to 4.3%, placating critics who fear a slackening of fiscal policy, although the government has indicated that it would be used to supplement fiscal income in case of downturn.

As in the case of Chile, one of the main reasons for this initiative is concern about exchange rate appreciation. However, the government's future plans for the fund are even more ambitious: according to Finance Minister Guido Mantega, the fund could expand to up to $300 billion within five years as recently discovered offshore oil fields begin to generate output, and revenues. Despite enthusiasm over prospects for development of those offshore reserves, this will prove technically challenging and economically costly, and the suggestion that revenues will rise so rapidly appears over-optimistic, even though state-controlled oil company Petrobras now says it hopes to begin production at its offshore Tupi field in the first quarter of 2009, a year ahead of schedule. Moreover, it has been suggested that the fund would invest in debt of Brazilian companies expanding overseas, rather than international financial assets. This has led to some criticism on the grounds that it would defeat the purpose of risk diversification.