Jan 29 2013

Rise of African SWFs

Rise of African SWFs Photo Credit:REUTERS/Louafi Larbi
As African countries' wealth grows, governments are exploring new way to manage their reserves with more fiscal responsibility, accumulate wealth and bring more transparency and accountability in how they manage their new-found riches.

Angola, Ghana and Nigeria - all major or promising hydrocarbons' players - established sovereign wealth funds in 2012, and Tanzania expressed its intention to establish a fund to manage its oil and gas reserves.

African states are relatively minor players in the global SWF industry. Major oil producers Norway and Abu Dhabi lead the way with two of the largest and successful sovereign wealth funds.

"Currently Africa accounts for 14 SWFs with a total amount of USD114 billion in 2009 [latest available data], representing 3% of global SWFs," said Professor Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank, in a note.

"The largest sovereign funds are the Libyan Investment Authority and Algeria's Revenue Regulation Fund with respectively USD65 billion and USD56.7 billion of total assets. However, in comparative terms, this is disproportionately lower than the Norwegian Government Pension Fund's USD656 billion and USD627 billion managed by Abu Dhabi Investment Authority, the world's two largest sovereign funds."

The Libyan example is important for fragile and vulnerable African governments. The Libyan Investment Authority 's wealth offered fiscal stability as the country began the tough task of rebuilding the country after the bloody civil war that led to the ouster of Moammer Gaddafi.

Also, LIA 's investments in Pearsons (owner of Financial Times), Italian bank Unicredit Banca Di Roma, car giant Fiat and other long-term investment portfolio separated the wealth of dictator Moamer Gaddafi with that of the government.

Angola, which has emerged as the continent's second largest oil producer with 1.8 million barrels per day, started a USD5-billion Funo Soberano de Angola (FSDEA) in October.

The Sovereign Wealth Fund Institute notes that the fund has been set up under international governance benchmarks and expects to diversify across a wide number of industries and asset classes.

The SWFInstiute notes the Angola fund will be investing in global private and public stocks, bonds, foreign currencies, financial derivatives, commodities, treasuyry bills and real estate and infrastructure funds.

The fund will be headed by President Jose Eduardo Dos Santos and managed by a three-member executive committee. The country has USD31-billion in international reserves, which is expected to reach nearly USD40-billion by 2016, according to the International Monetary Fund.

The USD5-billion fund was set up in response to the International Monetary Fund's recommendation to create a fund, when Angola borrowed USD1.3-billion as crude oil price plunged in 2008.

Less ambitious is Nigeria's USD1-billion sovereign wealth fund, which was set up to replace the "Excess Crude Account".

The Nigerian Sovereign Investment Authority (NSIA) is set to manage three funds, namely a Future Generations Fund, a Nigerian Infrastructure Fund and Stabilization Fund. The government plans to inject a USD1-billion each year into the fund till 2017.

Nigeria is the region's second largest economy after South Africa, and accounts for 20% of the continent's GDP.

But like most hydrocarbons-dependent economy, the country suffered during the global financial crisis, and the government had to step into the save the banking sector.

The Central Bank of Nigeria (CBN) intervened in 10 out of the 24 banks in 2009, following audits that revealed that most of the intervened banks were insolvent.

The economic shocks are a reminder of the dependence of the Nigerian economy on crude revenues and the need for a stabilization fund for rainy days.

"A SWF is also set in order to stabilize government fiscal and/or foreign exchange revenues and macroeconomic aggregates by smoothing out fluctuations in prices of export commodities," notes AfDB's Mr. Ncube. "A majority of Africa's SWFs are established for the purpose of price and revenue stabilization. Over the past years, resource-rich African countries have accumulated significant excess reserves from exports of natural resources."

Meanwhile, Ghana launched The Petroleum Holding Fund (PHF) and the Ghana Petroleum Funds (GPFs), reportedly with initial investment of USD69-million, according to SWF Institute.

"The fund will be purely allocated to fixed income in investment grade securities. The Minister of Finance will be responsible for managing the petroleum fdunds. They will set investment policy," the Institute notes.

The Bank of Ghana has been tasked with the responsibilities of managing the funds.

"Since the initial mandate is to invest the oil and gas revenues into fixed-income instruments, the Bank of Ghana's skills and experience in managing foreign exchange reserves by investing in the treasury securities of developed economies made it a natural choice for this role," said Efi Chalamish and Steve Opata, analysts at Central Banking Journal.

"However, the Bank of Ghana's mandate may become more challenging over time should the manager of the fund be allowed to invest in corporate bonds and equities."

Meanwhile, Tanzania is considering a sovereign wealth fund to manage its gas riches, especially as the IMF expects USD3-billion of revenues each year.

While sovereign wealth funds are not a new concept in Africa, they are certainly new to some of the new crude and gas producers awash in new-found wealth.

But many sceptics believe that many African countries are ill-equipped to manage these funds.

"There is controversy about the merits of such funds... critics posit that these funds could give too much power to governments and could switch the global economy away from liberalism and therefore hamper market competitiveness," said AfDB's Ncube.

"Moreover, SWFs could be a source of threat of national security in recipient countries if they are used by investors for political rather than economic purposes."

Despite the dangers of the funds being abused, hopefully the SWFs mechanism forces officials to keep an arms' length with the wealth of their nations.

© alifarabia.com 2013

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