Sovereign Wealth Funds Provide The Patient Capital Necessary For Growth

For a small country without abundant mineral resources, the idea of a sovereign wealth fund for Djibouti might have seemed as bordering on the absurd but Lionel Zinsou, founder and managing partner of Southbridge, a pan African advisory consultancy, profoundly disagrees. To prove his point, he was involved in structuring Djibouti's Sovereign Wealth Fund Fonds Souverain de Djibouti, FSD.

In a continent where patient capital is hard to come by, sovereign wealth funds can be an important instrument for long term, sustainable financing, he argues. While sovereign wealth funds are typically based on natural resources, their absence is not necessarily an inhibiting factor. Singapore, for one, is a classic example.

"Even if a country does not have natural resource-based revenues, such as oil or gas, that does not mean it cannot have a sovereign wealth fund. We are not Saudi Arabia with oil wealth, and we are not Botswana with diamonds. But we have identified resources and potential savings capacity. At that point, we need to use that capital to strengthen public or private companies," he argues.

In the case of Djibouti, Zinsou says, its strategic location, stability and consistent revenues were among the assets on which the FSD would come to be based. "It is the most stable country within a 2,000 to 3,000 km radius Djibouti is one of the most liquid financial centres in Africa it has a strong banking system, which acts as a financial haven for the region the Djiboutian currency is stable, pegged to the US dollar, backed by a sovereign guarantee and there is a steady income source from military bases, which ensures security and financial stability," he points out.

Regular allocations to the fund would thus enable the country to make the capital investments it needs.