Angola Banking on Oil to Buffer Economy

May 31, 2013 by Louise Redvers

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Angola's parliament building in Luanda

ON A HAZY October morning in 2012, a group of international journalists gathered at an office building in the Angolan capital of Luanda for a press conference on the launch of a new sovereign wealth fund. Although the event had been scheduled to start at 11:00 a.m., the organizers soon pushed it back to 1:30 p.m. Hours passed as the increasingly restless group of reporters fidgeted, waiting for speakers to arrive. Finally, after 3 p.m., the new fund’s Chairman, Armando Manuel — who was late because he’d just been sworn in as the president’s secretary for Economic Affairs — announced with great fanfare that the Fundo Soberano de Angola (FSDEA) would be established with an initial asset pool of $5 billion.

This was not Angola’s first attempt to create a sovereign wealth fund. In February 2011 the government had announced the Fundo Petrolifero (FP), a domestic infrastructure fund that was intended to support spending on water and electricity projects — services badly needed in a country emerging from three decades of civil war. Although FP was only to receive revenue from the sale of 100,000 barrels of oil per day, a small fraction of Angola’s current daily output of approximately 1.65 million barrels, it was still considered a significant step toward greater fiscal prudence. But few details about the fund ever came to light. At FSDEA’s launch Manuel tacitly acknowledged that the new fund’s initial capital had come from savings accumulated for FP, which had lain dormant since 2011. To the gathered journalists this overall lack of specificity — and the spectacle of the haphazard press conference — struck jarring notes in contrast to FSDEA’s otherwise slick press campaign and website.

The awkward juxtaposition between public assertion and political reality highlights the difficulty Angola now faces in seeking to protect and manage revenue windfalls from oil production in the absence of strong institutions or a political culture of fiscal accountability. Although FSDEA claims to be committed "to operating transparently, responsibly and in full compliance with the laws and regulations of Angola and the countries where it will make future investments," according to its website, the Angolan government has not impressed global arbiters of good governance. The World Economic Forum’s Global Competitiveness Index for 2011–’12, for example, rated Angola 138 out of 142 countries overall and 135th for the strength of its institutions, citing the efficacy of its corporate boards, the ethical behavior of its firms and the strength of its auditing and reporting standards as the worst in the world.

The WEF’s index also revealed that the diversion of public funds and government favoritism in decision-making procedures were severe impediments to Angola. The country was actually excluded from the most recent index ranking, in 2012–’13, because the forum’s researchers could not gather enough data to make an assessment (only Belize and Syria were also excluded on those grounds). Unfortunately for FSDEA, these issues appear to be rooted in the oil industry: New York–based policy watchdog Revenue Watch Institute ranks Angola 41 out of 58 in its 2013 Resource Governance Index, which measures the quality of governance in the oil, gas and mining sectors.

Although Angola’s oil industry may be fraught with conflicts of interest and corporate opacity, the fact that it has survived three decades of civil strife is remarkable. Even as the dominant Movimento Popular de Libertação de Angola (MPLA) used oil revenue to fund its military campaigns, major international oil companies, including BP, Chevron Corp., Exxon Mobil Corp. and Total, staunchly protected the industry’s offshore production infrastructure. Angola’s civil war ended in 2002. That year global oil prices began to rise, soaring through 2008 and driving Angola’s economic growth as the country upped its oil production. Angola’s gross domestic product swelled by an average 14.9 percent a year during those six years. According to the Economist, Angola was the fastest-growing country in the world from 2000 through 2010.

Angola’s vast energy resources continue to power its economy. In the years since the end of the civil war, Angola has become Africa’s second-largest oil producer after Nigeria. Oil revenues currently account for 50 percent of the country’s overall economic output and 95 percent of its export earnings, yet the decades of conflict and Angola’s Marxist past have left scars on its institutions. All of its government departments and ministries, for example, are still led by MPLA supporters.

Although the logic and need for FSDEA has broad-based political support — and the fund claims to prioritize transparency, accountability and good governance — it has not escaped the pitfalls of close association with the country’s dominant ruling family. Although officially a multiparty democracy since 1992, when it embraced a free-market economy, Angola is still labeled by its critics as a dictatorship in everything but name. President José Eduardo dos Santos, Africa’s second-longest-serving leader, has been in power since 1979. Dos Santos’ Economic Affairs secretary, Manuel, chaired FSDEA’s board of directors until May 6, 2013, when he was appointed minister of Finance. As of late May the government had not yet named his successor.

