The latest cesspool of funding currently in focus by the government is the Sovereign Wealth Fund. However, not many Nigerians, indeed even so-called informed commentators know what the Sovereign Wealth Fund is actually all about.
The current shift of financial power from multi-national organisations such as the World Bank, International Finance Corporation (IFC) and others to Sovereign Wealth Funds presents developing nations such as Nigeria with a new source of foreign direct investment.
A Sovereign Wealth Fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments. Sovereign Wealth Funds have gained world-wide exposure by investing in several Wall Street financial firms in the United States, particularly in the aftermath of its’ financial crisis. These firms needed a cash infusion due to losses resulting from the credit crunch caused by the mortgage meltdown which started in the USA.
These funds present an important source for capital for developing nations, like Nigeria, especially Africa since many of them are from other emerging countries that seem to understand the emerging markets more accurately due to similar background.
Many SWFs are held solely by central banks, which accumulate the funds in the course of their monetary and fiscal management of a nation’s financial system; this type of fund is usually of major economic and fiscal importance. Most of newer sovereign wealth funds are simply the state’s savings which are invested by various entities for the purposes of investment return, and which may not have significant role in fiscal management.
However, due to their government control, size and potential to be used to effect non-financial outcomes, SWFs are attracting attention than before. A nation has to be more proactive to attract these funds as their global clout is on the rise.
The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, Short-term Deposit Receipts (SDR) and IMF reserve positions held by central banks and monetary authorities, along with other nation’s assets such as pension investments, oil funds, or other industrial and financial holdings.
These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, Euro and Yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.
A significant development arising from the current trend of record high commodity prices is the increased investment clout of emerging markets and their governments. This is not news to anyone who has been monitoring the re-emergence of China, India and Russia as economic powerhouses. These states have amassed sizeable reserves derived from oil and gas revenues in the cases of Russia and the United Arab Emirates, while China has built up its reserves and holds large amounts of foreign debt, especially US Treasury Bills.
The immensity of these foreign exchange reserves exceeds the typical buffer that a country requires, thereby enabling these states to make strategic investments buying critical foreign assets. These massive reserves are looking for a stable destination, which is why countries like Zimbabwe and other African nations like Nigeria have to position themselves as attractive investment destinations.
A resource rich nation such as Zimbabwe is an ideal candidate of SWF most of which were built from resource generated wealth. SWFs are typically created when governments have budgetary surpluses and have little or no international debt obligation. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately.
This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. To reduce the volatility of government revenues, counter the boom-bust cycles adverse effect on government spending on the national economy or build up savings for future generations, SWFs may be created (and therefore not as a LOAN, as is the case in Nigeria, to be repaid by to the next generation and now brandished as a political weapon).
Fuelled by resource income, state sovereign wealth funds from China to Africa are reshaping the global economy and at their current growth rate will surpass current US economic output by 2015.
Leke Fakayode, MD/CEO Netcorp management consultant, wrote from 17c, Kanta road, Kaduna.
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