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AfricaJuly 3 2017

Angola struggles to cut oil ties

After contracting in 2016, the Angolan economy is expected to make a slight recovery in line with the improvement in oil prices. However, the government has been slow to deliver the diversification that could improve the country’s fortunes further. James King reports.
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Angola oil

Angola’s economic fortunes took a turn for the worse in 2016. Falling oil receipts and tighter government spending dented gross domestic product (GDP) growth, which contracted by about 4.7% in the first three quarters of the year.

A dwindling supply of foreign currency, sourced mainly through the oil sector, hampered the inflow of imports essential to the functioning of the non-oil private sector, while headline inflation reached a multi-year peak of 41.9% in December 2016. These problems, and others, have laid bare the authorities’ failure to diversify the economy over the past decade, despite Angola’s vast non-oil potential.

With no easy answer to these challenges in sight, the country’s fortunes remain closely linked to the price of oil. Fortunately for the government, the value of Brent crude has slowly risen over the past 10 months, offering a much-needed boost to the economy in the first quarter as the improved price environment kicked in. Accordingly, incremental growth is expected for 2017.

“Rising oil prices have helped to expand the flow of dollars into Angola’s economy. This has helped marginal recovery in the non-oil sector and improved economic growth,” says Jermaine Leonard, director of sovereign ratings at Fitch Ratings.

Oil price effect

Research from Standard Bank, the largest lender in Africa, indicates that Angola's GDP growth should hit about 0.6% in 2017, backed by more abundant foreign currency liquidity and a more supportive fiscal position by the government. This is welcome news to Angola’s beleaguered non-oil private sector and to its banks, which are exhibiting signs of strain. But the extent to which such a marginal increase in growth will be felt on the ground is debatable.

“Although Angola’s economic situation is not as dire as last year, its recovery will be slow. The country hasn’t diversified to a point where it is not reliant on oil,” says Samantha Singh, Africa strategist at Standard Bank.

Backed by increased oil receipts, in recent months the central bank, the Banco Nacional de Angola (BNA), has been releasing additional foreign currency into the national economy. Research from rating agency Moody’s shows foreign currency sales amounted to about $5bn in the first three months of 2017, compared with just over $10bn for the whole of 2016.

“In the first quarter of 2017, the BNA has supplied more foreign currency to the economy relative to 2016,” says Lucie Villa, vice-president and senior analyst at Moody’s.

This follows the introduction of import restrictions to stem the depletion of foreign currency reserves in the aftermath of the oil price collapse. Under these challenging conditions, the BNA has been rationing foreign currency and allocating funds to priority sectors and essential goods as total reserves have fallen since 2014.

According to data compiled by Standard Bank, Angola’s total foreign exchange reserves have slipped from $32.2bn at the end of 2012 to $24.4bn in December 2016. But despite this decline, the BNA still has the requisite funds to support the rollout of additional foreign currency.

“In terms of its foreign currency reserves, the central bank is looking to maintain six months of import cover. In the first quarter of 2017 it had about eight months’ worth of cover, meaning there is scope to release additional funds into the market,” says Ms Singh.

Reduction in inflation

Growing foreign currency liquidity is also having a positive impact on headline inflation. After hitting a high of nearly 42% at the end of 2016, it is expected to improve through 2017. According to a research note published by Eaglestone Securities in April 2017, average annual inflation is expected to moderate to about 23% in 2017 – down from 32% in 2016.

“Inflation is coming down and that is partly due to improved supply of foreign currency. A big source of Angola’s inflation stems from the parallel market but as the spread with the official rate has narrowed, the inflation trajectory has followed,” says Ms Singh.

The authorities are also expected to take action to tackle inflation in 2017, though precisely what this entails remains unclear. Angola’s dependence on imports means that it has a high inflation pass through. As such, any exchange rate depreciation would have a negative impact on domestic purchasing power and in turn lead to increased inflation.

“Inflation is very high and the BNA is reluctant to let the exchange rate depreciate to try to preserve domestic purchasing power. It is likely to take some action after the election but it’s hard to say exactly what kind of new exchange rate policies it will pursue. In 2015 and 2016, the BNA devalued the currency several times, but did not introduce any significant flexibility; a similar move would be the most likely outcome given where we expect oil prices to be,” says Fitch’s Mr Leonard.

Looking ahead, much will depend on the outcome of Angola’s leadership transition taking place under the auspices of general elections scheduled for August 23. Current president Eduardo dos Santos, who has ruled Angola for the past 38 years, plans to step aside and has chosen current defence minister João Lourenço as his successor.

The dominance of the ruling party, the Popular Movement for the Liberation of Angola, points to the near certainty of Mr Lourenço becoming the next president. What such a leadership transition means for the economy and the wider evolution of the business environment remains unclear.

“We don’t know for sure what kind of policy environment will emerge in the aftermath of the elections this year. The process by which the MPLA chose Mr Lourenço to succeed Mr dos Santos has offered little insight into what will come next but our baseline view is one of continuity,” says Mr Leonard.

Backing diversity

Some market participants consider the changing political landscape to be a positive, as they see scope for a greater push towards economic diversification. Indeed, as Angola’s banks look to diversify their loan books by taking on more small and medium-sized enterprises in non-oil sectors there is growing hope that local production of essential goods can increasingly diminish the country’s reliance on imports.

“There are lot of positive expectations hinging on the likely forthcoming political change. If this brings fresh impetus to both domestic production and consumption, growth should look up. Also, the efforts of the government, banks and entrepreneurs to spur local production should show initial signs of bearing fruit. However, the international price of oil remains the key issue,” says Sanjay Bhasin, chief executive of Banco Economico.

Agriculture is a particular focus for many lenders. In common with other markets across southern Africa, the Angolan authorities have been relieved by the steady alleviation of a drought that has afflicted much of the region over the past few years. The severity of the crisis, judged to be southern Africa’s most severe drought in 35 years, hit many of the major agricultural exporting economies. But since conditions began to ease in late 2016 and early 2017, Angola is expecting a boost to its agricultural output.

“The Angolan authorities have been making a slow but steady start to the diversification of the economy. There is a big focus on agriculture, given that the country has historically been one of the better producing agricultural economies in Africa,” says Ms Singh.

Other initiatives designed to attract foreign direct investment (FDI) into the country are also gaining traction, but progress will be slow. For the time being, Angola will remain hostage to the performance of oil prices, particularly as it abides by a production cap of 1.67 million barrels per day, agreed with the Organization of the Petroleum Exporting Countries, down from a 2016 daily average of 1.7 million barrels.

“There is some talk of setting up investment zones to attract FDI and investors who want to conduct low-level manufacturing. I am not sure that will see any major pay-off in the short term. Our view is that Angola will continue to be an oil story,” says Mr Leonard.

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