Africa ponders framework on how to manage new wealth

Angola, which expects 2010 oil revenues of US$16.6 billion, is considering a Norwegian-style fund. In Tunisia, which has foreign exchange reserves of around US$10 billion, lawmakers are calling for the creation of a national fund to help unemployment, according to a report by Magharebia, a website sponsored by the United States Africa Command.

And Ghana could also be a contender as it looks to reap the first benefits of oil production in late 2010.

But New York University's Chalamish said he had advised one government which approached him recently for guidance on running an SWF to wait, and first think hard.

“The fact that many countries in Asia and the Gulf did it, it doesn't mean you have to do it,” Chalamish said.

“It's like a club. You really want to become part of the club because it shows the strength of your own economy and traditionally it involves economics, politics, power, passion... Even weak governments feel this is the way of executing global economic expansion and to have an impact in the world.”

Home investment is often seen by sovereign funds in major developed and emerging economies as something of a taboo, except in a severe economic downturn, because the domestic recycling of the surplus risks fanning inflation.

Asian or Middle Eastern funds invest in a diverse portfolio including equities, alternative assets and private equity-style stakes in companies. SWFs in Norway and Azerbaijan are not allowed to invest domestically. Libya's US$65 billion fund, set up in 2006, is Africa's biggest and invests mostly in European countries, such as Italy.

Domestic investment inflates the economy. For fast-growing Africa - where not all countries have robust central banks and a monetary mechanism, uncontrollable inflation could scare away potential foreign investors.

But governments may have no choice but to invest at home, using sovereign funds to complement state spending to improve infrastructure, raise productivity and establish its position as a viable investment destination within frontier markets.

According to the World Bank, the continent needs around US$93 billion a year to address its infrastructure needs. Only half of that is being spent at the moment.

For example, in Angola, two-thirds of people still live on US$2 a day or less even as billions in oil reserves and Chinese loans have helped rebuild infrastructure devastated by a 27-year civil war that ended in 2002.

Gary Smith, head of central banks, supranational institutions and SWFs at BNP Paribas Investment Partners, said countries coming into wealth should take a “ladder” approach: when they reach a certain wealth level they would benefit from a sovereign fund-based framework to manage their reserves.

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