Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Country reportsMay 1 2014

Angola seeks an end to oil dependence

Angola’s impressive post-war development continues apace. But as oil production stagnates, the government is under greater pressure than ever to diversify the economy and create jobs. 
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Angola seeks an end to oil dependence

In one of his rare speeches in October last year, Angolan president José Eduardo dos Santos said he expected the country's economy to grow 5.1% in 2013, well below the government’s target of more than 7%. To his audience of politicians, it was a signal that the oil-rich south-west African country had reached a turning point in its post-war development.

The former Portuguese colony was in a sorry state when it ended a bloody 27-year civil war in 2002. Much of its economy and infrastructure were destroyed and its health and education systems existed in name only.

Since then it has soared thanks to oil exports. Crude production rose from 800,000 barrels per day (bpd) in 2003 to almost 2 million bpd in 2008. The economy expanded at more than 10% annually in real terms, making it one of the fastest growing in the world. Angola’s gross domestic product (GDP) of more than $120bn is now the fifth largest in Africa and roughly equal to those of Ghana, Kenya and Ethiopia combined.

In Luanda, the capital, there is a frenzy of investment. Cranes clutter the skyline, putting up high-rise offices, luxury hotels and flats. The first mall in the centre of the city, Sky Gallery, is set to open its doors in July. It will include Armani, Hugo Boss and Prada shops. In the rest of the country, the government is spending billions of dollars on roads, railways, ports and energy projects.

Yet the days of Angola being able to rely on oil to fuel its boom have ended. Following a severe slump in 2009 and 2010, caused by a crash in crude prices, Angolan officials hoped the economy would quickly regain its strength. But oil output has been stagnant since 2009, when it dropped to 1.8 million bpd because of technical problems. As a result, Angola’s growth, although still high by sub-Saharan African standards, is a long way off its pre-crisis levels. The International Monetary Fund (IMF) believes GDP actually rose 4.1% last year, even lower than the president’s revised forecast.

Oil targets missed

GDP growth is unlikely to pick up significantly in the near term. Manuel Alves da Rocha, an economics professor at Luanda’s Catholic University, says growth rates could remain about 5% to 6% until 2020. Analysts generally think state oil company Sonangol’s prediction that exports will climb to 2 million bpd by 2015 are unrealistic. And even though oil firms are optimistic about the country’s largely untapped onshore and deepwater blocks, any finds from them will take a few years to come onstream.

Against this backdrop, policy-makers are under pressure to step up efforts to diversify the economy. Today, oil, which has provided few jobs for Angola’s mostly impoverished 21 million people, accounts for 97% of exports and almost 80% of the state’s revenues. Moreover, there has seemingly been little progress in the past decade. INE, Angola's national statistics body, recently said that the commodity made up 44% of GDP in 2010, down only a few percentage points from 2002.

Public finances have already come under strain from oil receipts being lower than forecast. Last year, Angola posted its first budget deficit since 2009. The IMF does not expect a surplus until 2019, mainly because the government plans to spend billions of dollars on infrastructure in the next decade, while the first ever local elections, which are meant to be held next year, and an upcoming census, the first since 1973, will be expensive. “The budget is expanding, but income is not increasing at the same rate,” says Markus Weimer, an independent consultant and Angola expert. “So, at least in the short term, there will be some pressure on Angola.”

The government’s low debt-to-GDP ratio of 27% means it will not struggle to borrow more, either locally or abroad, to fund its deficits. Foreign bankers say there will be plenty of demand if the country, rated BB- or its equivalent by Moody’s, Standard & Poor’s and Fitch, issues its first Eurobond later this year.

Seeking diversification

Nonetheless, members of the ruling Popular Movement for the Liberation of Angola (known by its Portuguese abbreviation, MPLA) privately admit that it is vital to boost the non-oil sector. Some parts of it are flourishing. Profitability ratios in the banking industry, now the third largest in sub-Saharan Africa, have dropped in recent years, but they remain high. Telecommunications firms, retailers and drinks companies are benefiting from a rising middle class.

Manufacturing is picking up, albeit from a very low base. Fewer goods, particularly food items, have to be imported, which is helping to make Luanda, one of the world’s costliest cities for expatriates, slightly cheaper. “It is now easy to find local produce in the shops,” says Anthony Lopes Pinto, head of Imara Securities Angola. “Previously, it was hard. It’s still an expensive city to live in, but not to the same extent as before.”

But Angola’s reputation for being one of Africa’s toughest business environments persists. It ranked 179th out of 189 in the World Bank’s latest Ease of Doing Business survey. Its inefficient courts make it hard for companies to enforce contracts. A shortage of power – only about half of Angolans have electricity – leads to high manufacturing costs. “What Angola needs is cheap electricity and water,” says Oxford University’s Ricardo Soares de Oliveira, author of Magnificent and Beggar Land, a forthcoming book on the country’s post-conflict history. “These are basic inputs for industrial production that are not in place right now.”

Investors and entrepreneurs are also hampered by rigid bureaucracy and a rentier culture that often forces them to partner with members of the political and ruling elite. Analysts say this hinders the development of the private sector. “The public sector still dominates and drives the economy,” says Mr Weimer. “Part of the solution to build the non-oil sector is to get away from the state being the main source of contracts and engine of growth.”

Political changes

Angola’s economic outlook is changing at a time of political transition. The 71-year-old president, who has held power since 1979, is widely thought to want to step down before or at the next national elections in 2017, even though the constitution allows him to run for one more term until 2022.

Rumours that his son, José Filomeno dos Santos, who is chairman of Angola’s newly created sovereign wealth fund, was being lined up as a successor have died down. Instead, the president is thought to favour his vice-president, Manuel Vicente, who gained a reputation as a savvy businessman when he ran Sonangol between 1999 and 2012, before he joined the cabinet for a brief stint as the minister for economic coordination.

“There would be continuation of policy [if he became president],” says Mr Weimer. “Mr Vicente has already been influential in terms of the direction Angola takes. His efforts when he was a minister were focused on empowering the local private sector. There would probably be more of that.” Angola’s political and social stability does not seem under threat. The MPLA’s grip on power is strong, and it controls most of the media. Occasional street protests are sporadic and usually small. The two main opposition parties lack broad support.

Nonetheless, whoever becomes the next president will take over a country vastly different from what it was in 2002. The economy may continue to grow quickly, but it is slowing. And about 60% of Angolans are under the age of 25, with little or no memory of the war. Peace alone will not be enough to satisfy them. They will want jobs and greater prosperity. For that, economic diversification is badly needed.

Was this article helpful?

Thank you for your feedback!