The unavoidable sovereign wealth funds

A growing number of African states, well beyond the restricted circle of black gold exporters, are creating these investment structures. Efficiently managed, these public savings vehicles are helping to diversify the economy and encourage innovation.

Sovereign wealth funds are being set up at an ever increasing pace on the continent, where they are attracting a great deal of interest because of their positive image amongst investors: ‘Vehicles that speak the language of the private sector, while working for the priorities of the public sector’, is how Mohamed Benchaâboun, former Moroccan Minister of the Economy and Finance, and current CEO of Morocco's Mohammed VI Fund for Investment (FM6I), describes them. The kingdom's second largest sovereign wealth fund after Ithmar Capital, established in 2016, FM6I is dedicated to supporting businesses and innovation. Since 2016, no fewer than eight new African countries have launched sovereign wealth funds: Morocco, Egypt, Cape Verde, Djibouti, Mauritius, Ethiopia, Mozambique and Namibia. Most of the sovereign wealth funds founded on the continent in the early years of the new millennium were set up by oil and gas producing countries (Algeria, Libya, Angola, and Equatorial Guinea, etc.), with the aim of saving a portion of the revenues generated by oil exports. As pointed out by economist Henri-Louis Vedie, author of a recent paper on the subject called Les Fonds ouverains africains: une deuxième vague (2016-2023) sous le signe de la redéfinition stratégique, published by Policy Center for the New South, 2024, most of the new sovereign wealth funds are being set up by countries that have no hydrocarbon reserves but intend to establish ‘strategic investment platforms’. He also highlights ‘the key role played by Morocco’ in this new drive to create sovereign wealth funds: since late 2021, through Ithmar Capital, the Kingdom has headed the International Forum of Sovereign Wealth Funds (IFSWF), an umbrella organisation for funds from five continents. Morocco is also behind the Africa Sovereign Investors Forum (ASIF): launched in Rabat in June 2022, ASIF, whose members to date include the sovereign wealth funds of Morocco, Angola, Djibouti, Egypt, Gabon, Ghana, Nigeria, Rwanda and Senegal, aims to promote foreign direct investment (FDI) across the continent, by defending joint, inclusive projects.

THE BOTSWANA MODEL

Most people are unfamiliar with Sovereign Wealth Funds (SWFs), which originated in the Pacific islands of Kiribati in the 1950s. Its local authorities, concerned about the inevitable depletion of their phosphate mines, introduced a tax on fertiliser exports, and set aside the proceeds in a public investment fund. The idea was to preserve finite mineral resources for future generations. After the 1970s oil crises, African producer countries sought to save their fossil fuel surpluses in order to protect their national budgets from volatile commodity prices. At the time, the International Monetary Fund (IMF) encouraged emerging hydrocarbon-exporting countries to set up public funds of this kind, as a way of avoiding the well-known ills of excessive extractivism: a rentier economy, lack of reinvestment and innovation, etc. In Africa, the pioneer of sovereign wealth funds was Botswana's Pula Fund: founded in 1994 and following Norway's example, the Botswana fund (‘Pula’ is the Tswana word for ‘rain’, and is also the name of the country's currency) is financed by diamond mining revenues. Managed by the State and the Central Bank of Gaborone, renowned for its good governance, the Pula Fund has more than 4 billion dollars at its disposal. This is a modest amount compared with the 1,700 billion dollars in Norway's sovereign wealth fund! The Scandinavian kingdom, a rich oil-producing country that has always refused to join the European Union, has been meticulously saving part of its oil revenues in the Government Pension Fund Global for thirty years. This little-known but essential player in global finance holds shares in around 9,000 companies around the world, selected according to strict ethical criteria in terms of compliance with social and environmental standards. Its power gives an idea of what a sovereign wealth fund can become if it is properly managed.

TRANSFERRING STATE-OWNED COMPANY ASSETS

According to Boston Consulting Group (BCG), Africa now has 25 funds in 21 countries, compared with just ten in 2014. Established in 2022, Ethiopian Investment Holdings (EIH) holds the assets of 27 Ethiopian state-owned companies, accounting for around a third of GDP, including giants Ethiopian Airlines and Ethio Telecom. The EIH has invested more than $100 million in Djibouti's Damerjog logistics port. Egypt's TSFE fund is working with Saudi and UAE funds to stimulate investment in the country, especially in infrastructure: “The cost of capital for sovereign wealth funds is relatively low,” says BCG, “which makes them the ideal investment for exploiting opportunities on the continent.” Sovereign wealth funds in Egypt and Ethiopia are financed by the assets of colossal national state-owned companies, which are often “in difficulty and unattractive in their current state to potential investors, both national and international,” points out Henri-Louis Vedie. The operational capacities of this category of funds are logically more limited than those of funds fed, month after month, by the cash cow of hydrocarbon and mineral resources.

According to economists Tony Addison and Amir Lebdioui of the GlobalDev blog, while the world's hundred or so sovereign wealth funds have assets in excess of 8,000 billion dollars, African funds represent only a tiny fraction of this total. Are they achieving their growth and development objectives? These experts are perplexed: “Citizens with unmet basic needs may well prefer more spending today on child nutrition, basic healthcare, education and cash-transfers to benefit everyone,” they write sternly in a study published earlier this year. “However, it is often difficult for governments to pursue a consistent strategy for spending public savings, even with rules in place. SWFs that begin as intergenerational funds often turn into de facto stabilization funds when hard-pressed governments need to maintain spending”, as was the case during the Covid-19 pandemic or during the inflationary period triggered in February 2022 by the invasion of Ukraine.