Tuesday, April 15, 2008

Sovereign Wealth Funds and Africa

Source: World Bank considers Africa ‘super-fund’

The World Bank’s private-sector lending arm is considering the use of sovereign wealth funds to create a super-fund to channel investments into Africa’s emerging markets. Lars Thunell, chief executive of the International Finance Corporation, explained the “fund of funds” as one way to encourage state-owned wealth pools to invest in African businesses. He emphasized that the fund is not designed to be aid; rather it is aimed at creating a new asset class, pointing out that frontier investments can often prove very profitable

World Bank President, Robert Zoellick, urged sovereign wealth funds to invest one percent of their assets in equity (valued at $3,000 bn) in Africa. The issue of sovereign funds remains controversial. Criticisms include concerns that a surplus of state-owned capital could lead to dangerous economic imbalances, the funds appear to lack transparency, and the fact that an increased investment seems to ignore China’s already substantial investments in sought-after commodity resources in Africa.

African economies are expected to continue to grow by 6.5 percent this year. However, the International Monetary Fund warns that there is a risk that foreign direct investment might weaken amid a global economic slowdown. This is problematic for Africa because private capital flows in 2006 emerged as the primary source of external finance for sub-Saharan African countries, quadrupling to $48bn between 2000 and 2006. Private equity and debt flows are estimated at $53 bn for 2007.

Mr. Thunell points out that a sovereign wealth funded ‘super-fund’ would focus more on much-needed projects, such as agricultural processing, as opposed to commodities and natural resources that are the primary focus of private investors. He describes sovereign wealth funds as an opportunity to invest at arms’ length, a situation he describes as particularly attractive for those funds who fear provoking a hostile public reaction.

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