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Monday, 22 September 2014
Africa sovereign funds tread tricky path on investments
London: As the oil producers of Sub-Saharan Africa rush to create sovereign wealth funds, competing pressures to boost living standards now while saving for the future can throw up as many problems as they solve.
Jose Filomeno dos Santos, chairman of Angola’s fledgling $5 billion fund, noted that while his country has one of Africa’s highest economic growth rates, it still has one of the continent’s highest child mortality rates.
“(Angola) still lacks doctors, it still lacks hospitals,” he told sovereign wealth fund conference at London’s Chatham House last week.
“These are things that take time to build. Investment has to be done so that there’s a generation in the future that the sovereign wealth fund will be serving,” he said.
African nations are relative newcomers to the club of countries running these funds. But the history of others made rich by commodities underlines the difficulty of ploughing the money into projects that will keep generating wealth when the natural resources run out — and the temptation to withdraw cash to douse crises.
Those that have drawn on sovereign wealth funds in recent years include Kuwait, to stop a slide on the local bourse and help banks raise fresh capital; Russia, to buy local stocks; and Kazakhstan, to bail out the domestic financial sector.
Then there is the risk of money being used to paper over long-term problems or line the pockets of corrupt politicians.
New oil discoveries and robust revenues in recent years from resource exports has increased interest in the funds set up by countries including Ghana, which now has around $450 million in wealth fund assets, while Nigeria has around $1 billion and Angola’s vehicle is poised to start deploying $5 billion in assets.
Sovereign funds are widely regarded as a means of countering the “resource curse” that attracts labour and capital to a single industry with a finite economic life.
The idea is to use resource wealth to develop manufacturing and service industries that can offer workers more skills and income and make national wealth more sustainable.
That requires robust oversight and clear goals.
“Before jumping on the bandwagon of creating sovereign wealth funds, it’s important that Africa pauses and thinks very carefully whether it has the right institutional framework,” said Virgil Mendoza, head of Central Bank Relations at Standard Bank, speaking at the conference.
Most sovereign funds have a remit to preserve the windfall from oil revenues for future generations. But they may also have a ‘stabilising’ role, to act as a buffer against commodity price volatility so that public spending can continue during times of falling oil export revenues.
A sovereign wealth fund with a remit focused on stabilisation can, Mendoza noted, create a moral hazard.
“There is a potential risk whereby you have a government that is incapable of managing the economy correctly, saying ‘we don’t have to manage things prudently because we have a stabilisation fund’,” he said.