WHAT IS 'Macroeconomic Stabilization Fund (FEM)'

The Macroeconomic Stabilization Fund (FEM) was established by Venezuela to stabilize cash flow from oil production.

BREAKING DOWN 'Macroeconomic Stabilization Fund (FEM)'

The Macroeconomic Stabilization Fund (FEM) was created in 1998 at the request of the International Monetary Fund, or IMF, as a fund to receive income generated from oil production above a certain price per barrel and pay out the difference if the price falls below that level. Regulation of the fund by the central bank board began in 1999. By December 2001, the fund had US$7.1 billion in assets. In 2003, the government tapped the fund to cover its fiscal budget deficit, withdrawing more than US$6 billion.

Stabilization funds

A stabilization fund is a mechanism set up by a government or central bank to insulate the domestic economy from large influxes of revenue, such as from commodities such as oil. A primary motivation is maintaining steady government revenue in the face of major commodity price fluctuations as well as the avoidance of inflation. This usually is accomplished through the purchase of foreign denominated debt, especially if the goal is to prevent overheating in the domestic economy. The first such fund was in Kuwait in 1953. Stabilization funds since have been set up for Russia, Norway, Chile, Oman, Kuwait, Papua New Guinea the UAE and Iran. They also may be set up for exchange rate stabilization as in the European financial Stability Facility, the UK Exchange Equalization Account and the US Exchange Stabilization Fund.

Dependence on revenue from natural resources tends to cause fiscal volatility and macroeconomic instability. Reducing this dependence is made difficult by the so-called Dutch Disease, which occurs when the production of natural resources attracts large foreign capital inflows. This in turn causes appreciation of the real exchange rates and weakens the competitiveness of domestic tradable sectors. The current account deteriorates, making the economies vulnerable to price swings. In addition, governments of resource-rich economies, especially those lacking strong institutional and legal framework, tend to make more-than-proportional increases in discretionary spending following commodity-driven fund inflows.

Studies have shown that stabilization funds contribute to smoothing government expenditure. Expenditure volatility in countries with stabilization funds can be 10-15 percent percent lower than that in economies without them. Stabilization funds can smooth expenditure volatility. A strong institutional framework is key in managing stabilization funds and their resources. Export product diversification tends to reduce expenditure volatility. Countries with better-managed real expenditure have less volatile public spending. And then, domestic and international financial markets can function as buffers to smooth expenditures. Better institutions have been shown to reduce fiscal volatility.

RELATED TERMS
  1. Price Per Flowing Barrel

    A metric used to determine the value of a oil and gas company. ...
  2. Oil Reserves

    Oil reserves are an estimate of the amount of crude oil located ...
  3. Peak Oil

    Peak oil is the hypothetical point at which global oil production ...
  4. Global Recession

    A global recession is an extended period of economic decline ...
  5. Estimated Ultimate Recovery - EUR

    Estimated Ultimate Recovery (EUR) is a production term used in ...
  6. Futures Contract

    A contractual agreement, generally made on the trading floor ...
Related Articles
  1. Investing

    Venezuela Teeters On Edge As Oil Revenues Shrink

    Low oil prices have drastically revised the economic status quo -- dealing a destabilizing blow to oil-exporters like Venezuela due to falling oil revenue.
  2. Investing

    These Oil Stocks Are at Risk From Venezuela's Chaos

    Things are going from bad to worse for oil companies in Venezuela.
  3. Financial Advisor

    Oil Is Cheaper Than Bread In Venezuela...The Country Is In Chaos (BAC, TAPR)

    Venezuela is floundering, and the story has more to do with just the falling price of oil.
  4. Insights

    Three Economic Reactions to Record Low Oil Prices

    The United States, Venezuela, and Russia are all impacted in very different ways by the low price of crude oil.
  5. Financial Advisor

    The Biggest Oil Producers in Latin America

    Find out which countries produce the most oil in Latin America, and learn about some of the biggest oil companies operating in each country.
  6. Investing

    Who is Most Affected by Lower Oil Prices?

    With low oil prices affecting just about everyone, from citizens to corporations to entire nations, we look at who wins and who loses with the price drop.
  7. Tech

    Venezuela to Launch National Cryptocurrency: The Petro

    Cash-starved Venezuela will soon issue the world’s first national cryptocurrency called the Petro.
  8. Insights

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  9. Financial Advisor

    Oil Prices Expected to Surge in 2017

    Oil has made headlines for its plummeting prices this year. When will prices rise again?
  10. Investing

    Who Benefits (And Loses) From Increasing Oil Production?

    With OPEC expected to continue the oversupply of oil, there will be winners and losers among nations and businesses associated with the oil economy.
RELATED FAQS
  1. How does the price of oil affect Venezuela's economy?

    Learn how the price of oil has a direct relationship with Venezuela's economy. High oil prices result in good times for the ... Read Answer >>
  2. How do externalities affect equilibrium and create market failure?

    Learn about the responsibilities of the International Monetary Fund and its functions regarding the international monetary ... Read Answer >>
  3. Why are stocks and oil so correlated right now?

    Learn whether the stock market and oil prices will continue their highly correlated price relationship or decouple again ... Read Answer >>
  4. How does the price of oil affect the stock market?

    Read about how the price of oil might impact the stock market and why economists have not been able to find a strong correlation ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center