Sovereign Fund of Brazil

What is the Sovereign Fund of Brazil?

The Sovereign Fund of Brazil is the country’s government-controlled financial vehicle with different revenue sources, objectives, and investment approaches. It was established to insulate the country from short-term political pressure.

Some of the Sovereign Fund of Brazil’s objectives were to fund projects of strategic interest to the country and expand investment outside the local economy by national firms. Founded in 2008, it’s since been disbanded to open up the Brazilian national economy.

Breaking Down the Sovereign Fund of Brazil

As with other state-owned wealth funds, the Sovereign Fund of Brazil was established by the country’s national government in 2008. It was designed to benefit the country’s national economy and investors. However, the government’s heavy external debt obligations forced the dissolution of the sovereign wealth fund in 2019, with the remaining reserve assets used to service the government’s debt. ,

Upon its establishment, the Sovereign Fund of Brazil was set up with an initial capital of $14.2 billion. The country’s booming economy motivated the establishment of the sovereign wealth fund. In 2010, the national government declared its intent to purchase external sovereign funds denominated in U.S. dollars in a bid to arrest the rapidly depreciating Brazilian national currency.

Due to the importance of the country’s strategic activities, the Sovereign Fund of Brazil advisory board included, among others, the President of the country’s central bank and the Minister for Finance. The board was tasked to offer advisory services and ensure that the sovereign wealth fund aligned with its investment goals.

History of Sovereign Funds

The history of sovereign funds dates back to 1953 when the Kuwait Investment Board created a sovereign fund to manage its oil exports fund. To reduce Kuwait’s reliance on its finite oil surplus, there was a need to invest the country’s surplus revenues from oil, which led to the establishment of an office in London in 1953 to implement this role.

The office serves as the independent government body that manages two major funds in Kuwait. Currently, the Government Pension Fund Global of Norway is the largest sovereign fund by far compared to other sovereign funds in the world. Its initial endowment came from Norway’s oil surplus.

Another country with a large wealth fund is the United Arab Emirates (UAE), whose sovereign fund is meant for oil reserves. In 2019, UAE announced its intent to invest $10 million in Brazil and use the country as a gateway to other countries in Latin America.

The fund will be directed to oil, infrastructure, and gas. It is one method that UAE plans to use to diversify assets in its sovereign wealth fund to reduce its overreliance on oil and protect itself from oil-related risks.

Investment Goals of the Sovereign Wealth Fund of Brazil

One of the main reasons for establishing the Sovereign Fund of Brazil was to support the national firms in their exporting efforts and expand the country’s national economy.

Under the Brazilian National Treasury’s custodianship, the government intended to invest the funds during periods of economic stability and expend the funds during the financial crisis.

Most of the sovereign wealth fund’s revenue was stored in national treasury bonds in frozen form, impeding the then common trend of investing sovereign funds in private equities and currencies of developed economies. In 2019, the Sovereign Fund of Brazil was shut down to pave the way for an economic rebound following a reckless investment decision in Petrobras stock market, which caused a 40% fall in stock value.

Special Considerations

The Sovereign Wealth Fund of Brazil is just one example of other sovereign wealth funds that have operated for many decades in different niches of global financial markets. These sovereign wealth funds have, in recent years, become the target of political controversy, especially in the period preceding the stock market collapse of 2008-2009.

The premise of the political reservation or outright rejection of these sovereign funds has been their lack of corporate governance and transparency. Another recurring question concerning sovereign wealth funds has been whether a country’s fiscal policy can help a sovereign wealth fund to maintain a stable equilibrium of interests between the recipient economies and local investors.

In the U.S., the sovereign investment funds are reviewed by the President’s Working Group on Financial Markets. In contrast, investments from sovereign funds are assessed by the Committee on Foreign Investment in the United States (CFIUS).

More Resources

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Brazilian Real (BRL)
• European Sovereign Debt Crisis
• Korea Investment Corporation (KIC)
• Sovereign Wealth Fund (SWF)
• Heritage and Stabilization Fund (HSF)
• See all fixed income resources