Sovereign wealth funds: is Africa next logical target?

IN recent times there has been transfer of wealth from the traditionally rich nations of the West to economies now classified as “Emerging Markets”.

This has been partly due to the adoption of more prudent economic policies in countries such as China, India and the Middle East.

The commodities boom has been the main driver for oil exporting countries which have found themselves with huge trade surpluses and billions of excess US dollars often referred to as “petrodollars”.

After the Asian and Russian financial crises of 1997-98, these governments realised that they could not rely on the International Monetary Fund (IMF) to bail them out but needed sufficient reserves of their own.

These reserves have since reached US$450 billion in Russia and US$1,44 trillion in China, corresponding to one third of Russia’s GDP and half of China’s. This has led to the establishment of Sovereign Wealth Funds (SWF) by many of these countries.
 
SWFs are government-inspired investment vehicles established to manage a nation’s savings. The phenomenon of SWFs can be traced back to the 1970s when states accumulated a lot of reserves which were benchmarked to the stable US dollar and sought to mitigate the risk of negative economic cycles.

In an effort to diversify their wealth, states sought to invest in other assets apart from the traditional gold standard. Most of the funds over the years simply invested their “dollars” in US treasury bonds and had a passive investment strategy.

The trend has been reversed over the years with most SWFs becoming actively managed and taking on more risk to enhance their returns. The funds have diversified to equities, bonds, real estate, private equity etc.
 
Their investment horizon is usually long term with a minimum period of about five years. According to an IMF report SWFs held around US$500 billion in 1990 — this figure has ballooned to US$3 trillion and based on the current path of current accounts this could reach US$10 trillion by 2012.
 
The largest of the SWFs is Abu Dhabi’s Investment Authority which recently injected US$7,5 billion into the sub-prime hit Citibank taking a 4,9% stake and has an estimated asset base of US$875 billion. Norway’s SWF has an estimated US$300 billion spread over 700 companies.

Dubai World, the SWF for Dubai, recently took a stake in MGM, the US movie company, and the chief executive officer was quoted as saying they are the benefit of the notion that “America is on sale”.

On the African front, Libya which has the largest oil reserves on the continent, has also established a SWF and President Muammar Gaddaffi was quoted as saying they expect to “splash” US$200 billion in petrodollars around the world. 

The question on everyone’s mind at this stage considering all these “petrodollars” floating around is: will there be a stampede for foreign direct investment into Africa?

Basic portfolio structuring theory would at this stage suggest a diversification of SWF portfolios to reduce concentration risk from US assets. With the slowdown in the US economy it appears logical to take the money elsewhere.

By their nature SWFs take a long-term view and there has been an indication that the focus is now on emerging markets.

Concern has also been raised in the US over the influence of these funds and calls for more scrutiny over their previously secretive activities especially considering the link to government control which might have political motives.

This might also force SWFs to diversify out of the US. The perception of African countries beleaguered with wars, bad governance and imprudent economic policies has been changing over the years with most investors actually realising value in hard currency terms.
 
There have been increased calls for accountability on the part of SWFs which by their nature do not have to adhere to stringent regulatory and disclosure requirements.

The funds are not under any obligation to disclose their investments except in the case of listed entities. This explains why the size of the funds is difficult to estimate.

The investment strategy of these funds is also not strictly political and this is where Africa will benefit as compared to the Western model where foreign direct investment is usually intertwined with political prescriptions.

This has been evident from the Chinese who are involved in most African countries and adopt quiet diplomacy when it comes to sensitive sovereign and political issues.

The Chinese factor was evident in the Standard Bank deal last year when they took up 20% for US$5 billion and this was widely regarded as China’s largest foreign direct investment deal in Africa.
 
Recent developments from Cuba indicating that the long serving leader, Fidel Castro is finally stepping down after half-a-century in power could see SWFs also looking to invest there motivated by renewed hope that the more pragmatic Raul Castro could now have more latitude to reshape the country for reintegration into the global village.
 
Potential investment opportunities in Africa include mineral resources which are the main driver with gold, platinum and oil leading the pack as these are benefiting from the commodity boom.

The African tourism industry also has serious potential and remains untapped. There is a general shortage of hotel accommodation in Africa with the improved political climate this poses an opportunity for growth.

The financial services sector is also another opportunity. The unbanked population in Africa is still very significant.

In Zimbabwe there has been a dearth of foreign direct investment because of the political climate which culminated in the country risk being perceived to be high.

If the stampede for African assets gains momentum, the opportunity will be a godsend for Zimbabwe as generally assets in the country are considered cheap in hard currency terms.

The notion that the Zimbabwean economy will take a long time to turn around also fits in well with the long-term investment horizon of SWFs.
 
Africa has vast opportunities that remain untapped and the resurgence of SWFs as a diversification strategy, a contingency to influence world commodity prices and to guarantee a sustained growth of their economies through having a stake in the “producer” Africa will lead the “African Renaissance”. 

lNhlanhla Nyathi is a director of a private equity firm and Precious Mhlandla is an equities trader based in Johannesburg, South Africa.

By Nhlanhla Nyathi/Precious Mhlandla 

They can be contacted at kexhe@yahoo.com and pmhlandla@gmail.com

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