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
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
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
The report, entitled 'Resource Nationalism' is available at www.fitchratings.com
Additional information is available at www.fitchratings.com.