Sovereign Wealth Growth Shifts to Africa

Emerging Markets IMF editions, October 2015

With Lucien Chauvin

The engine of sovereign wealth fund growth may be shifting to Africa and other frontier states, as the nations with the most developed funds begin withdrawing assets to compensate for a low oil price.

This week the Norwegian government rolled out its new state budget proposal for 2016, stating that Norway will be withdrawing oil revenue from its sovereign wealth fund to plug deficits. Government Pension Fund Global, run for the Norwegian state by Norges Bank Investment Management, is believed to be the world’s largest sovereign wealth fund, with NOK6.92 trillion ($854.9 billion) under management.

“This is yet another sign that the buying activity of oil rich sovereign wealth funds may well be a thing of the past,” said Alexander Free, an analyst with Nasdaq’s Advisory Services. “Asset sales by oil-dependent SWFs show no signs of slowing down.”

Although Gulf sovereign wealth funds do not operate with anything like the same level of transparency and disclosure as Norway’s, it is believed that both the Saudi Arabian Monetary Agency and the Abu Dhabi Investment Authority, among others, have seen funds taken from them for budget purposes in recent months. SAMA, in particular, is understood to have called back billions of dollars worth of mandates from third-party asset managers.

If the world’s biggest sovereign funds are briefly shrinking, the sector’s momentum may instead be taken up by the numerous new wealth vehicles under development in frontier markets, notably Mongolia, Papua New Guinea, Kazakhstan, Azerbaijan and in particular across Africa. There, new or recent funds include Angola, Nigeria, Ghana and Mauritania, in addition to longer-standing funds in Equatorial Guinea and Gabon.

While not all have moved forward as quickly as planned, there seems to be widespread intent to develop new vehicles. “Most African countries have been blamed for mismanaging natural resource wealth,” said Caleb Fundanga, head of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa, and the former central bank governor of Zambia.

“We think we can change this by improving a number of things,” including concessions, adequate taxation and viable projects. “Once we have projects and taxes, what do we do with it? That is where sovereign wealth funds comes in.”

There is some doubt as to whether so many countries actually need sovereign wealth funds; both Nigeria’s and Angola’s were set up some time after their oil booms, and missed out on the largest expansion of wealth either country had ever experienced. Oil production is well down from peak levels in both.

But in many cases the intention for sovereign wealth funds is as much about good governance as exceptional returns. “Corruption is a major issue,” Fundanga said. “We want to mainstream anti-corruption in al our activities.” The level of disclosure that can be applied to a sovereign wealth fund is sometimes seen as an antidote to this – an approach maintained, for example, with East Timor’s sovereign wealth fund, considered among the most transparent in the world.

Nigeria shows a trend to divide sovereign wealth in to a number of categories, some serving future generations, some the needs today. “Sovereign wealth funds are not just for the future,” said Fundanga. “SWFs can be created in order to put together money for investment in infrastructure needs, education and other immediate needs.” In Nigeria, for example, 40% of commitments go to a future generation fund, with the remainder split between a stabilisation fund and an infrastructure vehicle. A similar split is envisaged for the Libyan Investment Authority once its assets are unfrozen.