Masters Dissertation Proposal
Midlands State University
Faculty of Commerce
Author: Precious Chineka
E-mail: [email protected]
Proposed Dissertation Topic:
According to the World Economic Forum, “A sovereign wealth fund (SWF) is simply a mechanism through which countries make investments. A pot of money –often derived from oil or other commodities-that is then invested in shares, bonds, property or other areas of potential growth.”
A sovereign Wealth fund can also be defined as a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity funds or hedge funds. These funds also invest globally.
According to the Sovereign Wealth fund institute, the definition of a sovereign wealth fund excludes, among other things, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state owned enterprises in the traditional sense, government employee pension funds (funded by employee /employer contributions) or assets managed for the benefit of individuals.
According to Nesbert Ruwo, The Standard (2014), more than US6 trillion in assets are being held by these funds globally.
The study will analyse the macroeconomic indicators of the countries with Sovereign Wealth Funds (SWF`s) and proposes that the determinants for the establishment of the SWF`s are: substantial current account surpluses; reliance on exports of precious minerals and rare commodities; high levels of domestic savings and low levels of external debt.
Zimbabwe is a country well-endowed with natural resources minerals as diamonds, gold, platinum coal just to mention a few. Ideally this a basis from which the nation can establish and benefit from a sovereign wealth fund. However, the motives for the establishment of the Sovereign Wealth Fund of Zimbabwe appear to be related more to the adoption of this type of financial instrument by major developing countries and the dynamics between domestic authorities responsible for economic policy than to the macroeconomic. According to the findings presented in Harare at a validation workshop, setting up of the SWF was against normal and best practice, as Zimbabwe is battling unsustainable external debts.
“The setting up of the Sovereign Wealth Fund was clearly against standard and normal practices considering that the Government is battling unsustainable debt level and very low international reserves,”.
Background of the Study
The main resolve for setting up a SWF is to invest a country`s surplus revenue and to creäte wealth for its future generations with a vision to generate long term wealth.
A SWF is normally funded from a domestic budgetary surplus. The whole idea of a SWF started in Kuwait in the 1950`s when the Kuwait Investment Authority fund was set up to invest surplus oil proceeds. Kiribati was the second state to develop a SWF, in 1956; the Revenue Equalization Reserve Fund of Kiribati was funded by the phosphate mining proceeds.
Despite the increase in the number of SWFs, over 50 years went by without greater attention was paid to this type of financial instrument at governments’ disposition. The situation changed radically when, in March 2007, China announced that it would create a sovereign wealth fund. Since then, the academy, investment banks, international organizations, think tanks, and governments themselves turned to study the SWFs. The Chinese initiative generated an “analytical race”, aiming at defining these funds, delimiting their particular characteristics, estimating their volume, projecting their impact and, finally, creating rules for their operation. The first articles on the topic sought to understand the phenomenon and they manifested a certain surprise with the SWFs, as shown by the title of Stephen Jen’s article (2007a), director of the Morgan Stanley bank and one of the first to study the topic: Sovereign wealth funds: what they are and what’s happening. The first issue dealt was SWFs definition. There is not a particular one that has predominated, with variations that range from more comprehensive concepts involving any kind of investment fund controlled by the government to the more restricted that exclude funds investing in the domestic market
Although sovereign wealth funds (SWFs) have existed for over 60 years, their number has inflated rapidly since 2000. In particular, countries dependent on natural resources have sought to diversify their economic exposure and SWFs have been promoted as a useful vehicle for this. Their low leverage and exposure to alternative assets gave them resilience during the global financial crisis, and consequently 15 new SWFs have been created since 2008. The value of assets held by the funds has similarly been increasing, to a record $5.78 trillion in 2013. This is due in part to the creation of the 15 new SWFs. Countries in Africa are among those moving to harness the potential of SWFs. Many of these countries have been substantial exporters of natural resources since they have been independent, yet have fairly slight results to show for it in terms of infrastructural development or savings. Over the past decade, SWFs have come to be viewed as a tool to reverse this trend. New discoveries of oil and gas reserves in East and West Africa have driven the creation of several funds on the continent in recent years, joining those in Botswana, Libya, Algeria, Gabon, Equatorial Guinea and Mauritania. Since 2012, Angola, Nigeria, Senegal and Ghana have established SWFs with initial seed capital of $5bn, $1bn, $1bn and$100m respectively. Mozambique and Tanzania are set to become large exporters of natural gas by 2020 and both are expected to set up SWFs, while Sierra Leone has suggested it could launch its own fund.
