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Managing Sovereign Commodity Exposures in an Uncertain World
For example, exporter and importer nations,
most notably in Latin America and Africa, have
been setting up financial hedging programs
to hedge oil exports, fuel import costs and
agricultural commodity imports. Elsewhere,
for example, in Asia, government-owned
stabilisation funds have historically helped
to subsidise oil or agricultural products
domestically. For many, while commodities
represent only a small part of the national
economy, the nature of subsidy and royalty
flows often mean that they form a much
larger part of fiscal budgets. As this insurance
mentality spreads, and the management of
commodity risk takes a more central place
in strategic planning, so the role of state
intervention will be revised profoundly.
Despite this growing trend for countries to have
more control of their commodity exposures,
many state agencies are still relatively inactive
in this field, and seek to absorb price volatility as
it arises. Leaders in this field have shown that it
is possible to protect citizens, fiscal budgets and
national industry from avoidable volatility. The use
of technical committees and strong governance
oversight ensures strategic programs are
developed and that transparency is maintained.
With the tools and technical capabilities widely
available to governments for risk mitigation, there
is an established method for countries with little
track record to look to risk mitigation strategies
for their commodity exposures.
Citi is able to work with governments and public
agencies to:
• identify and quantify potential impacts
of commodity market risk exposures on
governments’ economic and financial
performance;
• define the risk tolerance, constraints and
overall objectives of suitable hedging
programs, potentially benchmarked versus
comparable peers;
• develop and execute communication strategy
within both Treasury and Procurement;
• implement chosen strategies allowing
government agencies to manage their budgets
with visibility; and
• review such programs periodically to assess
the effectiveness of hedging tools, rebalancing
as necessary.