Czynniki ryzyka i perspektywy

Given the profound lack of export diversification, Angola is structurally exposed to the risk of oil price volatility and deficient global commodity demand. Both Angola’s fiscal health – despite forthcoming efforts in fiscal management reform - and external solvency are vulnerable to any sustained negative oil price shock. The poor infrastructure and difficult business climate are expected to keep on restraining the development of both the private and non-oil sector. The threat of political derailment has recently diminished somewhat. Nonetheless, challenges will emerge from presidential succession plans and increased empowerment of civil society and opposition groups, which might again spark urban demonstrations and severe crackdowns.

The basic medium-term scenario projects an optimistic macroeconomic outlook with strong growth prospects driven by oil prices that are likely to remain favourable and an anticipated steady increase in oil output and investment, while growth is being increasingly supported by large public investments in non-oil sectors such as infrastructure, commerce and agriculture (‘Angola 2025’ development plan). Thanks to strong oil revenues, Angola’s external accounts are solid with vigorous financial fundamentals, a strong liquidity position and a surplus - though declining - on the current account. Henceforth, the country is likely to preserve a favourable classification for short-term political risk, while the middle- to long-term risk classification was upgraded early 2013 to 5/7.

Fakty i liczby

Zalety

  • Africa’s third biggest economy
  • Robust financial indicators (net external creditor) and low debt ratios
  • Strong balance of payments enables accumulation of financial buffer
  • Significant oil/gas reserves

Wady

  • Persistent high poverty and simmering social tensions
  • Profound lack of export diversification
  • Difficult business environment and infrastructure bottlenecks thwart competitiveness
  • Fragile banking sector

Main export products

  • Crude & refined oil and gas (96.8% of total current account earnings), Diamonds (1.8%)

Income group

  • Lower middle income

Per capita Income (USD)

  • 3,830

Population

  • 19.6 million

Parliamentary and presidential elections (every 5 years)

  • Latest in August 2012

Head of State and of government

  • President José Eduardo dos Santos

Ocena ryzyka dla kraju

Political hegemony reaffirmed yet facing future challenges

On 31 August 2012, long-ruling President José Eduardo dos Santos – in power since 1979 - secured another five-year term after his MPLA (People’s Movement for the Liberation of Angola) won almost 72% of the vote. The ruling party’s continuing dominance was widely expected as it has a tight grip on media and state institutions while facing fragmented opposition. A new controversial constitution enacted in 2010 concentrates power in the hands of the president, who oversees all major decision-making. In this new system of ‘parliamentary presidentialism’ the nominated candidate of the largest party automatically becomes president.

After gaining independence from Portugal in 1975, Angola plunged into a civil war that was fought between rebel movement UNITA - which transformed into today’s main opposition party - and the ruling MPLA. The conflict was ended with a peace agreement that was signed in 2002. Tapping into growing discontent with the ruling MPLA, UNITA managed to double its number of parliamentary seats during the 2012 elections. Nevertheless the main opposition party is still struggling to shake off its former-guerrilla reputation among   a population whose priority is preserving peace and stability after decades of conflict. Despite phenomenal oil riches, the majority of Angola’s population continues to live in extreme poverty and life expectancy lies below the African average. In 2012 the capital Luanda witnessed unprecedented yet fiercely suppressed demonstrations led by youth and civil society groups that voiced growing disillusionment with the MPLA’s failure to use the oil wealth to benefit its citizens instead of sustaining patronage.

Near-term risk for political destabilisation recently diminished with the relatively smooth passage of the August 2012 elections, despite the violent run-up. However, succession plans of seventy-year-old President dos Santos are expected to raise tensions. The most probable scenario is a ‘controlled handover’, shortly before or after the next elections in 2017, to a successor of the president’s choice; currently Vice-President Manual Vincente or his son Zénù (who recently became chairman of the Sovereign Wealth Fund, see below). This scenario would imply a continuation of the status quo where the dos Santos clan’s interests are safeguarded, yet where the risk for accelerating social unrest and anti-government demonstrations would surely manifest itself. In a second scenario, President dos Santos dies or becomes incapacitated ahead of the 2017 elections, which would lead to inter-MLPA power struggles given the profound factional rivalries. This could equally encourage people to take it to the  streets and increase the risk for contract renegotiations (as most contracts bypass the Angolan state) if the dos Santos clan is deprived of its assets and a reshuffle of industrial gatekeepers takes place.
For now, political stability depends almost entirely on President dos Santos’ ability to balance the different factions inside the MPLA. Moreover, UNITA’s renewed urban campaign could lead to increased street protests during the current presidential term. With a negligible political dialogue between MPLA and opposition, there is little encouragement for regulatory reforms in the near term. In the long run, growing independence of civil society groups, progression in competitive politics – as demonstrated by the significant number of votes to split opposition party CASA-CE – and President dos Santos’ succession make it likely that MPLA’s crushing supremacy will decline.

