The majority of wealth funds of the oil-exporting countries of the
Middle East and Asia are stabilisation funds to act as a buffer against
the volatility of oil and gas prices in the international market while
in the African context savings and development is also a key objective.
TEA Graphic
By Christine Mungai The EastAfrican
In Summary
- Question vexing analysts is whether these funds are suitable for the region’s economic, social and demographic profile, considering that the countries in which sovereign wealth funds have been successful have small populations, huge current account surpluses and very low public debt—none of which characterises EA.
- Conflicting political interests are also a problem that governments have to negotiate, particularly in the context of devolving power to sub-national units as has been done in Kenya.
- Still, sovereign wealth funds reflect increasing acceptance of the power of finance by developing countries, giving emerging economies an opportunity to achieve some form of balance between globalisation and national sovereignty.
Sovereign wealth funds are fast becoming the
“must-have” for any natural resource-exporting country, and for any
country hoping to commercialise reserves of oil, gas or minerals in the
near future. East Africa has not been left behind, with Kenya, Uganda
and Tanzania all considering the establishment of such funds.
But the question vexing analysts is whether these
funds are suitable for the region’s economic, social and demographic
profile, considering that the countries in which sovereign wealth funds
have been successful have small populations, huge current account
surpluses and very low public debt—none of which characterises East
Africa.
According to some estimates, the total wealth held
by such funds globally is more than $5 trillion, expected to grow
quickly as more and more countries move to set up their own national
funds.
Originally created in the 1950s by oil and
resource-producing countries to help stabilise their economies against
fluctuating commodity prices, and to provide a source of wealth for
future generations, they have proliferated considerably in recent years.
Since 2005, 32 sovereign wealth funds have been
created around the world; about 60 per cent are financed by proceeds
from oil and gas while the rest are based on non-commodity sources, such
as from the manufacturing sector.
Last month, Tanzania enacted the Natural Gas
Policy of 2013, which provides for the establishment of a sovereign
wealth fund, a state-owned investment vehicle where proceeds from its
vast reserves of natural gas will be channelled to finance social and
economic development; and generate wealth for future generations.
The creation of a similar fund in Kenya was part
of President Uhuru Kenyatta’s Jubilee campaign manifesto. In October, a
taskforce on parastatal reforms set up by the President proposed the
establishment of the Kenya Sovereign Wealth Fund.
It is intended to support local communities with
the proceeds of oil, gas and mining, support government savings and act
as a stabilisation fund to cushion the economy from the abrupt inflow of
foreign exchange, which could destabilise monetary policy, making
exports more expensive and thus negatively affect other sectors of the
economy such as agriculture.
“A sovereign wealth fund is a good idea. Kenya has
had a problem with high domestic borrowing which crowds out the private
sector and pushes up interest rates. Government can borrow from the
fund and reduce competition for credit,” says Dr Moses Ikiara, managing
director of the Kenya Investment Authority (KenInvest). “It will also
allow us to do long term investments in infrastructure and energy.”
Uganda and Mozambique, too, are mulling the
setting up of such funds, anticipating the windfall that will come with
the commercialisation of oil and gas in the next five to 10 years.
Rwanda already has a sovereign wealth fund in the
form of the Agaciro Development Fund, which was set up to support the
government development budget following an abrupt cut in donor aid in
August 2012.
Valued at $41 million as of June 2013, Agaciro is
however not funded by the proceeds of natural resources but rather is
financed by voluntary contributions from Rwandan citizens at home and
abroad, as well as “private companies and friends of Rwanda”, according
to official government statements.
What critics say
The majority of wealth funds of the oil-exporting countries of
the Middle East and Asia are stabilisation funds to act as a buffer
against the volatility of oil and gas prices in the international
market, while in the African context savings and development is also a
key objective. The proposed Kenyan and Tanzanian SWFs adopt a
combination of stabilisation, savings and development.
But critics say that sovereign wealth funds are
not suited for East Africa’s current economic and demographic profile,
arguing that governments are better off using the profits from natural
resources to reduce the huge public debt and provide citizens with basic
health, education and social services today.
Kwame Owino, CEO of the Institute for Economic
Affairs in Nairobi, argues that countries with poverty, unemployment,
and current account deficits should not rush into sovereign wealth funds
just because they suddenly have foreign exchange surpluses.
“If you look at the characteristics of countries
that have successful sovereign wealth funds, they are all small, with
very little debt, and at least $10,000 gross national income per capita —
none of which describes East Africa today,” he says. “They were already
rich before setting up the funds, and that is one of the things that
makes them profitable.
Mr Owino argues that the region is caught up in
the “hype” of sovereign wealth funds. “If the intention is to provide a
stabilisation fund against volatile commodities, no problem. But if the
intention is to spare wealth for future generations, we have very basic
needs; the priority should be to provide infrastructure, health care
and education today, and pay off some of our debt. I am totally opposed
to the idea of valuing future generations more than the present one,” he
says.
Jason Braganza, senior analyst at Development
Initiatives, a poverty and development research NGO, agrees, saying that
East Africans have “more urgent needs” than setting up what is
essentially a savings account, and adding that such funds are premature,
particularly in Kenya’s case.
“The fund presupposes that we will have oil
flowing very soon, but that is not known for sure. We don’t know the
commercial viability, or how long the reserves will last. We need to
re-examine the rationale for setting up such a fund,” he says.
But Dr Ikiara contends that the two are not
mutually exclusive. “Having a sovereign wealth fund does not mean that
we cannot use it for infrastructure and health. The government can
borrow from the fund and still invest in securities and projects abroad.