In this context, Zimbabwe might have been under pressure to establish its own fund which led to the setting up of The Sovereign Wealth Fund of Zimbabwe Act of 2014 to be effective from 26 June 2016.According to a local paper on November 11 2014, Zimbabwe Treasury was with immediate effect starting to remit a quarter of mining royalties to the Sovereign Wealth Fund (SWF) after President Robert Mugabe ,had signed into law a bill to set up the fund, which was meant to secure investments for future generations and support economic growth.
According to the Act, obtained by The Source, the SWF will be funded through mining royalties, with the Reserve Bank of Zimbabwe being its principal custodian.
“There shall be paid into the account of the fund with the Reserve Bank of Zimbabwe as the primary custodian of the Fund…such portion (not exceeding a quarter ) of the royalties payable in accordance with Chapter VII (Mining Royalties, Duty and Fees) of the Finance Act in respect of each of the following minerals – gold; diamonds; coal; coal bed methane gas; nickel; chrome; platinum and any mineral that may be specified for the purposes of Chapter VII of the Finance Act as allocated by the Zimbabwe Revenue Authority and specified in the Finance Act to be payable in the fund,” reads part of the SWF Act.
Previous studies have concentrated on the investment behavior of SWF especially in light of regulation of these entities. The researcher seeks to contribute to the debate on whether the motive for setting up these funds is more of economic or political and shed light on the challenges these funds are facing especially in administration in developing countries and in the Zimbabwean scenario to be specific.
While several countries have managed to set up sovereign wealth funds, the question is, should every country set-up their own and for what purpose? What are the key determinants to setting up such a fund and what are the challenges that are likely to be encountered in setting up and administering the fund taking the Zimbabwean scenario into account.
The researcher seeks to identify those macroeconomic indicators that are common in countries that already have a SWF set-up and compare these to the ones in the case of Zimbabwe in order to determine if they were the same. The researcher also seeks to identify the challenges that the Zimbabwean SWF is encountering in achieving its main goal and objective since it was set-up.
Aims and Objectives
The aim of the study is to investigate whether macroeconomic indicators are key determinants of setting up of Sovereign Wealth funds and to identify the challenges these funds face in achieving their objectives in Zimbabwe. To achieve this aim, the objectives of the study are:
1. To identify the key macroeconomic indicators that are common in countries with Sovereign Wealth Funds.
2. To interrogate the relationship between the key macroeconomic indicators in these countries and those of Zimbabwe currently.
3. To assess how the Sovereign Wealth Fund OF Zimbabwe is currently being managed and funded and identify the challenges being encountered in administering this fund.
The hypotheses of this study are:
Ho (Null Hypothesis)-Macroeconomic indicators were not ideal for setting up a SWF.
H1 (Alternate Hypothesis)-Macroeconomic factors were ideal for setting up a SWF
Significance of the Study
Sovereign wealth funds have been attracting a lot of attention in recent years as more countries establish funds and invest more capital in a wide range of assets, in this context there is a need for continuous research to monitor and add value to the way SWF work as instruments. A research of this nature will be of value to developing countries to determine when they should set up SWFs and how to overcome challenges that they encounter in administering these funds so that they can achieve their objectives, Most SWFs in developing countries are passive not strategic and in the end do not achieve their goals.
Preliminary Literature Review
Although the sovereign wealth funds were established in the mid-1940s, they have grown in importance recently, following the world economic situation in the last years (Berkelaar et al., 2010), the early literature on Sovereign Wealth funds looked at their definitions and what actually constitutes sovereign wealth funds Bortolotti B., Fotak V. and Megginson W., 2014 however, there has been no clear agreement of what constitutes a sovereign wealth fund. Several authors have attempted to define sovereign wealth funds e.g Blundel- Wignall, Hu and Yermo (2009, p. 4) .Other authors wrote about the rise and what lay ahead of them as an investment tool for example Alexandru Cosmin BUTEIC?* , C?t?lin Emilian Huidumac Petrescu** (2017) in the article, The rise of sovereign wealth funds: an overview of the challenges and opportunities ahead. Most recent literature has concentrated on looking at the long term trends of these funds and the aspects of governance ,Abdullah Al-Hassan, Michael Papaioannou, Martin Skancke, and Cheng Chih Sun(2013) in their article Sovereign Wealth Funds: Aspects of Governance Structures and Investment Management articulated the characteristics of Sovereign wealth funds asset allocations and governance of these funds.
