Angola Plays Its Sovereign Wealth Cards Close

July 25, 2013 by Loch Adamson

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ANGOLA is keeping its oil riches in the family. On June 21, just one day after the World Bank Group called on the Angolan government to open up about the operations of its fledgling sovereign wealth fund, the $5 billion Fundo Soberano de Angola (Fsdea) announced its new chairman and released details of its investment strategy.

In a move that surprised no one, given Angolan President José Eduardo dos Santos’ almost absolute power, Fsdea appointed José Filomeno de Sousa dos Santos, the president’s 35-year-old son, as chairman. Dos Santos, whose sister is billionaire businesswoman Isabel dos Santos, replaced Armando Manuel, whom the president named Finance minister in May. The fund’s only other director is former Standard Bank of Angola manager Hugo Miguel Évora Gonçalves. Dos Santos joined Fsdea’s board from Luanda-based investment bank Banco Kwanza Invest.

Some eight months after Fsdea’s launch, the June announcement also outlined the fund’s investment strategy. Fsdea said it would split its $5 billion portfolio into two discrete pools of capital.

Fifty percent will be invested conservatively, primarily in bonds and cash. This portion of the fund will target a diverse range of fixed-income securities issued by sovereign agencies, large companies with investment-grade credit ratings and financial firms. Fsdea will also allocate selectively to equities listed in the Group of Seven countries: Canada, France, Germany, Italy, Japan, the U.S. and the U.K.

The fund will invest the remaining 50 percent of its portfolio in alternatives and other higher-risk assets. It plans to look at emerging markets securities, high-yield and distressed debt, commodities, agriculture, mining, infrastructure, real estate and the Brics. Fsdea will start by investing capital from this half of the portfolio in local hotel infrastructure through its new Hotel Fund for Africa. It aims to develop a portfolio of three- to five-star business hotels throughout sub-Saharan Africa.

Before he became Finance minister, former Fsdea chairman Manuel said the fund would also be available to stabilize the economy during downturns in Angola’s business cycle and to help mitigate excessive volatility in tax returns. But its main goals are to preserve Angola’s oil revenue, diversify the economy and rebuild national infrastructure, which has seen limited improvement since the country’s bitter civil war ended in 2002.

The fund’s response to the World Bank’s request and the fairly candid outline of its investment strategy might reassure investors who have been waiting patiently for clarification since Fsdea launched in October 2012. But the appointment of the president’s son as chairman — a decision that required the president’s approval — and the scant detail about asset allocation may not be enough to assuage them.

Nepotism and corruption have blighted Angola’s public institutions for decades. In several major surveys the country ranks among the world’s worst for corruption. The World Economic Forum’s Global Competitiveness Index for 2011–’12 placed Angola 135th out of 142 nations for the strength of its institutions — and a lowly 138th overall. Angola ranked 157th out of 176 in the anticorruption organization Transparency International’s Corruption Perceptions Index, scoring poorly on government transparency thanks to its lack of budgetary openness.

Fiscal opacity has also resulted in alarming discrepancies in Angola’s public finances. In December 2011 the International Monetary Fund reported that $32 billion in oil revenue (then one quarter of the country’s gross domestic product) had gone astray. By January 2012, however, the IMF was able to account for much of the lost revenue, attributing its absence from government records to "quasifiscal operations" by national oil company Group Sonangol.

International watchdogs will probably follow Fsdea’s fund allocation process with interest. Dos Santos has sought to allay their concerns by resigning from the board of Banco Kwanza Invest and selling his company shares in June.

He’s been eager to assert the robustness of Fsdea’s governance and investment procedures, stating that he intends to have the fund’s accounts independently audited. Dos Santos plans to adopt the International Forum of Sovereign Wealth Funds’ generally accepted principles and practices, known as the Santiago Principles, to promote good governance. These are all positive signs for Fsdea’s future, but — with no indication of any impending investments — the chairman has yet to convince the asset management community of the fund’s independence.

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