What is the Economic And Social Stabilization Fund?
The Economic and Social Stabilization Fund is a government-owned investment organization that manages a sovereign wealth fund for the government of Chile. The funds deposited in the ESSF were sourced from surplus revenues from Chile's copper exports.
Understanding the Economic and Social Stabilization Fund (Chile)
The ESSF was established in March 2007 with a contribution of $2.58 billion, most of which was from the dissolution of the Copper Stabilization Fund, established in 1985, which the ESSF replaced. The ESSF was created to stabilize revenues for the government of Chile and to help overcome fiscal deficits when copper revenues suddenly decline, as copper is Chile’s main export, or in periods of low growth. The fund supports fiscal spending stabilization by reducing the exposure to global business cycles as well as volatility from changes in copper price. It also provides funding for public education, health, and housing plans. The other sovereign wealth fund that was created around the same time is the Pension Reserve Fund (PRF), which aims to help finance pension and social welfare spending.
The ESSF receives deposits from the Chilean government each year where there is a fiscal surplus. It receives the resulting positive balance from the difference between the fiscal surplus and deposits to the Pension Reserve Fund and the Central Bank of Chile. Contributions into the PRF are a minimum of 0.2% of the prior year’s GDP. The majority of the ESSF is managed by the Central Bank of Chile. Appointed members of a Financial Committee are responsible for the daily running operations of the fund.
The ESSF is invested in the following asset classes: banking assets, Treasury bill, and sovereign bonds, inflation-indexed sovereign bonds, and equities. Its primary investment objective is to maximize value to cover cyclical reductions in fiscal revenues while minimizing risk. It employs diversification as part of its investment strategy. According to the Ministry of Finance, the portfolio has a high level of liquidity and low credit risk and volatility. It invests using a passive strategy, which means only minor deviations are permitted within the portfolio as far as asset allocation.