Sovereign wealth funds are not a recent economic phenomena. They were first synthesized in the 1950s as a way of saving up excess cash generated in rich commodity economies. The first-ever sovereign wealth fund was the Qatar fund formed in 1953. At the time of its formation, the Qatar fund was to be a special purpose vehicle to manage excess liquidity from the discovery of the ‘black gold’.
At that time Qatar had a tiny population of 200,000 people compared to the country’s revenues which put at risk of frothing of the Dutch Disease. This is an economic situation where the country’s domestic currency becomes excessively overvalued and results in a non-competitive export sector and the crowding out of those industries.
In the book The Shadow Market, the author promulgates how the global sovereign wealth funds came into prominence after the 2008 financial crisis. These SWFs helped in rescuing some of the failing banks, purchase international conglomerates, and even bought the world’s beloved football clubs[1].
So, what are sovereign wealth funds? Does Zambia need a sovereign wealth fund with its current economic malaise or better still, is it the right time?
Sovereign wealth funds are special-purpose funds or arrangements owned by governments to achieve economic and financial objectives. These objectives can range from stabilization funds, savings funds, or investments that are intended to achieve targeted macroeconomic objectives or a hybrid.
These sovereign wealth funds were originally associated with commodity revenues due to price volatilities in the market and were meant to help with counter-cyclical spending. Sovereign wealth funds have grown over time to a tune over $7 trillion worth of assets and have become a significant feature of the global economic landscape.
The investment guidelines of these sovereign wealth funds are dictated by the country’s macroeconomic framework and its intended targets and objectives. For instance, the Norwegian sovereign wealth fund, is quite a conservative fund, as compared to the Australian and Singapore funds which generally invest in riskier asset classes with higher risk-adjusted returns. The Norway sovereign wealth fund has grown to 1.1trillion dollars to become the largest sovereign wealth fund globally. The Norwegian fund has invested in almost 2.5 percent of the total listed equities in Europe and about 1% of the total global equities. The average Norwegian has an allowable location of $200,000 per person, and the fund is 3x the size of the country’s GDP. The governance of the fund doesn’t allow the country to dip into principal investment but only 3% of the total fund return[2].
According to the International Forum of Sovereign Wealth Funds, one of the most efficiently managed sovereign wealth funds is the Nigerian Sovereign Investment Authority which was set up in 2012. The NSIA has three ring-fenced separate accounts, one for savings, one for stabilization, and one for domestic infrastructure spending. Its adherence to the Santiago Principles has made it a prime example of well-managed SWF. The Santiago Principles are a generally acceptable set of 24 principles and practices. These principles promote good governance, transparency, accountability, and prudent investment practices of sovereign wealth funds.
In terms of recent performance, the Nigeria Sovereign Investment Authority says that it recorded a total of N160.06 billion in comprehensive income in 2020, representing a 343% growth compared to N36.15 billion recorded in 2019. The NSIA, in 2020 achieved a 33% growth in Net Assets amounting to N772.75 billion as against N579.54 billion in 2019[3]. The NSIA has invested in infrastructure, agriculture, and power.
I have highlighted two very distinct sovereign wealth funds to give perspective and impact of these SWFs. Africa has a total of 13 sovereign wealth funds.
The list of Africa’s SWFs includes; $65,000m Libyan Investment Authority (Libya), $12,700m The Sovereign Fund of Egypt (Egypt), $1,790m Nigeria Sovereign Investment Authority (Nigeria), $1,939m Fonds Gabonais d’Investissements Stratégiques (Gabon), $1,500m Ithmar Capital (Morocco), $2,500m Fundo Soberano de Angola (Angola), $1,717m the Pula Fund (Botswana), $210m Agaciro Development Fund (Rwanda), $100m Cape Verde Sovereign Wealth Fund (Cape Verde), $97m Ghana Petroleum Funds (Ghana) $330m Ghana Infrastructure Investment Fund (Ghana) and finally $2m Petroleum Investment Fund (Uganda)[4].
Only the Libyan Investment Authority, whose $65 billion in assets are still frozen under international sanctions, has substantial assets under management by international standards. Africa’s total assets under management in 2020 (excluding the Libyan Investment Authority) was only $24 billion across 13 funds, of which more than half of is accounted for by The Sovereign Fund of Egypt’s authorized capital of $12.7 billion, according to data from the International Forum of Sovereign Wealth Funds.
Zambia’s timelines in the formation of its sovereign wealth fund have been a convoluted process. The first discussion of Zambia’s SWF was held in 2014, the then government had proposed a 100,000 Kwacha be set aside for the establishment of the fund, unfortunately, it never came to its operationalization start. In the recent unveiling of political party manifestos, it has again resurfaced, a suggestion that a stabilization fund is set up. To fully understand the dynamics and hurdles associated with the formation of SWF in the current dispensation, requires an understanding of the current macroeconomic landscape. Zambia currently has an external debt of 12.7billion dollars according to the ministry of finance statistics, we further made a deal of 1.5billion dollars transactional debt deal to acquire the 90% ownership of Mopani copper mine held Glencore. Zambia through Zambia Consolidated Copper Mine Investment Holding is to repay the loan principal by giving Glencore creditors 3% of Mopani’s gross revenue from 2021-2023 and 10-17.5% of Mopani’s gross revenue from then on. ZCCM-IH will also owe quarterly interest of LIBOR plus 3%. ZCCM IH will have to repay its transactional debt in a period of 10 to 17 years[5].
Zambia’s external debt repayment has eroded the foreign reserves at the central bank and further weakened the domestic currency.
However, amid all this economic chaos, Zambia has recently discovered gold, which has led to the formation of the Zambia Gold Company. Gold is currently trading at $1,886.33 per ounce. With our favorite red metal, copper, prices having rebound to $ 9020.00 per metric tonne[6] and coupled with these attractive metal prices with the state pension fund buoyancy, there is potentially a scenario where all these can be compounded to form a pool of funds that can enable the formation of Zambia’s first-ever sovereign wealth fund.
It is mindful to note that, there’s a school of thought that emphasizes that a country can only set up a sovereign wealth fund when it has budgetary and structural surpluses.
Are sovereign wealth funds are a panacea to financial and economic woes a country might face in the future? It is hard to say, but empirical data and evidence show that for instance, Chile withdrew $ 9billion from its sovereign wealth fund after the 2008/9 economic crisis and its recovery was faster and bullish than its neighbors in the region. This type of “safety” net poses an interesting discussion as Zambia seeks out solutions to its financial and economic woes.
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Professional economist and skilled financial markets specialist. A knowledgeable professional of global Economics, Financial markets, Financial modeling and valuation, Equities and Equity Research, Corporate finance, Taxation and Business advisory and analytics
[1] The Shadow Market: How Sovereign Wealth Funds and Rogue Nations Threaten America’s Financial Future
[2] Columbia business school lecture by Andrew Ang on sovereign wealth funds
[3] https://nsia.com.ng/investor-relations/financials-statement/annual-reports
[4] Investing for Growth and Prosperity: In Africa sovereign wealth funds paper Vol2
[5] https://www.zccm-ih.com.zm/news/
[6] https://www.lme.com/en-GB/Metals/Non-ferrous/Copper#tabIndex=0