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The Sovereign Wealth Fund

The Sovereign Wealth Fund

  • Meul Gulabsinh • CFO at Big Bank

Following the discovery of large non-renewable natural resources over the last decade, the Mozambican Government soon recognised the need to create the foundations for the appropriate and responsible management of the revenues derived from the implementation of the projects to exploit these resources, namely through the creation of a Sovereign Fund.

Thus, following various events and working visits, with the aim of promoting debate and obtaining contributions from other success stories and best practices, last October the Bank of Mozambique published a proposal for a Sovereign Wealth Fund model, and opened it to public consultation, encouraging debate and listening to comments from civil society and other interested stakeholders.

The Bank of Mozambique’s proposal envisages that the country will raise about US$96 billion over the lifetime of natural gas exploration projects. The proposal also states that, in line with the best international practices, the Sovereign Fund should not invest in the domestic market, which should be carried out exclusively through the State Budget, based on the criteria of allocation of revenues and inflow and outflow of financial flows previously defined.

This positioning is understandable and has as interpretation a concern in distancing the Sovereign Fund as a potential future source of funding for infrastructure projects or to act as a financer of last resort of the economy in periods of stress, keeping this entity independent from the various economic and political cycles.

This restriction also seeks to protect the economy from the effects of the so-called “Dutch Disease”, namely from the effects that may arise from over-investment in the economy in the short term, which could lead to an exchange rate appreciation, making exports in traditional sectors of the economy more expensive, leading to a loss of competitiveness for the country.

However, this position is open to debate, since it can also be argued that it should take into consideration the stage of economic and social development of the Country, which may be more adherent in situations of more developed countries.

Translating into figures, according to Stock Exchange indicators, in 2020 about a thousand transactions took place in the secondary market, for a total amount of about USD 75 million, mostly in bond securities

The Mozambican market, and in particular the capital market, despite showing growing development in recent years, is still underdeveloped. There are several reasons that contribute to this restrained growth of the stock market, among which is the lack of liquidity in the secondary market.

Translating into figures, according to Stock Exchange indicators, in 2020 there were about a thousand transactions in the secondary market, for a total amount of about USD 75 million, mostly in bond securities.

In equities, removing the non-recurring effect of a transaction of a block of shares, the total volume traded on the secondary market was less than USD 1 million, equivalent to about 0.3% of the market capitalisation of listed equity securities.

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This lack of liquidity, on the one hand, results from a buy-and-hold culture, in which investors hold assets to maturity or for long periods, disregarding, or in most cases not knowing, the possibility of trading them in the secondary market.

On the other hand, it appears to be a “chicken and egg” dilemma, to the extent that it discourages investors from trading in the secondary market and, in turn, discourages companies from considering the implementation of primary market operations.

Thus, notwithstanding the concerns identified, in the scope of the creation of the Sovereign Fund and in the definition of the investment policy, it is important to consider the allocation of a small percentage of the Fund to investments in financial instruments in the domestic market, in order to support its development and promote liquidity.

Naturally, these investments should be subject to the same risk and return analysis as the other investments of the Sovereign Wealth Fund.

However, its mere participation in the domestic market, as an institutional investor, with professional management in accordance with international standards, would have catalytic effects in the way companies and investors, domestic and international, would perceive the capital market, contributing to increase players and transactions, and drive liquidity and professionalism in the market.

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