Event

Mid-April, the Angolan government turned to the IMF for financial assistance to deal with a bad liquidity crunch. Following the collapse of international oil prices mid-2014, foreign exchange reserves dropped by more than 25%, given that Angola is one of the most oil-dependent economies in the world. In order to prevent further erosion of its foreign exchange reserves and avoid additional devaluation of the kwanza (which already lost over 30% of its value), capital controls were introduced by the Angolan central bank in 2015. Despite these arbitrary restrictions on hard currency availability for banks and corporates, foreign exchange reserves further plunged.  Apparently, fears about the Angolan follow-up of anti-money-laundering regulations made some major banks (e.g. Bank of America) cease providing US dollars to Angolan banks. As a result, banks came under additional stress and overseas payment problems aggravated, which eventually drove the government towards seeking IMF assistance in order to wind off a full-blown balance of payments crisis.

Impact on country risk

A positive outcome of currently ongoing negotiations for a three-year ‘Extended Fund Facility’ is important for stopping the downward spiral. Around USD 1.5 billion in concessional financial assistance could be unlocked over three years if Angola adheres to targets and reforms are implemented. In fact, IMF support raises the opportunity for tackling major structural weaknesses like lacking diversification, opaque regulation, corruption and transparency issues. Moreover, it is expected that currency flexibility and dismantling capital controls will be important IMF requirements. Consequently, the programme could improve Angola’s macroeconomic fundamentals in the longer run while market confidence might get a boost and help encourage international banks to resume dealings with the country. Even so, during the 2009 crisis Angola also turned to the IMF yet it didn’t bring about a well-diversified economy or trustworthy buffer savings, and the deeply-entrenched patronage network around the dos Santos family hasn’t disappeared either. Therefore the government might simply reverse reforms in case oil prices increase significantly again, yet with international oil prices expected to remain low for a long time, reforms might actually stick this time. Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com