SINGAPORE — Africa is experiencing the strongest growth in new sovereign wealth funds in the world as its nations are amassing commodity revenues and foreign-exchange reserves, JP Morgan Asset Management said on Monday.
During the past two years, 15 state funds have been set up or are being considered in Africa, the group’s global head of sovereigns Patrick Thomson said.
The region would see more starting in coming years, he said.
With commodity prices rising, African countries are putting their surpluses into government-owned funds designed to manage a country’s wealth for future generations. Angola set up its $5bn state fund in October, Uganda said in April it planned to create a sovereign fund, and Nigeria, Africa’s biggest oil producer, inaugurated its $1bn fund eight months ago.
"We expect the number in Africa to grow further over the coming years," Mr Thomson recently said in Hong Kong. There are two main reasons why more state funds are being set up in Africa — "it’s the growth in commodity prices, and it’s the growth in foreign exchange reserves".
Africa was catching up with many Asian and Middle-East countries that already had a state fund, Mr Thomson said.
Latin America was expected to see the second-strongest growth in the number of new funds, he said, without elaborating.
Mr Thomson, who advises state entities such as wealth funds, central banks and pension funds, declined to name particular countries as candidates for new state funds. The annual average price of copper has more than quadrupled during the past decade, while the average cost of oil surged almost four times, bolstering the assets of African state funds.
The average price of gold, for which SA is the continent’s biggest producer, surged more than 300% since 2003.
Africa’s biggest sovereign wealth fund is Algeria’s $77.2bn Revenue Regulation Fund, the Sovereign Wealth Fund Institute said. The Algerian fund is followed by the $65bn Libyan Investment Authority and Botswana’s $6.9bn Pula Fund.
Tanzania, the holder of the second-largest natural gas resources in East Africa, was considering starting a state-owned investment vehicle using income earned from the fuel, President Jakaya Kikwete said in August.
The Zimbabwean government in December said that it had created a sovereign wealth fund after it compelled foreign-owned companies to sell 51% stakes to Zimbabweans under its indigenisation initiative.
Mozambique was mulling starting an investment pool, the head of global sovereign markets strategy at UBS, Massimiliano Castelli, said in March.
Sierra Leone President Ernest Bai Koroma proposed setting up a state fund with the proceeds from the mining industry, Reuters reported in October.
Sovereign funds around the world were shifting their investments from the developed world into emerging-market assets, Mr Thomson said.
They were buying mostly debt and equity in public markets in developing regions, he said, without quantifying.
State funds were also increasingly joining forces in their investments, partly investing in alternative assets, such as infrastructure and real estate, including airports and utility companies, Mr Thomson said.
The wealth funds of Russia and China in June last year started a joint private-equity fund mainly targeting transactions in Russian forestry, logistics and agriculture. Sovereign funds’ investments in alternative assets may face less competition from other investors, including pension funds and insurers in developed markets, that face increasing constraints due to tightening regulations, Mr Thomson said.
European Union regulators are setting up new regulations, known as Solvency 2, aimed at making insurers safer by harmonising the way they allocate capital against the risks they take.
"Solvency 2 is making insurance companies change their investment behaviour in order to meet regulation," he said.
"That provides the opportunity for sovereign funds to invest in assets that insurance companies used to invest in and now perhaps they are finding it more difficult under new regulation," Mr Thomson said.