Investigations by The Weekly have revealed that Sovereign Wealth Funds usually come into existence to tackle macroeconomic or fiscal concerns associated with resource abundance, such as commodity price volatility.
They also address the Dutch disease which refers to an increase in the economic development of one sector of the economy while diminishing in others according to one economic expert, Munashe Matambo, in a study paper presented at the African Economic Conference in 2021 titled “Financing Africa’s post-COVID-19 Development”.
For example, Zimbabwe currently has large deposits of lithium, which is in high demand because of energy transition. It is only wise that before the mine is depleted or its price drops, Zimbabwe has a stabilisation buffer. In order to reduce the negative impacts of Dutch disease, cash-rich economies such as Singapore and Norway invest excess financial capital resulting from current account or fiscal surpluses abroad for the benefit of future generations, according to scholar Balding in remarks made in 2012.
Determinants of a successful Sovereign Wealth Fund
- Investment strategy and goals – It’s important for the fund to have a clear strategy and objectives that are aligned with the country’s overall economic priorities. Are they aiming for growth, capital preservation, supporting specific industries, etc.
- Management and oversight – The fund needs to be well-run by experienced investment professionals, but also have proper governance and oversight so the investments stay on track. Strong leadership and accountability are important.
- Risk management – Sovereign wealth funds must balance risk and returns. Success means achieving their goals while avoiding big losses that could set back the country. Managing risk is a big part of long-term success.
- Economic environment – External market and economic conditions play a role in any investment fund’s performance. Successful funds can navigate different environments and seize opportunities when they arise.
- Transparency – Some level of transparency, while protecting sensitive info, helps maintain credibility and support for the fund domestically and internationally. Successful funds operate with integrity.
- Resources – Larger funds with more assets to invest generally have more options and stay power, but success depends more on the above factors than the sheer amount of money.