Angola's Headwinds: Low Oil, Large External Debt - Emerging Market Views

Angola’s Headwinds: Low Oil, Large External Debt

Low oil prices, rapid currency depreciation, and large external debt redemptions have raised concerns over Angola’s debt sustainability in the medium term, says global rating agency S&P Global.

In reaffirming its rating of CCC+/C and maintaining its stable outlook this month, the agency on February 5 also noted the country’s debt restructuring arrangements with its official lenders do not “constitute an event of default” under their criteria. However, “debt restructuring arrangements with official lenders provide some breathing space until 2023,” S&P Global said.

The country’s stable outlook balances the “risks associated with the large external funding needs against reduced near-term debt-servicing requirements” following restructuring agreements with bilateral lenders. The agency noted it could lower the rating if the government’s access to external funds were to weaken, which could limit its ability to service external commercial debt. Or, if the additional deterioration in the external environment, such as lower oil prices, were to heighten external and fiscal pressures. “We could also lower the rating if the government signaled its intention to restructure its commercial debt on top of its bilateral restructuring arrangements,” the agency said.

An Upside Scenario

S&P Global could raise the rating if economic and fiscal reforms, supported by an improving external environment, were to reduce the debt-servicing burden, stabilize the exchange rate, and increase foreign exchange reserves beyond their current projections.

However, the combined impact of low oil prices, lower oil production, sharp currency depreciation, and the COVID-19 pandemic continue to pressure Angola’s debt-servicing ability and external buffers. Oil plays a dominant role in Angola’s economy, contributing about 25% of GDP, 90% of exports, and over 60% of fiscal revenue. The agency forecasts oil prices at $50 per barrel (/bbl) for 2021 and 2022, and $55/bbl for 2023 and beyond, compared with $43.6/bbl in 2020.

Angola’s restructuring of bilateral debt with Chinese lenders and G-20 members as part of the Debt Service Suspension Initiative (DSSI) is likely to create some room to service the commercial debt over 2020-2022. The renegotiated arrangements include deferral of interest and principal payments. The agency’s issuer credit ratings are assessments of default risk on commercial debt, rather than on concessional debt. The debt restructuring reduces Angola’s overall debt service requirements by about $4.1 billion over 2021-2022, according to the government’s estimates.

S&P Global noted in its announcement that lower hydrocarbon production and subdued non-oil growth will continue to weigh on Angola’s fiscal and external positions, despite an expected 15% increase in oil prices this year. Weak foreign direct investment inflows will constrain foreign currency reserves and the exchange rate, and keep gross external financing needs high.

“Although we expect government debt levels to gradually decrease from 2020 levels, the interest-to-revenue ratio will remain high and peak in 2023 following the current period of debt-restructuring arrangements with some bilateral lenders.”