Country Response Not Sufficient
Angola’s policy response to the international oil price environment has weakened over the last year. Coupled with the higher provision of foreign exchange to the interbank, higher spending in 2017 ahead of the elections and a political transition are likely to mean a wider fiscal deficit and a decline in FX reserves. However, import cover remains amongst the highest within regional issuers, while government buffers (partly included in central bank reserves) are also stronger than peers’. Meanwhile, with much of public debt denominated in foreign exchange, a stable exchange rate has helped lower the debt burden by nearly 10% of GDP. A further decline in headline debt levels could be somewhat difficult, given the higher fiscal deficits and anaemic growth levels.
Angolan domestic politics could also be a source of downside risk for traded external debt. “In our view, there is unlikely to be any real challenge to the MPLA’s electoral dominance this August. Further, President Jose Eduardo dos Santos’s reported continuation as head of the MPLA post-elections will help ensure some continuity after he steps down as president,” Raza Agha, London-based chief economist for Middle East and Africa with VTB Capital told Emerging Market Views. “The real question is whether Angola will return to greater fiscal/policy prudence post elections. With fiscal buffers having weakened since 2014, our view is that any fiscal impulse is unlikely to hold beyond the elections if oil prices continue to evolve as currently envisaged in the consensus forecasts.”
This suggests Angola will eventually have to return to fiscal consolidation. The sooner this happens post-elections, the less abrupt it will be. Without fiscal prudence, FX reserves, the kwanza’s (Angola’s official currency) premium on the black market, public debt levels and ratings are all going to remain under pressure, keeping borrowing costs elevated.
Oil, Rates, FX
Angola’s policy response to lower international oil prices has not been the most substantial. Highlighting this, after raising administered fuel prices by an average 169% from September 2014, retail prices have been unchanged since January 2016. Second, the central bank’s provision of FX to the market, which fell to a low of ~USD 500 million in January 2016, increased to an average USD 650 million over February-June 2016, and further to USD 1.2 billion since then (in euros), pressuring reserves.
Third, with the kwanza having weakened ~75% versus USD since June 2014, the exchange rate has been re-pegged since mid-April 2016. Fourth, benchmark rates, hiked 725bp between September 2014 and June 2016, have been left unchanged at 16% since then, despite sharply higher inflation. Lastly, the 2017 budget, first presented to the cabinet in October last year, raised spending after cuts of nearly 45% in total outlays over 2015-16.
Meanwhile, there have also been unexpected changes at the helm of public, quasi-public and political institutions over the past year. In March, incumbent President Jose Eduardo dos Santos announced he would retire in 2018, having been in office since 1979. Earlier in March, a new central bank governor was appointed. By June, the Angolan authorities had had a change of heart regarding the International Monetary Fund program they had solicited.
The same month, political/institutional change continued with appointments to the Angolan national oil company (Isabel dos Santos) and the ruling MPLA’s Central Committee (Welwitschia dos Santos and Jose Filomeno dos Santos). In September, a new finance minister was appointment. In December, Defense Minister Joao Lourenco was chosen by the MPLA’s Central Committee as the party’s presidential candidate in the August 2018 elections.
New Policy Ahead?
Amongst other things, these changes might suggest that the government is looking to shift economic policy into expansionary mode. Two things have likely underpinned this shift: first, oil prices bottomed out in late January 2016, raising monthly MinFin revenues from a low of ~USD450 million in March 2016 to an average monthly USD700 million between then and the end of 2016, easing financing constraints; and secondly, preparations for the August 2018 elections and the first political transition in Angola since 1979.
Given the centrality of oil prices and the government sector, the rise in oil prices, shift to expansionary economic policy and political changes (made and in store) are likely to be the key determinants of how the Angolan economy evolves in the near term.