- Burkina Faso
- Cape Verde
- Central African Republic
- D.R. Congo
- Equatorial Guinea
- Guinea Bissau
- Ivory Coast
- São Tomé and Príncipe
- Sierra Leone
- South Africa
- South Sudan
Tuesday, April 19, 2016
Nest-egging for a rainy day
The boom years of the commodities and the fast-growing African economies produced a growing class of millionaires and billionaires. According to a study by Capgemini and RBC Wealth Management, there were nearly 150,000 “high net worth individuals” in Africa by 2014, sharing wealth of $1.44tn.
But the revelations of the Panama Paper has the rich and famous worldwide squirming as their financial dirty laundry gets a public airing. Some of the documents released has uncovered illegal or scandalous conduct. But it may be revelations about the routine nature of offshore finance that have the most lasting impact. Mounting evidence suggests that a preference among African elites to shield their assets offshore means that inequality is greater than generally realised.
Between 1970 and 2010 an estimated $814bn flowed out of the continent, according to the Political Economy Research Institute at the University of Massachusetts. “Most of the estimates we have for inequality leave out the fact that the top 1 per cent, in addition to all the money in their domestic accounts, have a lot of money offshore,” says James Henry, an expert in offshore finance and former chief economist of McKinsey & Company.
In Nigeria, Africa’s largest economy and top oil producer, for example, the number of individuals with assets over $1m surged by 44 per cent between 2005 and 2013, to 15,700.
Ethiopia, which has struggled with food insecurity and famine for decades, is producing millionaires at a faster rate than anywhere else on the continent. Between 2007 and 2014, the number more than doubled, from 1,300 to 2,700, according to New World Wealth, a consultancy based in the UK and South Africa.
The offshore industry has been growing since 2010 as stock markets in the region have taken off. The gains tended to accrue to a small elite and, thanks to the increasing ease with which money can be moved, the rate at which it flows offshore has surged. Global Financial Integrity, an NGO, estimates that illicit flows out of Africa are increasing at a rate of 20 per cent a year.
“Most ordinary people do not have stocks, so it is simply a result of the ownership of securities that has been a fact,” says Mr Henry at McKinsey. “What we tend to find is that once it is offshore, [money] stays offshore and is reinvested . . . Basically people are looking at this as their nest egg for when they get thrown out of power or need to retire.”
While rainy day funds held offshore tend to stay there, an estimated 20 per cent of such assets do circulate back into domestic markets. One popular avenue is through privatisation. However, such investments tend not to stay in domestic markets for long, as the companies invested in can then be used as vehicles to shift significant amounts of wealth offshore. “In every respect, this is an extremely poor quality of investment,” says John Christensen, director of the Tax Justice Network.
The private banking industry that caters to Africa’s wealthiest, including their offshore needs, has attracted many of the biggest global banks. Swiss banks such as UBS, Credit Suisse and Julius Baer are all major players in African private banking, as are family-owned banks Pictet & Cie and Lombard Odier. Big French banks such as BNP and Société Générale as well as British banks HSBC, Standard Chartered and the upmarket Coutts are also significant players.
Johannesburg-listed Standard Bank is among the firms that have expanded their services to cater to Africa’s new class of wealthy individuals. In 2009 it established a Wealth and Investment business as an offshoot of its existing Private Clients division, catering to individuals with $1m in investable assets or more. Since then, its business in South Africa has trebled, while franchises in Nigeria and Kenya have each grown by over 50 per cent. Offshore is a key component of the services offered. “Almost all of our clients chose to externalise a part of their discretionary savings into safe havens such as our offshore jurisdictions,” says Deon de Klerk, Jersey-based head of Africa and International for Standard Bank Wealth and Investment. “This part of their wealth is seen as the nest egg and philosophically tends to be managed for long-term capital preservation,” he adds. “UK property has been very attractive over the past few years, and many wealthy Africans own second properties there.” The business currently has in excess of $12bn in assets under management worldwide.