Frontier Friday: Angola Growth Halved, Revenues Shortened
OPEC-member Angola appears to be heading for a very rough patch of economic and potentially political instability that will “sap investor confidence” ahead of its elections in 2017. According to Verisk Maplecroft, the UK-based global risk analytics firm, Angola’s president, José Eduardo dos Santos (who has led the country since 1979), announced in March of this year that he will step down in 2018. Shortly after in June, it was announced that his billionaire daughter Isabel, coined as Africa’s richest woman, had been named head of the national oil company Sonangol. This unsurprisingly evoked speculation that she is now next in line to rule Angola.
What may at first have appeared as an orderly family succession–one that promised political and essentially policy continuity, actually conceals a much more worrying picture of an oil-dependent country in turmoil. And the worst is probably yet to come, says Verisk Maplecroft. “Economic mismanagement during the boom years has left the country unable to cope with the impact of persistently low oil prices. Moreover, dos Santos’ grip on power has hinged upon oil wealth and its distribution among the ruling elite,” Dr. Maja Bovcon, senior Africa analyst with the firm said in a published note. “The decline in oil revenues therefore corrodes his ability to retain state control and eventually pass it to his chosen heir.”
According to the International Monetary Fund (IMF) Angola‘s external balance sheet has been its credit strength. However the steady decline in oil prices since 2014 has put real constraints on external buffers. The current forecast on Angola’s account deficit stands at 13.9% in 2016, from an estimated 8.7% last year and in contrast with a large surplus as recently as 2013.
Angola has a large external funding gap due to capital outflows as oil companies transfer deposits abroad. With foreign direct investment (FDI) inflows falling, external borrowing is necessary to avoid a sharp fall in foreign exchange reserves.
The Angolan government has not revealed an alternative to IMF support after stating in June that it would discontinue talks with the Fund on a potential loan. This therefore now increases risks to the sovereign’s external financing position if no other sources of external funding are available, global ratings agency Fitch Ratings says. “We identified deteriorating external dynamics as a rating sensitivity when we revised the outlook on Angola‘s ‘B+’ sovereign rating to “negative” from “stable” in March, the agency said in a published note.
The IMF confirmed that Angola has sought to halt talks on an economic program supported by financial assistance. The Angolan authorities had made a formal request for discussions on a program and possible three-year Extended Fund Facility (EFF) in early April. The IMF said that dos Santos wants to maintain dialogue regarding the its annual assessment of the country’s economy.
Currently, risks to the country’s reserves appear to have risen. Failure to attract sufficient financing sources, precipitating a more abrupt macroeconomic adjustment, could lead to a downgrade.
Weak governance is a significant constraint on Angola‘s sovereign rating and ending IMF talks highlights policy unpredictability– notwithstanding the strong policy response mounted so far to the fall in oil prices, Federico Barriga Salazar, London-based director with Fitch Ratings’ Sovereigns group wrote in a note to clients. “This has included a series of kwanza devaluations, most recently in January 2016, to cushion the current account balance and maintain reserves, which have been stable at USD24.5bn this year, according to the National Bank of Angola.”
Photo Credit: Martin Bureau/AFP/Getty Images