AFRICANGLOBE – Oil, gas, minerals…it is the story of many emerging African economies. Foreign investors flock to these countries with new ideas, new technologies, and more money. Presidents and prime ministers announce new discoveries and rightfully hype the potential of the country. But how do you keep the momentum going in the long run? Start a sovereign wealth fund (SWF).
Or so that is what many investors and advisors keeps telling us, says a Mozambican government official, but we are still internally working out the concept. The path to prosperity, he continues, is not that clear.
Government officials across Africa, including Mozambican Prime Minister Alberto Vaquina, openly acknowledge that their countries are pondering or, in the case of Tanzanian President Jakaya Kikwete, are intent on creating SWFs. But most officials with knowledge of the situation admit that developing the particulars of the funds will take time.
The concept is nothing new. Almost every member of the Organization of the Petroleum Exporting Countries maintains a SWF to effectively manage oil revenues over the long term and lessen the impact of any commodity price volatility. But its emergence in Africa is centered more on the promotion of economic and social development.
The recent launch of SWFs in Nigeria and Angola, equatorial Africa’s only two OPEC members, speaks to the growing popularity globally and the optimism on the continent. Yet critics remain as to whether SWFs will benefit the newly emerging economies.
Natural gas futures are trading at nearly double the low price hit mid-April last year. Many experts predict that prices could rise further through the end of 2013 but fall off slightly in 2014. Such price volatility favor SWFs in Tanzania and Mozambique where natural gas is expected to fund long-term growth. Price projections by bankers – let alone governments – often are not perfect. Random market shocks and normal price volatility cause fiscal imbalances that SWFs help to reduce.
The expected success of LNG facilities underscore another potential problem. Foreign currency will start flowing in at levels that would make it challenging for central banks to stabilize national currency price levels. And the Tanzanian Schilling or Mozambican Metical would rapidly appreciate, which would effectively destroy other small sectors of businesses as exports become too expensive and consequently uncompetitive in the market. SWFs offer an opportunity to manage foreign exchange off the balance sheets of the Central Bank and give hope to the country’s smaller sectors.
SWFs maintain positions in companies in nearly every country in the developed world. Whether Mozambican or Tanzanian SWFs can become big global players, similar to those in the Gulf States and Norway, may be a question more about resources than expertise in the long term. Returns garnered abroad can supplement the financial resources employed at home. But imitating their larger peers in terms of asset allocations will prove to be difficult.
Divergent internal demographics create differing political dynamics. Mozambique and Tanzania are larger populations at 24 and 46 million with high birth rates compared to 5 million in Norway or 2 million in the United Arab Emirates. Greater segments of the population in Mozambique and Tanzania are uneducated. Thus investment in local education and training will also be at the forefront of the debate about SWFs.
Local asset management capacity is currently low but will grow through experience with the SWFs. Mubadala, a SWF in Abu Dhabi, made news last year through its initial investment into Advanced Micro Devices (AMD) that it strategically finessed into a profitable spin-off of AMD’s manufacturing division via a joint venture with the Advanced Technology Investment Company of Abu Dhabi.
Similar long-term investment plays could be a great boost to local business development. Mozambican and Tanzanian SWFs could be the first introduction for many companies to these burgeoning economies and potential partnerships. Surveys, especially in the United States, still show a high percentage of business owners do not believe there are many opportunities in Africa or know where the opportunities lie.
African SWFs can boost their local economy through allocating part of their assets to growing sectors in-country. The Angolan SWF has been a vocal leader in its intention to target sectors vital to local development, including agriculture, power and transport.
Similar efforts will have to be made by a Mozambican and Tanzanian SWF to meet their long term development goals. Demonstrating that there are highly profitably and impactful opportunities in-country will foster greater long-term growth and spur further foreign investment from global players. Is that not the ultimate goal of a SWF?
By: Kurt Davis Jr.