Angola’s central bank has carried out a wave of reforms in recent years to improve its monetary policies and modernise the banking sector. And its governor, José de Lima Massano, says there is still more to come.

Angola’s financial system has developed at a frenetic pace in the past decade, matching the rise of the oil-fuelled economy following the end of a devastating civil war in 2002. The country’s banks have grown from having a paltry $3bn of assets to more than $60bn today, making theirs the third largest banking sector in sub-Saharan Africa after those in South Africa and Nigeria.

The central bank, Banco Nacional de Angola (BNA), has had the tough task of overseeing and regulating this expansion, as well as creating a monetary framework virtually from scratch.

Since José de Lima Massano became governor in late 2010, BNA has launched one reform after another. Among his first moves was to improve the bank’s fiscal management by creating a monetary policy committee, a benchmark interest rate and an interbank rate, called the Luanda Interbank Offered Rate (Luibor).

Rising influence

These initiatives are still in their infancy. The base rate is not yet a powerful tool on its own for managing liquidity and the interbank market is more or less inactive beyond a small amount of overnight lending. But their influence on the economy is rising and they are, together with BNA’s use of cash reserve requirements, starting to affect the decisions of banks and liquidity levels. 

“Whenever there’s a change in BNA’s interest rates, you can see adjustments in Luibor,” says Mr Massano in an interview in Angola’s capital, Luanda. “To us, it is a sign of the increasing [importance] of our monetary instruments.”

Their greater effectiveness is one of the reasons inflation, which had long-blighted Angola, has fallen to single digits, an achievement many believe to be BNA’s finest in recent years. Inflation dropped significantly in the immediate post-war period, but was still as high as 15% in 2010. In mid-2012, it fell below 10% for the first time on record and has since carried on slowing. This February it measured 7.5%, well within Mr Massano’s target of 7% to 9%.

A stable exchange rate has helped BNA. The kwanza, protected by the country’s strict capital controls and current account surplus, has hardly moved against the dollar in the past four years, whereas many African currencies have been volatile. The kwanza’s steadiness has anchored the central bank’s monetary policy (Angola imports the bulk of its consumer goods and any depreciation would quickly result in higher prices) and enabled foreign exchange (FX) reserves to grow from $14bn in 2009 to $33bn at the end of 2013.

Less vulnerable

Economists have praised the taming of inflation and the building of FX reserves as a major step forward. They believe these give Angola the buffers it lacked in 2008 and 2009 when a crash in crude prices sent its economy and currency plummeting. While the country is still vulnerable to a big slump in oil earnings, it is, they reckon, far better positioned to cope.

BNA, partly to spur lending to the non-oil sector, has loosened its policy in response to falling inflation. It cut its base rate by 100 basis points to 9.25% in 2013 and since last June has lowered reserve requirements for local currency deposits from 20% to 12.5%.

But recent events could force the central bank to change its stance. FX reserves shrunk in the first two months of 2014 by $1bn, reflecting a slight decrease in oil production. And last year the government posted its first budget deficit since 2009. The International Monetary Fund predicts it will be the first of many as spending commitments rise.

Nonetheless, Mr Massano is confident that inflation will stay low and says he wants it to get even closer to 7%, the bottom end of his target range, by 2017. He does not expect a hike in customs tariffs in March, designed to assist local manufacturers, to affect prices much. “Angola is still highly dependent on imported goods,” he says. “With the new tariffs, the price of some products may go up. But we don’t think it will be a problem beyond the initial adjustment.”

He adds, however, that keeping inflationary pressure down in the long term will depend on the government rectifying Angola’s structural problems, including its poor infrastructure. “Although we have a primary role of keeping inflation low, in our case it’s not a job the central bank can do on its own,” he says. “We try to coordinate as much as we can with other entities, particularly with the fiscal authorities.”

Regulating oil payments

One of the biggest changes to the financial system in the past 18 months has been the implementation of an FX law for the oil and gas sector. Introduced by Mr Massano to increase the use of the kwanza in what remains a heavily dollarised economy, the law makes oil companies pay their suppliers through the domestic banking system, whereas before most transactions happened offshore.

The final part of the legislation came last October, when foreign suppliers started to be paid through Angolan banks (although, unlike local suppliers, they can still receive dollars). Some oil firms feared that the banks’ payment and processing systems would be too backward to cope with their billions of dollars-worth of transactions. But so far the transition has been smooth, testifying to the efforts banks made to modernise their systems in the run up to the law.

Mr Massano says kwanza transactions are already more common, which he felt was necessary for BNA to strengthen its monetary policies and better control the currency. In August 2013, the proportion of loans denominated in kwanzas was 65%, up from just 45% in 2010. “The FX law has helped us to maintain the exchange rate, as well as macroeconomic stability,” he says.

The FX law could also mark the first phase of Angola opening its capital account and making the kwanza convertible. It has led to the partial liberalisation of the FX market, with banks now able to source dollars from oil companies and not just BNA, as was previously the case.

Capital markets

Alongside this development, Angola’s capital markets regulator CMC has been putting in place a legal structure for a secondary debt market. At present treasury bonds are bought and held by banks. But officials hope that within a year banks and other local investors, such as insurance firms, will be trading them. Bankers in Luanda are optimistic the changes will go further and make the government remove curbs on foreigners buying kwanza securities.

Mr Massano confirms BNA will adopt a more flexible regime, but says it will do so slowly and maintain some restrictions. Angola’s financial officials have privately expressed concern at the volatility caused by rapid capital flows in emerging markets recently. And they argue that while the government has a fiscal deficit, it can fund it easily using local capital or by issuing Eurobonds.

“With the legal and operational framework being set up by the CMC, the central bank will have to introduce more flexibility to capital controls,” says the governor. “But we will need to keep the safeguards… to protect the economy from external shocks.” 

Banking reforms

Mr Massano, previously head of the country’s largest lender, Banco Angolano de Investimentos, has been no less vigorous with his reforms of the banking sector. Since 2011, BNA has introduced a raft of regulations concerning anti-money laundering, compliance, corporate governance and risk management. Analysts say these measures were vital to bring Angolan practices more in line with international ones, given that the country’s financial institutions will have to open up to global markets as they grow.

“It has been very intense in the past two years with new prudential and corporate governance rules,” says Mr Massano. “We want to bring the banking sector up to international standards quickly.”

Bankers in Luanda say already there have been significant improvements and that, should Angola’s stock exchange launch as planned in 2016, banks will be among the few companies that meet the requirements to list.

Further measures are due in the next two years, including an obligation for lenders to base their accounts on International Financial Reporting Standards. But BNA’s priority is to consolidate what rules are in place and to make sure banks comply with them.

The growth of Angolan banks is slowing, which economists generally welcome, saying that their expansion in the past decade was unsustainable and posed dangers to the country’s financial stability. Some hangovers from that period linger, however. Provisions have risen fast since 2011, in part because of troubles at construction and real estate companies, which banks lent to heavily before the 2008/09 crisis.

Mr Massano admits that the level of non-performing loans (NPLs) it too high and banks need to learn from their mistakes. But he insists that the situation is under control. “NPLs accounts for about 11% of the loan portfolio,” he says. “The rise in provisions is a consequence of that. It [shows there is a need for] further improvements in credit risk management. But at this stage it does not pose major risks to banks’ stability.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter