Nigeria, Africa’s top oil-producing nation, has a problem – too much money in its sovereign wealth fund and no idea what to do with it. Have no fear though, for as Reuters reports, Goldman Sachs, UBS, and Credit Suisse have kindly responded (to emails from long-lost cousins?) and will be allowed to managed 20% of Nigeria’s $1 billion fund (which is meant to cushion against oil price shocks – good timing?) This should come as no surprise to Zero Hedge readers as we have been discussing Africa as the only place left in the world capable of incremental debt capacity (and therefore growth). There are consequences (the boom-bust cycle) to this politically-motivated capital inflow; but for now the Nigerian Sovereign Investment Authority (NSIA) states (in a reassuring manner) that the banks will invest “the fund’s assets conservatively, with capital preservation in nominal terms being of primary importance,” which ‘nominally’ fits with UBS managing their Treasury exposure and GS and CS their corporate debt exposures.
Africa in geographical context…
Nigeria’s sovereign wealth fund on Wednesday appointed Goldman Sachs, UBS and Credit Suisse as asset managers for the 20 percent portion of its $1 billion fund that is meant to cushion against oil price shocks, it said.
The sovereign wealth fund (SWF) seeks to help Nigeria better manage its oft squandered oil windfall, with a threefold aim of putting money aside for infrastructure investment, providing a savings pot for future generations and lastly protecting against commodity price shocks – the so-called stabilization fund.
Africa’s top oil producer pumps around 2 million barrels of oil a day, but much of that money is wasted on corruption and a bloated, inefficient bureaucracy, economists say.
“The fund’s assets will be invested conservatively, with capital preservation in nominal terms being of primary importance,” NSIA special advisor Obinna Ihedioha said.
He added in a statement that UBS would manage the U.S. Treasury bond portfolio and Goldman and Credit Suisse would manage U.S. corporate grade bonds.
The fund started with only $1 billion owing to opposition from Nigeria’s powerful state governors, who want oil savings to be distributed for spending, arguing that it is unconstitutional for the federal government to hoard money that belongs to all three tiers of government – federal, state and local.
The Excess Crude Account, which the SWF was originally supposed to replace, is easily raided for spending. It had $9 billion in it in December last year, but distribution to governors and spending had shrunk it to closer to $5 billion by last month, according to state data.
…those who still have the capacity to look, and invest, in the future, are looking neither toward the US, nor Asia, and certainly not Europe, for one simple reason: there is no more incremental debt capacity at any level: sovereign, household, financial or corporate. Because without the ability to create debt out of thin air, be it on a secured or unsecured basis, the ability to “create” growth, at least in the current Keynesian paradigm, goes away with it. Yet there is one place where there is untapped credit creation potential, if not on an unsecured (i.e., future cash flow discounting), then certainly on a secured (hard asset collateral) basis. The place is Africa, and according to some estimates the continent, Africa can create between $5 and $10 trillion in secured debt, using its extensive untapped resources as first-lien collateral.
and also warned of the consequences here:
politically-directed capital flowing into the African resources sector is fueling and financing the strongest consumer boom in the world. It’s a vendor financing model for Asia, and it portends a major boom and bust cycle for the African continental economy.
Only by increasing real savings through a voluntary lowering of societal time preference, can Africa ever become a true diversified and sound continent economically. This is the only way for the African economy to progress. Until African people in general save more and create better policy environments for saving, investment gains will likely be unsustainable, and exposed to the whims of Western printing presses. The reality is that because this is not the direction Africa is moving in, Africa is embarking on another major boom/bust economic cycle.
and Goldman’s detailed look at the continent…