Africa ponders how to manage new wealth

DAVOS, Switzerland Mon Jan 25, 2010 7:20pm EST

DAVOS, Switzerland (Reuters) - As Africa moves from a significant fiscal deficit largely funded by aid to a continent with a fiscal surplus, the search is on for a framework to manage countries' resource-driven wealth.

Some -- such as Nigeria, Angola and Tunisia -- are considering launching sovereign wealth funds (SWFs), which would accelerate the already rapid growth of the $3-trillion industry.

But in sub-Saharan Africa, the challenges posed by such plans are significant: on the one hand is the need for a vehicle to invest windfall surpluses for future generations and ring-fence today's wealth from greedy leaders.

On the other, investing offshore -- as do the sovereign funds of major developed and emerging economies -- would be political dynamite in Africa. In many African countries, badly in need of infrastructure and poverty reduction, the funds would be more likely to be deployed at home.

"With a move from deficit to surplus and the commodities boom which affected many countries in Africa, they face a new reality where they have resources that they have to save for next generations," said Efraim Chalamish, an SWF expert and global fellow at the New York University Law School.

Particularly important for Africa is the assumption that political instability in such countries would endure: "You want to make sure there are many different mechanisms for the next government and money will be there for next generations and pay for national pensions, liabilities, etc."

Africa's current account balance has improved in the past few years, with the total balance standing at 3.3 percent of gross domestic product compared with 1.3 percent in 2004, according to data from the African Development Bank.

Its fiscal balance has moved to a surplus of 2.8 percent of GDP from a deficit of 0.1 percent in 2000. That would leave room for extra capital to be allocated to wealth funds.

"THINK HARD"

As some African countries hit an oil jackpot, governments have started to consider introducing a system to effectively manage their new surplus.

Nigeria's Senate has been working on legislation to create an SWF to soften any impact that falling oil prices may have on the OPEC member's economy. Sub-Saharan Africa's second biggest economy has around $41.6 billion in foreign exchange reserves.

Angola, which expects 2010 oil revenues of $16.6 billion, is considering a Norwegian-style fund. In Tunisia, which has foreign exchange reserves of around $10 billion, lawmakers are calling for the creation of a national fund to help unemployment, according to a report by Magharebia, a website sponsored by the United States Africa Command.

And Ghana could also be a contender as it looks to reap the first benefits of oil production in late 2010.

But New York University's Chalamish said he had advised one government which approached him recently for guidance on running an SWF to wait, and first think hard.

"The fact that many countries in Asia and the Gulf did it, it doesn't mean you have to do it," Chalamish said.

"It's like a club. You really want to become part of the club because it shows the strength of your own economy and traditionally it involves economics, politics, power, passion... Even weak governments feel this is the way of executing global economic expansion and to have an impact in the world."

TABOO INVESTMENT

Home investment is often seen by sovereign funds in major developed and emerging economies as something of a taboo, except in a severe economic downturn, because the domestic recycling of the surplus risks fanning inflation.

Asian or Middle Eastern funds invest in a diverse portfolio including equities, alternative assets and private equity-style stakes in companies. SWFs in Norway and Azerbaijan are not allowed to invest domestically. Libya's $65 billion fund, set up in 2006, is Africa's biggest and invests mostly in European countries, such as Italy.

Domestic investment inflates the economy. For fast-growing Africa -- where not all countries have robust central banks and a monetary mechanism, uncontrollable inflation could scare away potential foreign investors.

But governments may have no choice but to invest at home, using sovereign funds to complement state spending to improve infrastructure, raise productivity and establish its position as a viable investment destination within frontier markets.

According to the World Bank, the continent needs around $93 billion a year to address its infrastructure needs. Only half of that is being spent at the moment.

For example, in Angola, two-thirds of people still live on $2 a day or less even as billions in oil reserves and Chinese loans have helped rebuild infrastructure devastated by a 27-year civil war that ended in 2002.

"In all other cases half the idea is to go globally and invest in riskier assets," Chalamish said. "Here the purpose is different. It's really to invest locally and to build national champions, in terms of local manufacturing and labor markets that these funds are supposed to support."

Gary Smith, head of central banks, supranational institutions and SWFs at BNP Paribas Investment Partners, said countries coming into wealth should take a "ladder" approach: when they reach a certain wealth level they would benefit from a sovereign fund-based framework to manage their reserves.

"They trigger certain points, like the rungs on the ladder, certain wealth points are passed, and they create a new institutional framework with a clear definition of responsibility," he said.

"In countries where an institutional framework has been perhaps weak in the past, having a clear and unambiguous institution to take care of money is an excellent idea. It can help countries that had problems managing their wealth."

(Editing by Ed Cropley and Sara Ledwith)

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