Other literature has been written on the investment strategies and objectives of these funds, Peter Kunzel, Yinqiu Lu, Iva Petrova, and Jukka Pihlman(2013) in their IMF paper Investment Objectives of Sovereign Wealth Funds—A Shifting Paradigm. A few other authors have written on the link of these funds to development finance see Alan Gelb, Silvana Tordo, and Havard Halland with Noora Arfaa and Gregory Smith (2014) in their paper Sovereign Wealth Funds and Long-Term Development Finance: Risks and Opportunities and Seedwell Hove in Sovereign Wealth Funds and Infrastructure Development in Africa (2016).
Looking at Sovereign wealth funds and developing countries, research has been done by Griffith-Jones, S.Ocampo, J.A(2008) in Sovereign wealth funds: a developing country perspective and Marchick, D. M.; Slaughter, M. J. Global FDI Policy. New York:
Council on Foreign Relations Press, June 2008.Determinants of the Sovereign Wealth Funds and the Brazilian Case 135.There hasn’t been an analysis into the African developing country`s perspective of the Sovereign Wealth Fund determinants and management.
Authors have also written on the general accepted principles and practices of a SWF in the
IWG – International Working Group of Sovereign Wealth Funds Washington: IWG, Oct. (2008) in their paper, Sovereign wealth funds: generally accepted principles and practices.
There also has been literature on the challenges of sovereign wealth funds in Africa by
By Professor Mthuli Ncube, Head of Quantum Global Research Lab(2017) in his article: Sovereign Wealth Funds and Africa’s Unique Challenges. Here he talks about Africa specifically and I quote” typically, there are two kinds of sovereign wealth funds: saving funds and stabilization funds. The latter is particularly pertinent in countries whose economies are oveFrly reliant on oil and commodity exports, and whose revenues are volatile in nature. Other reasons for the creation of Sovereign Wealth Funds (SWF) include war chests and, in the case of nations with an abundance of natural resources, a SWF can help to avoid the ‘resource curse’ or ‘paradox of plenty’. These are all valid ‘stabilization’ reasons for setting up a SWF. In Africa, however, stabilization reasons are not enough”
On analysis of the challenges faced, researcher going to employ the quantitative literature review methodology, commonly called a meta-analysis. Primary and secondary sources of data will be used which will include historical, statistical audio and video recordings.
The researcher will observe behavior, listen to conversations, and ask questions. Questions will be asked using questionnaires.
On the determinants, the following method will be adopted:
i. Data sample selection
First, the researcher will estimate the model based on 44 Countries with sovereign wealth funds
The following macro-economic data will be collected for these countries:
• Current account balance/GDP percentage
• Main exports(e.g. oil) as a percentage of total exports
• GDP per capita
• Reserves/GDP as a percentage
• Domestic savings/GDP percentage
The data mentioned above will be acquired from IMF (World Economic Outlook Database)
The same macro-economic data will also be collected for Zimbabwe. The Zimbabwean GDP figures will be acquired from Zimstats.
After the data is collected, the data will be organised into excel spreadsheet. The researcher will compare the global average of these economic indicators with those of Zimbabwe.
The countries that decided to create SWFs are characterized by fuel and ores exports, sustained current account surpluses and/or high levels of domestic saving, as evidenced by statistical analysis. In this context, the case of Zimbabwe stands out. The country has recorded current account deficits, its dependency on exports is very minimal and it has relatively low level of domestic savings. The rationale for creating the traditional SWF, therefore, does not seem to work for the Zimbabwean case. The decision of establishing the Sovereign wealth fund of Zimbabwe is more related to the adoption of this kind of financial instrument by major developing countries, and the dynamics among authorities responsible for the country’s economic management than with economic fundamentals.
However, the situation may change if Zimbabwe becomes a large mineral exporter. If the current hypotheses are confirmed, the country will become a major producer and exporter of the minerals and it will start to register current account surpluses. Zimbabwe would get closer, in macroeconomic terms, to countries that today count on SWFs. Nevertheless, the change would not happen in the short term.