The remaining board members include one of the president’s sons, José Filomeno de Sousa dos Santos, and Hugo Miguel Évora Gonçalves, a former senior manager at Luanda-based Standard Bank of Angola and the Pension and Development Fund of Angola. Dos Santos’ appointment was the most controversial; the University of Westminster graduate appears to have relatively little experience in asset management and arrived at the fund from back-office roles at Baar, Switzerland–based commodities trader Glencore International (now Glencore Xstrata) and Luanda-based AAA Insurance Co., part owned by Angola’s state oil company, Sonangol. The multilingual 35-year-old has insisted that he is qualified for the job and was chosen for merit rather than for his family connections.

But personal and political connections appear to have influenced the fund’s management. FSDEA’s website states that the fund seeks to make attractive investments that support the development of Angola’s business infrastructure and help promote the country as a destination for foreign direct investment. But FSDEA missed its self-imposed April 2013 deadline to announce its investment policy; the fund’s Zurich-based spokesman blamed this on a Constitutional Court challenge from an Angolan opposition party. The challenge alleged that FSDEA was unconstitutional because it was formed by presidential decree rather than by parliamentary legislation, although this argument was subsequently rejected by the Court. For now, Zug, Switzerland–based discretionary wealth manager Quantum Global Investment Management, which was appointed without a public tender last year (the younger dos Santos confirmed that Quantum was managing the funds at the FSDEA’s launch in October 2012), continues to oversee FSDEA’s entire $5 billion of assets.

Quantum, which describes itself as an absolute-return manager, has a web of business connections to the dos Santos family. The firm, which according to Swiss records is owned by former Bundesbank president Ernst Welteke, already runs a significant portfolio of assets on behalf of Angola’s central bank, Banco Nacional de Angola. Welteke is the chairman of Angolan investment bank Banco Kwanza Invest (originally known as Banco Quantum Capital). The younger dos Santos is a shareholder in Banco Kwanza, although he contends he is trying to sell his stake. Another prominent shareholder in Banco Kwanza is Jean-Claude Bastos de Morais, a close friend of the younger dos Santos and chairman of Quantum Global’s advisory board.

Analysts like Markus Weimer, an Angola expert at London-based global risk consulting firm Control Risks Group, have noted that FSDEA’s opacity and apparent lack of independence might undermine its ability to fulfill its stated goal of promoting Angola’s economic and social development and generating wealth for the country’s future generations, by making it less attractive to potential partners.

"The fund would really benefit from some more clarity," says Weimer. "If I were an investor, I would want to know what this fund wants to do and how it wants to achieve its aims. The more trust you have in the fund, the better, but to trust you need information." The International Monetary Fund, however, has made allowances for Angola’s challenging conditions. Nicholas Staines, the IMF’s Luanda representative, says that "it is important for people to remember the magnitude of Angola’s capacity constraints," referring to the country’s lack of educated and skilled personnel as a result of decades of war that destroyed its education system. "I actually don’t think it is necessarily a bad thing that there are these delays to the FSDEA," he adds. "It is surely better to take time to develop a clear and effective strategy than to rush into something that does not work down the line."

In addition to spending money on basic infrastructure development and efforts to diversify Angola’s economy, Staines says, the government also needs to put aside a pool of cash in a stabilization fund so it has fiscal resources in difficult economic times and doesn’t have to rely on an external loan facility if oil prices decline. But with FSDEA’s dos Santos claiming that "Asia is a very interesting market, in terms of size and opportunities" for the new fund, it does not appear that FSDEA is destined to invest in highly liquid strategies or play a major role in economic stabilization.

As the markets await FSDEA’s announcement of its investment strategy — and critics wonder whether the fund will fulfill its development role or simply line the pockets of regime loyalists — experts note that little about FSDEA has followed commercial best practices to date. Angola created the fund through presidential decree, bypassing the parliamentary process instead of building political consensus. FSDEA’s three-man board of directors is overseen by an advisory council, but all of the council’s members, including the minister of Planning, minister of Finance, minister of Economy and central bank governor, are handpicked by President dos Santos. FSDEA’s board appointed an asset manager with close ties to the current regime without a public tender process. That move may have allowed FSDEA to sidestep a protracted political bargaining process like that surrounding the formation of Nigeria’s sovereign wealth fund, but it underlines the fact that the new fund, despite its claims of functioning independently of Angola’s powerful ruling family, is deeply influenced by it.

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