What are the types of sovereign wealth funds?
There are three types of sovereign funds. The first type is for profit. This is more prevalent in countries whose wealth depends on oil. For example, a country such as Kuwait, which has a small population and a large economy, but depends only on one commodity, therefore it must find a tool to maintain the strength of the economy and the wealth of the country, and generate a continuous return. The oil producing countries in Europe have also created this kind of sovereign funds, which are primarily aimed at making profit and maintaining the strength of the economy.
The second type is used by countries whose economy is based on one sector, such as the countries of the former Soviet Union, in which the economy depends on one type of income, such as gas or nuclear sector. The aim here is to diversify the economy and income resources, not to make profits.
The third type of sovereign funds, which Egypt resorted to, is moderate with some developmental purposes, but there must also be a return. Malaysia and Singapore both have similar funds.
What are the most important features of the Egyptian Sovereign Fund?
The Egyptian sovereign fund is fully independent. It is a private sector, and its management belongs to the private sector, but relies on the state budget to kick off. Immediately upon the announcement of the fund, it was registered as a member in the International Forum of Sovereign Wealth Funds (IFSWF). It is subject to transparency and good governance international standards in its transactions. The Egyptian fund aims to be a catalyst of investment.
GDP growth was driven in Egypt in the last five years by government spending. This is now the role of the private sector. Here comes the mission of the Egyptian Sovereign Wealth Fund (SWF), as it will identify the most important and attractive sectors for investors.
The fund focuses on creating investment opportunities in various sectors, providing capital which is currently not enough in Egypt, though the country has enough talents and a good market. The fund will not compete with any investor, and its role is to create investment opportunities that encourage investors to inject cash and participate in the fund’s management.
Why does Egypt take this step now?
Because Egypt now has very attractive components, including its positive fundamentals, its diversity, the potential growth in multiple sectors, the large population the current boom of the tourism sector, the growth of the economy, the stability of the local currency, and the low inflation.
What are the expected types of income for the fund?
Fixed yield
Capital Gains
Returns from floating on the stock exchange
What are the main areas of interest to investors that have talked to the Fund lately
1- Electricity
- Untapped archaeological areas
3 – Industry
Logistics
The interest in investing in these sectors this time is not out of courtesy. We are no more waiting for charity and will not waste our resources. Investment through the fund will be based on equal opportunities and convergence of interests.
What are the sub-funds of the SWF?
Sub-funds are funds created to be affiliated to the main fund, either for specific sectors, such as industry or tourism, or to introduce a specific partner or a country.
When were sovereign wealth funds established?
Sovereign wealth funds are gaining increasing importance in the international monetary and financial system, which pushed governments of many countries to establish these funds. Kuwait established its sovereign wealth fund in 1953 under the name of the General Investment Authority. The fund’s assets reached $524bn now, as the state moves to invest returns from oil in creating alternatives.
In a clearer view of the size and performance of global and Arab sovereign wealth funds, Standard Chartered said that these funds amount to 42% of the total transactions on the Tokyo Stock Exchange and 12% of the total transactions on the New York Stock Exchange.
Therefore, SWFs have become increasingly of interest to markets and policy makers, and this has led Egypt to adopt the same approach as the state announced starting the fund in September, but the idea of the SWF in Egypt depends on investing in unused assets and in green field projects
The capital of the Egyptian sovereign fund is EGP 200bn, while its issued capital is EGP 5bn, of which EGP 1bn shall be paid from the state treasury. The remaining EGP 4bn shall be injected within three years from the date of incorporation according to the investment plan. It is the first Egyptian fund aimed at managing state assets.
The Board of Directors of the Egyptian Sovereign Wealth Fund, chaired by the Minister of Planning, Follow-up and Administrative Reform, issued a decision appointing Ayman Soliman as the Executive Director of the Fund for a period of three years from 3 October 2019.
According to a statement issued by the Ministry of Planning, the selection of the Executive Director of the Egyptian Sovereign Wealth Fund came after the formation of a committee of independent members of the fund’s Board of Directors to choose between several candidates.
The establishment of the Egypt Sovereign Fund is one form of effective development partnerships between the government and the private sector. It aims at boosting joint ventures with the private sector, investment institutions, Arab and international wealth funds, maximising resources, and benefiting from the untapped assets to give a boost to sustainable development.
What are Egypt’s SWF sources of income?
Soliman explained that the management of the fund will work to balance the needs of cash and in-kind assets by entering into a partnership in cash part with the in-kind asset with investors. The return is re-invested to reach double the capital then the surplus will be transferred to the state treasury.
On the other hand, sub-funds can transfer their profits or surpluses to the sovereign fund, reinvesting the return in other sectors or sub-funds.
Revenues from sovereign funds globally depend on the proceeds of exports of some of the country’s main commodities, such as gas and oil, or through the management of foreign currency cash reserves surplus at central banks, or through insurance and pension funds to invest their funds.
He explained that the provision of cash income from the treasury of the state permanently is difficult in light of the suffering of the budget of a permanent deficit and increasing the volume of expenditure against revenue.
What are the primary goals of the SWF?
The fund will work to localise manufacturing and technology, especially that several countries want to ensure their access to industry-specific materials for a long time. Accordingly, several investment banks were encouraged to communicate with Egypt’s SWF to offer investment partnership opportunities with international investors.
Egyptian expats are extremely interested in establishing manufacturing companies, especially in automotive sector’s feeder industries.
However the need for a guaranteed minimum demand is the main challenge facing the localisation of such industries, and the fund will play a role in overcoming these obstacles through purchase contracts.
