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Poorest Nations to Create Sovereign Wealth Funds

Monday, 11 Oct 2010 08:47 AM

Investors are eyeing a new crop of sovereign wealth funds they hope will manage revenues in frontier economies more efficiently, avoiding past pitfalls of high costs and corruption and boosting inflows and country ratings.

At least nine frontier market countries in Africa, the Middle East and Asia, from Angola to Bangladesh to Nigeria, are looking at the possibility of setting up a sovereign wealth fund.

In addition to managing wealth for future generations, sovereign wealth funds are also designed as part of broader efforts to reduce corruption and run economies more profitably.

It's an attractive proposition for countries where investors are often deterred by concerns about mismanagement.

"It's a great idea, it implies a certain discipline," said Plamen Monovski, chief investment officer of Renaissance Asset Managers, which has launched two new Africa-focused funds.

Monovski pointed to the example of Russia, which successfully used its sovereign wealth fund to help domestic companies avoid the worst of the financial crisis.

 

FALTERING FRONTIERS

Although many frontier markets are enjoying some of the highest growth rates in the world, they are failing to benefit from the same levels of liquidity and investor interest as before the global recession.

Nigeria's stock exchange is seeing volume of $20 million daily, compared with $30-50 million before the crisis.

Among frontier nations, Nigeria is probably closest to setting up a sovereign wealth fund to manage its oil revenues, with a bill sent to parliament in September to create the fund with $1 billion in seed capital.

The fund will have three parts: inter-generational savings, a stabilisation fund to provide more immediate budget support, and an infrastructure fund for co-investment with other investors.

The country's credentials are not great. The precursor to the sovereign fund, the Excess Crude Account (ECA), saw its assets diminish to less than $500 million, from $20 billion in 2007.

"The ECA was not protected against different claims from different parties. Both the federal government and the local state governments had claims," said Christian Esters, director, sovereign ratings, at Standard & Poor's in Frankfurt.

But Nigeria's next shot may have a better chance.

"SWFs are a buffer against fiscal shocks that allow a government to follow counter-fiscal policies. That is a positive for a rating," Esters said.

Nigeria has a sub-investment grade B+ rating from S&P.

Fitch, which rates Nigeria at BB-, is more downbeat, telling a seminar this week that if Nigeria did not succeed in introducing a fiscal buffer such as a sovereign wealth fund, it would be a key negative for the rating.

 

DEVIL IN THE DETAIL

A sovereign wealth fund is designed to protect assets from squandering but has to be managed within a solid framework with clear objectives for that to be effective. "It makes sense to save some of the inflows for future generations, based on best practice in places like China, Norway, Singapore," said Graham Stock, chief strategist at frontier fund manager Insparo Asset Management.

"It can be done well, but the devil is in the detail. You need good rules for what goes in and for what comes out."

Many frontier economies that are planning to establish SWFs are fighting poor rankings in corporate governance indices.

Nigeria and Bangladesh come joint 130th out of 180 countries in Transparency International's 2009 corruption perceptions index and Angola comes 162nd, in a table topped by New Zealand.

Angola is also in the bottom 10th percentile of the World Bank's worldwide governance indicators for control of corruption.

"A number of countries have established SWFs only to squander and liquidate the resources that have been set aside under short-term political pressures," wrote Edwin Truman of the Peterson Institute for International Economics in his latest book, 'Sovereign Wealth Funds: Threat or Salvation?'.

Truman cited Chad and Papua New Guinea, whose SWFs have been wound down.

Frontier economies are taking advice from multilateral agencies like the International Monetary Fund, or established sovereign wealth funds in Norway, Singapore or the Middle East, in an attempt to avoid past problems.

"The questions are similar, the issues are very similar. We need to address those issues of savings investments, how much we put aside for the future, what should we take into consideration," Louis Kasekende, deputy governor of Uganda's central bank, told Reuters.

"I don't know the answer, I'm asking the questions. We must be ready to learn from the others."

(Additional reporting by Natsuko Waki; Editing by John Stonestreet)

© 2017 Thomson/Reuters. All rights reserved.

 
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Investors are eyeing a new crop of sovereign wealth funds they hope will manage revenues in frontier economies more efficiently, avoiding past pitfalls of high costs and corruption and boosting inflows and country ratings.At least nine frontier market countries in Africa,...
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2010-47-11
Monday, 11 Oct 2010 08:47 AM
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