The current upswing in commodity prices is driving African countries’ appetite to set up sovereign wealth funds (SWFs), of which Namibia’s Welwitschia fund is the latest.
Namibia has joined “several African countries that are interested in creating SWFs to capitalise on the current commodity price boom and to prepare themselves for the eventual downturn,” says Gerrit van Rooyen, Namibia Economist for Oxford Economics Africa.
Commodity prices are charting higher as the Ukraine war and supply chain bottlenecks are shoring up the price of anything from hydrocarbons to minerals and crops.
However, the success of new funds will hinge on the amount of assets they eventually receive, as well as the quality of their governance — something that has historically been an issue for African SWFs.
For Namibia, the establishment of its Welwitschia SWF in May is a key strategy in benefitting from the commodity boom, and it has plans to sink its proceeds into infrastructure and social development.
Namibia is “relatively well positioned” to benefit from “independence and transparency” of its SWF, Aleix Montana, Africa analyst at risk intelligence company Verisk Maplecroft, tells fDi Intelligence.
“SWFs are less effective in countries with higher corruption and political interference risks. Namibia is the third-best performing African country on Verisk Maplecroft’s corruption index although the efficiency of the Welwitschia fund will be determined by the compliance of the principles in practice,” Mr Montana says.
Namibia is known for its top-quality diamonds, uranium and there have been recent oil discoveries of up to three billion barrels by TotalEnergies and Shell off its coast. In setting up the Welwitschia fund, the southern African country has joined other resource-rich continental nations such as Botswana, Senegal and Libya that already have sovereign wealth funds. Mr van Rooyen believes Botswana’s Pula fund is one of the few success stories for SWFs in Africa.
“The Pula fund has successfully been used as a buffer in times of crises, such as the recent Covid-19 pandemic, helping Botswana to contain external borrowing, which has underpinned its investment-grade credit rating,” Mr van Rooyen tells fDi.
Namibia is hoping to walk the same line of success with its Welwitschia fund. And analysts such as Mr Montana believe “the Welwitschia fund will focus on sustainable investments with long-term potential, for instance growing the renewable energy” sector.
Mr Montana expects the Welwitschia fund “to support the Namibian government’s development of the green hydrogen industry [and] to capitalise on the country’s natural endowment of high solar irradiation” and wind potential.
Established by the Bank of Namibia and the country’s finance ministry, the Welwitschia SWF will be run by an independent board which will determine investment strategies, the central bank says.
Hage Geingob, the Namibian president, said at Welwitschia’s launch on May 12 that the fund has a seed injection of about $16.1m. Other funding flows will come from royalty payments by mining companies, tax revenues and proceeds from the government’s programme to privatise some of its state-owned enterprises.
Earnings from the Southern Africa Customs Union shared together with regional neighbours, such as South Africa and Swaziland, will also be another source of funding for the new fund. The discovery of oil reserves by Shell and Total Energies has emboldened prospects for Namibia’s Welwitschia, with Mr Geingob hopeful of contributions from the discovery.
“We are looking forward to the prospects and opportunities that will emanate from the recent discoveries of oil and the green hydrogen energy, which have the potential to further boost the fund’s capital,” Mr Geingob said.
More to come
Other than Namibia, other African countries are trying to act on the lessons learnt in the previous commodity boom cycle.
“Many African economies that were riding high on the commodity price boom of 2010–2014 were caught unawares by the crash of 2014/15, resulting in economic downswings and rapidly rising public debt levels. These countries would want to avoid this trap during the current price boom,” Mr van Rooyen tells fDi Intelligence.
Other African countries that have launched SWFs in the past 10 years include Morocco, Nigeria, Gabon, Rwanda, Senegal, and, more recently, Djibouti.
In spite of growing appetite to set up SWFs across the continent, such funds in Africa are considered to be small in size.
Research by the International Forum of Sovereign Wealth Funds (IFSWF) and asset manager Franklin Templeton notes that the continent is currently “not capital rich and is short of domestic and foreign investment”, which is key for growth and sustainable development.
As per the report by IFSWF, only the Libyan Investment Authority, whose $65bn in assets are still frozen under international sanctions, has “substantial assets under management by international standards”.
However, Global SWF, a research firm focusing on SWFs, notes in a separate report that there are about 30 sovereign wealth funds across Africa “with a combined wealth of $98bn”.
Despite growing investor apprehension over governance issues and resource nationalisation, Africa’s SWFs are “much more focused on channelling capital, whether local or foreign, into the domestic economy to push development,” Victoria Barbary, director for strategy at IFSWF tells fDi.
“We are seeing African SWFs investing more at home. That’s where the trend has gone,” she says. “There is so much investment needed, and African governments are working out new ways to get that investment rather than rely on foreign debt or through investment from China.”
In any case, Africa’s SWFs are geared to be the partners of choice for foreign direct investment. For Ms Barbery, this is especially so because the funds have a “link to governments and are local experts” in the economy and in investment.
“These funds know the local economy and they are on the ground,” she notes. “From an investor’s perspective, that sort of de-risks these investments.”
This article first appeared in the June/July 2022 edition of fDi Intelligence. Read the online edition of the magazine here.