GENEVA (IDN) - There is good news from Africa. The continent is witnessing the second fastest economic growth, and according to knowledgeable sources it may grow even faster in 2013. What is more, currently Africa accounts for 14 sovereign wealth funds (SWFs) with a total amount of USD114 billion in 2009, representing 3% of global SWFs, and that share is expected to increase in future with the establishment of new SWFs.
After expanding 5% a year in the past two years, well above the global average, Africa’s GDP (Gross Domestic Product) is on track to grow by 5.3% this year. This was the upshot od from a televised debate with the presidents of Nigeria and South Africa and business leaders at the 43rd World Economic Forum Annual Meeting in Davos, Switzerland.
“If certain bottlenecks were taken out, I can easily see that doubling,” said Graham Mackay, Chairman of the British SABMiller. The global brewer was established in South Africa more than a century ago and has extensive investments across the continent. Mackay singled out infrastructure development as probably the key driver to Africa’s continued economic progress.
South African President Jacob G. Zuma stressed that the countries that comprise Africa are determined to consolidate their gains. “We realize that intra-trade is not enough and are working hard on that,” he said. Africa is not consumed with conflict, he added. “We are also dealing with the economic issues. We’ve just discussed and agreed to integrate three of the five economic regions, creating a free trade area of more than half a billion people.”
There are risks for investors wherever you invest in the world, said Nigerian President Goodluck Ebele Jonathan. But in Africa, political instability is no longer one of them. “Presently, about three African states have conducted successful elections two times,” he said. “Most African states have stable political systems.”
Africa’s leaders recognize that there are risks, but they said they are dealing with them. Nigeria, for example, is diversifying beyond oil into commercial agriculture to avert economic damage from volatile commodity prices. On recent labour unrest in South Africa, Zuma said solutions are being discussed by all sectors, including the government, labour unions, businesses and civil society.
Louise Arbour, President and Chief Executive Officer of the Brussels-based International Crisis Group (ICG), warned about the risk of the current armed unrest in Mali destabilizing West Africa, but said that the fight against terrorism should not obscure equally important underlying issues that Africa must address, which are governance, political and economic exclusion and very weak institutions.
“The narrative in Africa is changing and changing very fast,” said Sunil Bharti Mittal, Chairman and Group Chief Executive Officer, Bharti Enterprises of India. “There is no question that you are seeing more and more countries moving on to the democratic process and moving up the growth curve.” Bharti has been very successful in setting up telecommunications companies on the continent.
“From the standpoint of investors and people coming into Africa, I think what is important to see is commitment from the political leadership to secure investments, ensure there are no major fallouts of any terror activities which have recently developed, and, importantly, manage foreign exchange in a manner which does not deliver shocks,” he added. Mittal also called for repatriation of business profits becoming the norm and development of Africa’s financial system.
The 43rd World Economic Forum Annual Meeting is taking place from January 23 to 27 under the theme Resilient Dynamism. More than 2,500 participants from over 100 countries are taking part in the Meeting. They include nearly 50 heads of state or government and more than 1,500 business leaders from the Forum’s 1,000 Member companies, as well as Social Entrepreneurs, Global Shapers, Young Global Leaders and representatives from civil society, media, academia and the arts.
Sovereign wealth funds (SWFs)
In run-up to the World Economic Forum, the African Development Bank reported that in recent years, with the sustained rise in commodity prices, significant revenues from commodity exports have led to the establishment of SWF in a number of African countries, especially by oil/gas exporters. Currently, 58% of SWF assets worldwide are derived from oil and gas revenues. Major global players of SWFs include China, Middle East and Norway which cumulate more than two-third of global SWFs’ assets.
Africa accounts for 14 SWFs with a total amount of USD114 billion in 2009, representing 3% of global SWFs. 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.
Africa’s contribution could increase in future with the establishment of new SWFs, the African Development Bank reported. It said that in 2012, three SWFs have been launched in Angola, Ghana, and Nigeria while the Tanzanian government has announced plans to create its sovereign fund to manage the country’s revenues from new gas and oil discoveries.
In addition, recent major oil and gas discoveries in East and West Africa are likely to give new opportunities for more African SWFs in the mid-term to foster management of revenues from these new resource discoveries.
The main purpose of a SWF is to ensure that resources of a country are preserved for future generations. Yet, there is controversy about the merits of such funds. On the one hand, advocates for SWFs argue that these funds can help boost economic growth and prosperity for current and future generations. Conversely, 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.
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.
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.
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. In the short term, because of commodity price fluctuations observed during the past years, countries have put in mechanisms to smooth their revenues/expenditures in order to ensure a better control of government expenditure planning. By creating SWFs, policymakers try to smooth the volatility of resource-driven revenues by lowering the effect of boom and bust cycles resulting from volatility in commodity prices. In this way, SWFs could be used to absorb large foreign exchange surpluses.
Furthermore, wealth diversification is another motivation for the widespread use of SWFs around the world. Prudent diversification of the natural resource generated wealth reflects a responsible approach for management of the country’s assets.
In some countries, the decision to create SWFs may be triggered by other factors such as supporting sustainable spending by the government, and reducing political temptation for malfeasance and corruption in the use of natural resource revenues. Thus, investing in SWFs rather than in traditional central bank’s reserve assets could reduce opportunity costs of reserves holdings and could shift the focus on return generation by the fund.
Role of SWFs in Africa?
Promoting intra-African investments and enhancing productivity: African SWFs can enhance productivity and spur intra-African investment through allocating part of their assets to growing sectors in Africa. For instance, the newly launched Angolan SWF is designed to target investments in Sub-Saharan Africa primarily in infrastructure and hospitality sectors. Other Sub-Saharan African sectors targeted by the Angolan Fund include agriculture, water, power generation and transport. Thus, African SWFs may benefit from the growth potential of African countries which offer significant wealth creation opportunities.
Fostering the role of the private sector: The SWFs are generally oriented towards investments in global financial markets rather than in emerging or developing countries, says the African Development Bank. However, African countries can use their own SWF assets to invest in domestic companies to boost growth and to create jobs through spurring private sector’s role. The SWFs in Africa may position themselves beyond the objective of macroeconomic stabilization and focus on maximization of investments and returns especially in domestic assets. Moreover, SWFs can indirectly foster the private sector by supporting sound fiscal and monetary policies. This can prompt a fiscal-friendly environment for private sector companies.
The Bank points out that African SWFs are encountering many challenges that slow their expansion. Governance, especially lack of transparency and accountability are the most important issues facing SWFs in Africa. Recent evidence indicates that African SWFs have low levels of transparency as measured by the Linaburg-Maduell Transparency Index.
In Nigeria for instance, lack of transparency has led to constant political wrangling between federal governments and states. Over the long term, lack of transparency and accountability, and weak institutions could lead to risk of expropriation and corruption. According to the African Development Bank, African SWFs are also facing internal risk management issues including operational and financial risks which tend to be high for new organizations in developing countries. [IDN-InDepthNews – January 23, 2013]
2013 IDN-InDepthNews | Analysis That Matters
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