We can structure the fund in a way that takes care of both today and
tomorrow,” he says.
Conflicting political interests are also a problem
that governments have to negotiate, particularly in the context of
devolving power to sub-national units as has been done in Kenya.
In Nigeria for example, the $1bn Nigeria Sovereign
Investment Authority is facing opposition by state governors, who
currently receive a portion of national oil revenues and would rather
share the cash out today than save it for the future. These are tensions
that are likely to play out in Tanzania as well as it negotiates a new
constitution, particularly when crafting resource-sharing agreements
between the mainland and Zanzibar.
But the lack of transparency is the biggest
criticism of sovereign wealth funds, which are generally under a cloud
of suspicion for their opacity, making it difficult for regulators and
citizens to perform any kind of oversight — leading to the widespread
perception that such funds could end up being slush funds for
politically-connected people to spend at their discretion.
The Linaburg-Maduell Transparency Index, developed
by the Sovereign Wealth Research Institute, rates the transparency of
government-owned investment vehicles using indicators such as the
availability of up-to-date independent audited accounts, information on
ownership percentage of company holdings, and on total portfolio market
value, returns and management remuneration. A fund needs a score of at
least eight to be ranked transparent.
This year, none of Africa’s sovereign wealth funds
was rated transparent; neither were funds managed by China, Saudi
Arabia, Oman or the UAE.
In Angola, for example, the country’s sovereign
wealth fund was accused of splurging on a $350,000 luxury office block
on Savile Row in London in the exclusive Mayfair District in November.
Launched last year, the $5 billion fund is chaired by Filomeno dos
Santos, the son of Angola’s President José Eduardo dos Santos. The
younger dos Santos denied the accusations.
But a 2009 research paper by Stanford University suggested that
even without the accusations of outright corruption, political pressures
do shape the investment strategies of sovereign wealth funds.
The research suggests that funds with
politically-connected managers are more likely to take larger stakes in
the firms they invest in, while independent external managers take
smaller equity stakes, especially when investing in domestic firms.
Instead of investing in small liquid stakes, as
those with external managers do, politically managed funds take larger
and potentially controlling equity stakes in domestic firms — suggesting
that these investments are targeted at supporting and potentially
propping up local firms, rather than optimising the investment returns
of the fund.
But it is not only corruption that is worrying
governments, investors and regulators as state-owned investments funds
circulate in the market, looking for an opportunity to plug into.
In the wake of the 2007-2008 US mortgage crisis,
sovereign wealth funds made much needed cash investments in struggling
Wall Street banks including CitiGroup, Merrill Lynch, UBS and Morgan
Stanley estimated at $37 billion, amounting to 63 per cent of the total
investments for such funds globally in 2007.
This led US critics to worry that foreign nations
were gaining too much control over their domestic financial
institutions, and that these nations could use that control for
political reasons, choosing to invest in sectors not for the economic
returns but as a leverage instrument for foreign policy purposes.
In a 2007 Congressional hearing on sovereign
wealth funds before the US Senate Banking Committee, Indiana Senator
Evan Bayh captured the fears aptly, in his testimony before the
Committee:
“Unlike private investors, pension funds and
mutual funds, government owned-entities may have interests that will
take precedence over profit maximisation. Just as the US has
geopolitical interests in addition to financial ones, so do other
countries. Just as we value some things more than money, so do they. Why
should we assume that other nations are driven purely by financial
interests when we are not?”
The taskforce paper on the establishment of
Kenya’s sovereign wealth fund even explicitly acknowledges political
motivations of setting up such fund, stating that “the very concept of a
sovereign wealth fund has turned into a significant symbol of the self
determination of the state...[they] have been seen as valuable
instruments for preserving a nation’s autonomy in global affairs”. This
fear could lead to investment protectionism in ‘recipient’ economies,
potentially damaging the global economy by restricting valuable
investment dollars.
In Asia, the political blow-back from state-backed
investments for strategic reasons already played out, when in January
2006, one of Singapore’s sovereign wealth funds, Temasek Holdings,
purchased from the family of then-Prime Minister Thaksin Shinawatra a
controlling stake in the Thai telecom company Shin Corporation, which
included taking control of space satellites used by the Thai military.
The transaction made the Prime Minister the target
of accusations that he was selling an asset of national importance to a
foreign entity, hence selling out his nation. The result was a
political crisis in Thailand, which eventually led to the ousting of
Thaksin’s government later that year.
No shift in power
Sovereign wealth funds thus embody an intersection
between politics and finance that echoes that of the late nineteenth
century, when private capital moved around the world in search of
opportunities that would bring high returns.
But a 2011 research paper from Winston-Salem State
University cautions that emerging economies should get their priorities
clear — if the intention is to save for future generations and finance
social and economic development at home, then the aggressive pursuit of
profit should be the overarching driver.
The paper indicated that the actual financial
performance of the funds have remained modest, and recommends that until
sovereign wealth funds are successful in reaping significant financial
returns, “emerging nations may be better off investing surplus funds in
removing production bottlenecks at home”.
Despite the fears of foreign domination which has made Western
governments jittery, the researchers say that internationally, the rise
of sovereign wealth funds is “unlikely” to indicate any significant
shift of power from western financial establishments to the emerging
nations.
Still, sovereign wealth funds reflect increasing
acceptance of the power of finance by developing countries, giving
emerging economies an opportunity to achieve some form of balance
between globalisat
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