Sovereign Wealth Funds: African States Can Do Better!
Set up to counter commodity price volatility and diversify sources of income, African sovereign wealth funds are not (yet) up to their ambitions.
The recent low oil prices (-11% over the quarter) reminded African oil-producing countries of the painful fact that making a majority of their budget revenues (up to 80% in Algeria) dependent on such an erratic source of income is an open door to disappointment. Deterioration of public accounts, cuts in social budgets, economic recession, social discontent… All the leaders of the countries concerned still remember the episode of the 2014-2016 oil counter-shock, which hit their economies hard, which are too heavily dependent on hydrocarbon production. Prices have since risen, but no one knows when the next crash will occur. « The only thing we know for sure, as far as the future is concerned, is that it never lives up to our expectations, » the French novelist Jean Dutourd recalled, spiritually, in the last century.
From the outset, unless we can speculate in vain on what the future will look like, we will try more modestly to establish a balance sheet of the main tool used by African commodity-providing countries to deal with the fluctuating nature of their financial inflows: sovereign wealth funds. Launched in the 1990s, African sovereign wealth funds were established on the basis of government revenues from the exploitation of natural resources. As elsewhere, they meet three main needs: a need for stability (stabilization fund) to smooth out fluctuations in commodity prices over time; a need for development (development fund) to finance social programmes and infrastructure in particular; and finally an investment need (savings fund) to acquire yield assets (shares, bonds, real estate) capable of generating a financial income « excluding commodities ». In short, a common sense and forward-thinking approach, adopted by a growing number of countries on the continent: Algeria, Libya, Nigeria, Gabon, Botswana, Equatorial Guinea, Mauritania, Ghana, São Tomé and Príncipe…
Africa’s top five sovereign wealth funds (in billions of dollars, 2019) - Source : Sovereign Wealth Fund Institute (SWFI)
- Algeria : 72,6
- Libya : 60
- Bostwana : 5,5
- Angola : 2,3
- Nigeria : 1,7
yond the good intentions and the effects of the round, has the formula kept its promises? Not really. Launched in 2011, the weak Nigerian sovereign wealth fund ($1.7 billion in assets) was only a small help to offset the continent’s staggering budget deficit - more than $11 billion - during the 2016 oil crisis. As a result, to fill the gap, the Abuja authorities had to decide to massively devalue their currency, the naira (-30% against the dollar in June 2016), and resort to the debt market. In Angola, the $2.3 billion in Fundo Soberano did not prevent the country from requesting IMF assistance over the same period. The same is true in Ghana or Gabon, where the idea of a state fund came too late (2011), and with too few resources (450 million dollars) to really make a difference.
However, not all funds are in the same position. The first African sovereign fund by size (more than 70 billion dollars), the Algerian Revenue Regulation Fund (FRR) has thus been able to cope with a reduction of more than 130 billion dollars in Algerian foreign exchange reserves since 2014, at the cost of severe budget cuts. The Algerian problem is elsewhere: like the mandate given to most of the continent’s other sovereign wealth funds, the FRR is first conceived as a stabilization fund, intended primarily to absorb shocks in commodity prices. As a result, these funds are used more to correct past mistakes and compensate for the difficult month ends of the present than to prepare for the future (development funds and savings funds).
Too bad, because it is this logic that pays the most in the long term. The Norwegian public fund, the world’s largest sovereign fund by asset size ($1,073 billion), is the best illustration of this: it was first subscribed in 1996 and has since generated a net annual inflation return of 3.9% and cumulative earnings of $505 billion. This is enough to enable this Scandinavian country of 5.3 million inhabitants to enjoy a rent higher than its oil revenues ($84 billion in financial capital gains in the first quarter of 2019 alone, compared with $29 billion from hydrocarbons for the whole of 2018). When will there be an African equivalent?