Maintaining well-diversified international relations

When it comes to foreign policy, Angola is determined to avoid repeating its Cold War proxy past. Consequently, the government skilfully maintains diversified diplomatic and financial partners. Despite China’s massive loans for Angola’s post-war reconstruction, the government has also arranged important oil-backed credit lines with Portugal, Brazil, Germany and the United States. Moreover, Angola restored relations with the IMF during the 2009 crisis, enabling a Stand-by Agreement loan facility (SBA) while avoiding overreliance on Chinese financing and opening the door for improvements in the detrimental business climate.

Angola_September_Graph1EN

Firm macro-economic recovery leaning on favourable oil prices

After four decades of civil war that brought the entire economy to a standstill, Angola managed to become Africa’s third biggest economy and second largest oil exporter during the oil-price boom of 2003-08. Moreover, Angola became China’s second oil supplier after Saudi-Arabia and attained an astounding real long-term annual growth average of 12.9% between 2000 and 2010. The collapse of oil prices during the 2008-2009 crisis revealed Angola’s problematic vulnerability to external shocks as the country was left with a substantial external financing gap and a budget deficit which led to public payment arrears. Since then  oil prices have surged, allowing Angola to pull off a strong macroeconomic recovery.

In 2013, the country’s economy is expected to grow 6.8% while for 2014, growth is anticipated to reach a favourable 6.9%. Angola’s positive growth outlook leans upon a projected steady increase in oil output and investment, buoyed by the first liquefied natural gas exports (LNG Soyo plant started up in June 2013) and an expected rise in crude production from 1.75 mn b/d in 2012 to 2.1 mn b/d by 2017. According to the World Bank, known crude oil reserves will allow for at least another 21 years of exploitation. In addition, non-oil sector growth is anticipated to continue, with its strong performance especially driven by public investments coming on stream primarily in infrastructure, but also agriculture and commerce. The ‘Angola 2025’ national development plan aims at curbing structural challenges and enhancing economic diversification, as the civil war left most non-oil economic potential underdeveloped.
The growth outlook – however optimistic – can still be affected by oil price fluctuations and the risk of sustained gloomy global commodity demand. However, the basic medium-term scenario projects record highs in terms of growth supported by oil prices that are likely to remain favourable, while being increasingly driven by large public investments in non-oil sectors.

Angola_September_Graph2EN

For now, oil exports allow for current account surplus

Angola’s current account balance has always been closely linked to the international oil price. The middle income country has displayed a double-digit surplus since 2005, interrupted by the crisis in 2009, after which current-account-to-GDP surpluses went into single digits. For 2013 and 2014, the current account displays an anticipated surplus of +5.2% and +3.7% of GDP and the balance of payments is likely to continue to allow for the expansion of a financial buffer. Nevertheless, Angola’s tight export base – with oil exports making up for 96.8% of total foreign currency revenues – leaves the country widely exposed to external shocks. The current account is likely to deteriorate in the coming years due to large import- intensive public investments.

Structural deficiencies hinder needed export diversification

The profound lack of export diversification forms a constant structural economic risk. High-potential, non-oil exports (mining, industry, agriculture) have been underperforming partly due to the resource curse phenomenon. The competitiveness of non-oil exports is heavily affected by a real exchange rate appreciation - the so-called Dutch disease - and substantial costs associated with the infrastructure gap, together with lacking human capital in a very troubled business climate (listed 172th out of 185 countries in the World Bank’s Doing Business ranking). Over the years, foreign direct investment (FDI) in Angola has been going downhill, which is typical for an oil-producing country with high historical significance of oil-related FDI, yet with little new FDI inflows given the neglect of non-oil sector development. Low net-FDI numbers are also due to the reversed flows of oil-related capital (as from Angola to Portugal) and the profound requirements for government approval in many non-oil industries.

Overall, government intervention – with the public sector dominating the entire economic domain - and deeply rooted corruption have been preventing private investment in the promising non-oil sector to take off. Also, the emergence of Angola’s demand-side potential – with its young and rapidly growing population– depends on the government’s willingness to invest in education, health and labour market development outside the vibrant informal sector.

