Event

On 3 January the Angolan Central Bank communicated it would shift from a fixed currency peg to a trading band in the course of this month. The long-awaited devaluation of the kwanza is estimated to bring about another 20%-30% value loss, adjusting to the reality of lower oil revenues. Indeed, the kwanza lost about 40% against the US dollar in 2015-2016 and still remained overvalued. The official rate was kept fixed at about 165 kwanza per US dollar, while street rates were touching on 400 kwanza to the US dollar. Exchange controls were put in place and foreign exchange reserves were sold by the central bank to defend the kwanza peg. In times of dwindling oil export returns, this policy approach had an aggravated impact on Angola’s liquidity level as foreign exchange reserves shrank by approximately 40% since early 2014. The announcement of the removal of the peg came only a day after Angola’s plans were unveiled to restructure some important government debts. Against all expectations and merely three months after being elected, President Joao Lourenco is moving swiftly in reforming Sub-Saharan Africa’s third-largest economy.

Impact on country risk

Angola was battered by the oil price collapse in 2014, leading to a sinking GDP, steep fiscal and current account deficits, soaring debt levels and liquidity shortfalls. Moreover, the imposition of opaque capital controls to defend shrinking foreign exchange reserves added to accumulating payment arrears on current trade transactions. In response, Credendo downgraded Angola to category 6/7 for both short-term (in 2015) and medium-/long-term (in 2016) political risk. Ever since Joao Lourenco took over the presidency from the long-ruling Jose dos Santos in September 2017, progress has been made in addressing the crisis and tackling widespread corruption and patronage. The dos Santos family’s economic and political legacy is rapidly being dismantled, for example by marginalising dos Santos’ appointees in public administration and security services, allowing new editors at state-run media companies (increasing media freedom) and by sacking Isabel dos Santos (daughter of the former president) as head of the distressed and inefficient state oil company Sonangol. Government revenues have halved since 2014 and interest payments on public debt (stock at 75% of GDP in 2016) are expected to absorb close to 20% of total revenues in 2018. In order to reduce the debt service burden and create more fiscal policy space, Angola’s finance minister is seeking to renegotiate interest rates and maturity periods on domestic and foreign public loans, dominated by Chinese bilateral debt. The relatively small share of Eurobond debt (USD 1.5 billion) is not likely to be affected. In the short term, the lifting of the peg poses some risks. A weaker kwanza makes foreign-denominated debt servicing more expensive and higher import costs could push up inflation. Hence, a looser currency should go hand in hand with a tight monetary policy in order to help prevent another period of outsized inflation and bloated living costs as witnessed in 2016 (42% year-on-year inflation). Either way, the (probable) subsequent recovery of foreign exchange reserves should have a positive impact on businesses and trade in the longer term, while bold policy decisions and reforms are helping to recover confidence. Consequently, a more flexible exchange rate policy could have a positive impact on Angola’s near-term political risk outlook if cautiously implemented.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com