TEXT-Fitch: resource nationalism on the rise
Feb 8 - Link to Fitch Ratings' Report: Resource NationalismFeb 8 - Fitch Ratings says in a newly-published report that the surge in commodity prices over the past decade has, as in past commodity booms, been accompanied by increased 'resource nationalism' whereby governments attempt to capture a larger share of commodity windfalls. Examples are evident across the rating spectrum. Outright expropriation - or nationalisation without compensation - is quite rare. Resource nationalism usually takes the form of 'regulatory expropriation', where regulation and taxes are adjusted to increase the government's share of resource rents. The impact of resource nationalism on sovereign ratings balances potential improvements in government revenue and the efficient use of those revenues, against any deterioration in governance and the rule of law and the impact on investment and long-term growth. Greater state participation in large commodity windfalls can provide additional revenues to improve government finances and accelerate economic development. Longer-term, however, it may curb the revenue-generating capacity of the mining sector. Excessive taxation and/or regulatory uncertainty can undermine the potential of the mining sector to attract new investment and place marginal assets into early retirement. Not all countries have fully capitalised on the commodity boom, thereby losing out on much needed tax and export revenue as well as the opportunity for fast-track development. Although many factors contribute towards a country being able to realise its resource potential, the regulatory and fiscal regime are amongst the most important. Such mining sector governance is highly correlated with a country's overall quality of governance, already an important element of sovereign rating methodology. But there are countries where mining sector policies are relatively weak compared to overall governance, and vice versa. The experiences of Chile and Peru show that, when governments have increased taxes and royalties in a reasonable fashion and have credible fiscal regimes and stable macroeconomic frameworks, foreign direct investment (FDI) has not been deterred by greater state participation. However, opportunistic nationalism and policy uncertainty can be extremely damaging to both investors and countries. Weak regulatory environments such as Argentina and Russia, and/or regulatory uncertainty as in South Africa, can hamper the successful exploitation of mineral endowments and may even lead to a decline in output, despite favourable prices. Commodity endowments can also complicate macroeconomic management and can be a source of social and political tension. The report focuses on non-oil commodities. Rated sovereigns where non-oil primary commodities are an important source of export and government revenue include Bolivia, Chile, Mongolia, Mozambique, Peru, Suriname and Zambia. However, non-oil commodities also play an important role in other emerging markets (EM) such as Brazil, Ghana and South Africa and in developed countries, notably Australia and Canada. 2012's upgrade of Suriname and the Positive Outlook on Mozambique's rating were due in part to their successful exploitation of commodity endowments, and not just high prices. Strong gains in the mining sector also helped to propel Brazil and Peru to investment grade, while prudent management of Chile's copper resources has long been crucial to its high investment grade rating. By contrast, lack of a policy to deal with commodity windfalls constrains many EM ratings, while regulatory uncertainty is part of the rationale for Zambia's current Negative Outlook. The report discusses the winners and losers in the non-oil commodity boom, recent examples of resource nationalism, and which regulatory and fiscal regimes are more likely to maximise government revenues from commodities without jeopardising long-term mining sector potential. However, the report is not intended to be an exhaustive discussion of state intervention in mining, but rather to illustrate through examples the opportunities and pitfalls of attempts to maximise returns from non-oil natural resources. The report, entitled 'Resource Nationalism' is available at www.fitchratings.com Additional information is available at www.fitchratings.com.