Posted by: zanshin, 2008-06-12 09:59

Story

Flaherty Says Canada May Create Sovereign Wealth Fund (Update2)

Theophilos Argitis and Greg Quinn, 2008-06-12 (Thursday), Bloomberg
Canada, home to the world's second- biggest crude oil reserves, may consider setting up a sovereign wealth fund to invest windfalls from record energy prices, Finance Minister Jim Flaherty said.

``I would not rule it out over time,'' Flaherty said in an interview today at the Vancouver international airport, on his way to a meeting of Group of Eight ministers in Osaka, Japan.

The Organization for Economic Cooperation and Development said yesterday that Canada should save revenue from high oil prices and convert it into foreign assets. Such a fund would protect against the so-called Dutch disease, which occurs when an energy boom drives up the local currency and hurts demand for a country's manufactured exports, the OECD said.

Flaherty, 58, said he discussed the idea of a sovereign fund yesterday with OECD Secretary-General Angel Gurria when they were both in Ottawa.

``It's an interesting idea, we can look at it,'' Flaherty said.

Sovereign funds control an estimated $2.5 trillion worldwide and Morgan Stanley estimates government-run investment funds may reach $12 trillion within a decade.

Commodity exporters including Norway, Chile and Libya have special accounts to invest their money to protect manufacturers and save for future generations. Sovereign investment funds from countries such as China and Singapore have invested in stocks of foreign as well as domestic companies.

`Force for Stability'

``The general view seems to be that sovereign wealth funds are a force for stability in capital markets,'' Flaherty said. ``That wasn't quite the view a year ago.''

Mohamed El-Erian, who helps oversee more than $800 billion as co-chief executive officer of Pacific Investment Management Co., said last month that the U.S. credit crisis would have been worse without investments from sovereign wealth funds.

Canada has benefited from a global commodities boom that allowed the federal government to reduce the national debt by almost C$100 billion ($97.7 billion) since 1997 even as spending rose. Canada has recorded budget surpluses for a decade, an unmatched record among the Group of Seven nations. Flaherty's latest budget cut taxes and shrank the size of estimated surpluses over the next three years.

``We have chosen to reduce taxes and actually not to accumulate tax revenue into special funds,'' Flaherty said.

In December, Flaherty said the government didn't have any ``extraordinary'' plans for extra cash such as a sovereign fund.

Oil, Currency

Canada's oil reserves are second only to Saudi Arabia's, with production projected to grow from about 2.7 million barrels per day in 2007 to 3.5 million barrels per day in 2015, according to the country's National Energy Board.

Rising oil wealth in provinces such as Alberta and Newfoundland drove the Canadian dollar to a record 90.58 Canadian cents per U.S. dollar on Nov. 7. It traded for C$1.0230 per U.S. dollar at 6:17 p.m. Toronto time today.

The appreciation is forcing some auto plants and lumber mills to lower output or close as they become uncompetitive.

Furniture maker Shermag Inc., for example, has been operating under protection from creditors since May 5 after struggling with a high currency, falling U.S. demand and overseas competitors.

Canada sends three-quarters of its exports to the U.S.

`Energy Superpower'

Prime Minister Stephen Harper has touted Canada as an ``energy superpower'' that relies on private investment to develop its reserves.

The relative opaqueness of many sovereign wealth funds has led to some calls for tighter regulation, or limits on what industries they can invest in. The European Commission in February called for an international accord to curb the political influence of the funds.

Canada last year issued guidelines meant to keep certain foreign, state-run firms and investment funds from gaining control of companies in strategic industries such as energy.

The Norwegian sovereign fund, the world's second-largest, in the first three months of this year suffered the worst quarter since it was established in 1998, as a global debt squeeze battered markets. The Government Pension Fund - Global's investments dropped 5.6 percent in the first three months of the year, the central bank said on May 23.

To contact the reporter on this story: Theophilos Argitis in Vancouver at targitis@bloomberg.net; Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: June 12, 2008 18:20 EDT

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Canada,   Chile,   China,   commodities,   Energy,   Finance,   Japan,   Libya,   Norway,   OECD,   Oil,   Saudi Arabia,   Singapore,   Sovereign Wealth Funds,  

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