Sovereign wealth funds: Ghana joins African wealth fund scramble

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By:
Dominic O’Neill
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Eurobond investors seek clarity on oil revenues; Gabon follows with new sovereign fund

Ghana’s new sovereign wealth fund took a step forward last month: forward, at least, from its position as little more than a couple of accounts at the central bank. A new investment advisory committee – headed by one of the best-known figures in Africa’s business and financial community – was inaugurated and held its first meeting in February.

According to the 2011 Petroleum Revenue Management Act, the committee is supposed to formulate the fund’s investment strategies for the minister of finance, Kwabena Duffuor. This includes guidelines on asset-allocation and targeted returns.

Ghana's president, John Atta Mills
John Atta Mills at a ceremony marking the first flow of oil from the Jubilee offshore oil field in 2010
The law says transparency should be a fundamental principle of management of the state’s new-found oil wealth. However, Euromoney understands that the investment committee decided at its initial meeting to make no official announcement either on its inauguration or membership, which is appointed, according to the law, by the president, John Atta Mills, with advice from Duffuor.

Investment committee

The seven-member committee includes a traditional leader from the country’s oil-producing west coast, someone from the central bank, as well as Ghanaian experts on law and development policy. The chairman is Kofi Bucknor, a Ghanaian former treasurer of the African Development Bank, and more recently known as the main point man for investments in Africa by Saudi billionaire Prince Al-Waleed Bin Talal.

"The committee has been set up as prescribed by the law, and payments have been to the fund as required," Bucknor tells Euromoney.

But according to another member of the committee, government action in setting up structures to manage the oil industry, including oil revenues, has been tardy. When discussing management of the new industry, including formation of the investment committee, the source says: "The government is firefighting. [...] I was not the only [member of the investment committee] confused about the purpose of our role."

According to the source, such problems have meant that, although the act says the committee should meet every three months, it has decided to meet every month, to try to ensure it is better able to perform its duty. Meanwhile, the investment committee’s scramble to get up and running has raised questions over how effectively the body designed to ensure compliance with the Petroleum Revenue Management Act – the Public Interest and Accountability Committee – has been able to fulfil its role.

Revenues from oil started to flow into Ghana’s state coffers last year from exploitable reserves discovered offshore four years ago. The interval from oil discovery to production has been particularly short, partly because Ghana is eager to reap the profits.

"Pressure to spend has been higher because of the oil discoveries, so in that sense Ghana has been an oil economy since at least 2008," says Sebastien Dessus, the World Bank’s lead economist for Ghana.

The rapid development of the oil industry and the associated challenges for the government have made it critical to assure investors that a framework is in place to save oil money when energy prices are high. In 2007 Ghana issued a benchmark debut 10-year Eurobond, as did another African oil exporter, Gabon. Both bonds mentioned oil revenue in their prospectuses and in recent months rising oil prices have supported both bonds’ prices.

Partly thanks to oil, GDP growth in Ghana last year was 13.5%, according to the IMF. However, oil-price volatility means oil revenue is not without risks for the government’s finances.

Price rises

As is not unusual for countries in an oil boom, Ghana has already seen rises in property prices and construction, particularly in the oil-producing west and in the capital, Accra, which is also becoming something of a hub for West Africa. Some of the bigger local banks are getting hungrier for risk because of the oil boom. They are financing nascent construction frenzy.

If there is a bust, the banks’ systemic importance could be a contingent liability. Meanwhile, in addition to local-currency debt and the $750 million Eurobond, the China Development Bank agreed a $3 billion loan to Ghana last year, for infrastructure developments carried out by Chinese contractors. It too is collateralized against oil revenues.

Partly because of overspending during the last election in 2008, Ghana went to the IMF for a programme, which is due to expire in June. Mills is up for re-election in December, and the cedi has already lost about 15% of its value against the dollar over the past six months.

On February 15 this year, the central bank said currency volatility and what it termed fiscal pressures were behind its decision to increase the base rate by 100 basis points to 13.5%.

The wealth fund should protect the government against all this. From 2011, according to the new law, a minimum of 30% of the Ghanaian state’s projected oil revenues should have been flowing from the overall oil-revenue pot at the central bank – the Petroleum Holding Fund – to the subsidiary Ghana Stabilization Fund and Ghana Heritage Fund. While the latter is for when the oil runs out, the former is to support the budget when oil revenues fall below expectations.

Revenues from higher-than-expected prices and production are supposed to provide additional flows to the two funds. Average global oil prices have been at least $20 more than the $90 a barrel projected in the budget so far in 2012.

For 2012, the budget foresaw total revenue from oil sales of an equivalent of $735 million. But Duffuor has said this year only the minimum 30% of projected revenue would be transferred into the two subsidiary funds, leaving the government free to spend the rest (purportedly on infrastructure and capacity-building in oil and gas). Last year the government put only $54.8 million into the Stabilization Fund and $14.4 million into the Heritage Fund.

Searching for surplus
Balance of payments, Ghana, 2008 to 2013, $million
2008200920102011E2012E2013E
Trade balance-5,000-2,207-2,962-2,881-1,800-1,850
Exports5,2695,8407,96011,86911,00012,850
Cocoa1,4871,8662,2202,6502,2002,800
Gold2,2462,5513,8044,5004,1004,750
Oil2,5003,0503,400
Imports-10,269-8,046-10,922-14,750-12,800-14,700
Non-oil-7,912-6,557-8,686-11,750-10,000-11,500
Oil-2,357-1,489-2,236-3,000-2,800-3,200
Net invisibles1,671519262-850-825- 825
Current account-3,328-1,688-2,700-3,730-2,625-2,675
% GDP-11.8-6.5-8.4-9.7-6.8- 6.3
Source: Bank of Ghana, Ministry of Finance, Morgan Stanley Research estimates

Gabon

In February, Gabon announced that its sovereign wealth fund (first created in 1998) would be relaunched as the Sovereign Fund of the Gabonese Republic. According to research from Standard Bank, the fund will target a minimum capitalization of the equivalent of $1 billion, funded by 10% of oil revenue projected in the budget, as well as 50% of revenue above budget assumptions, plus portfolio dividends.

But the record for saving oil wealth is not propitious in Africa’s other oil-exporting states. According to Standard Chartered, Nigeria’s Excess Crude Account, for example, failed to receive inflows commensurate with rises in prices and production, partly because of politicking around a presidential election in April 2011.

Nigeria passed a Sovereign Wealth Fund bill through parliament in May, in an effort to boost savings from oil. The Excess Crude Account was to be restructured and renamed the Nigerian Sovereign Investment Authority. But Standard Bank research says sections of the elite are preventing proper implementation of the bill.