Manageable public debts backed by slowly emerging reforms

After the abrupt decline in world oil prices resulted in a budget gap and payment arrears in 2009, Angola strengthened public financial management - encouraged by the IMF’s Stand-by-Agreement (2009-2012) - which allowed for clearance of the sizable domestic arrears. Gradually emerging fiscal reforms aim at containing the current draining of public resources by fuel subsidies (7.8% of GDP in 2011), broadening the tax base and reducing fiscal vulnerability to oil-related shocks. Budget diversification may be making headway as the ratio of oil revenues to total public revenues exceeded 90% a decade ago, whereas in 2012 oil earnings made for about 75%. Yet despite imminent progress in fiscal management, the government budget is still exceedingly dependent on oil. The non-oil primary deficit (NOPD) for 2012 is projected at -24.9% of GDP, owing to persistent oil dependence and untenable fuel subsidy costs.

Backed by the IMF, the authorities recently began to phase out the system of quasi-fiscal operations (QFOs) under which unverifiable spending of oil revenues is carried out by Sonangol (the state-owned oil company) on behalf of the government, which created budgetary opacity and posed a considerable fiscal risk. The USD 32 billion (around 30% of GDP) ‘accounting discrepancy’ tracked by the IMF in December 2011, was linked to these QFOs. Moreover, in October 2012 an initial USD 5 billion was set aside in an upstarting Sovereign Wealth Fund (SWF) – containing inflows from oil sales – to protect the budget against oil price volatility and to preserve the country’s oil wealth for future generations. The fund should enable the enrolment of a steady investment envelope for improving social welfare. Yet, in reality it might be used for investments abroad to benefit the political elite, as the lack of a transparent investment or spending strategy makes it possible for the fund to invest wherever it chooses. In June 2013, the President’s son Zénù was named Chairman of the SWF and the only confirmed transaction so far is the purchase of a building in Mayfair, London.

Angola_September_Graph3EN

Angola_September_Graph4EN

Angola plans to issue its first sovereign Eurobonds this year to raise USD 1 billion - largely needed to finance the infrastructure spending plans - following the recent example of neighbouring Zambia and Namibia. After reaching a 6.1% of GDP budget surplus in 2012, the country’s budget is expected to reach a 3.1% surplus in 2013 and 2.4% in 2014, according to this year’s budget bill. The downward trend results from the ambitious government spending plan set to be rolled out over the projection period and the incorporation of QFO-spending into the 2013-budget for the first time. Nevertheless, it remains doubtful whether Sonangol transfers adequate oil revenues to the treasury given the history of lacking transparency, and it should be tackled to ensure fiscal sustainability. In general, the public debt outlook is favourable thanks to projected solid oil revenues. Total public sector debt has been falling to an estimated 28.5% of GDP in 2012 and is expected to increase moderately in the upcoming years.

Single-digit inflation amongst difficult financial sphere

Before 2002, consumer prices in Angola rose by more than 100% yearly. Yet as export revenues started to flourish and led to an appreciation of the local currency (Kwanza), while the Central Bank of Angola (BNA) tightly monitored broad money aggregates, inflation came down averaging around 13.8% between 2005 and 2011. In 2012, inflation dropped to a multi-decade low, reaching 9.6%. Consumer price increases are expected to stay in the single digits provided that the BNA pushes through a sustained tight monetary policy. However, structural excess liquidity limits the impact of BNA’s lending rate or credit manoeuvres  and should be mopped up by the BNA. Credit to the private sector is still relatively low and corresponded to 20% of GDP in 2012. As inflation cooled down, the BNA seized the opportunity to lower its benchmark interest rate by 0.25% to 10% in January 2013 and the benchmark was cut again late August to 9.75%.
However, inflation might be pushed back into the double digits by a new foreign exchange law to be finalized in late 2013. It mandates the transfer of offshore oil money to domestic banks and requires for oil-related transactions to be carried out in Angolan Kwanza, which might create a credit boom and put upward pressure on prices by end 2013.

Angola’s banking sector still faces systemic weaknesses despite its post-crisis recovery due to an inadequate legal system, lacking supervision, vulnerable capital positions and low market penetration. Links with foreign-owned banks - mainly Portuguese - expose the banking system to cross-border contagion in the event of renewed turmoil in the EU.

Favourable debt dynamics, ample external liquidity

External debt remained moderate over the past years due to robust economic activity, high oil prices and demand, and, on average, a strong and stable Kwanza. Thanks to the large arrears clean-up worth USD 3.7 billion in 2006, Angola’s external debt stock abruptly diminished and relations with external creditors were regularised.

External debt relative to GDP dropped from 76.5% in 2002 to merely 22% in 2012 and is expected to only moderately increase over the coming years. The country’s external liquidity position has further improved as foreign exchange reserves have surged tremendously over the past five years (more than tripled) and currently permit 7.3 months of import cover while covering eleven times the short-term debt and thirteen times the very modest debt service. The latter’s ratio to export earnings has been stable around a low average of 4% in the past five years and is expected to remain modest in the long term. It is therefore fair to say Angola holds a very comfortable external liquidity situation.

Angola_September_Graph5EN

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com