The unprecedented collapse of oil prices in the final six months of 2014 created winners and losers around the world; Angola clearly belongs to the latter category. To call the country a petrostate would be an understatement – pumping out 1.75 million barrels per day in 2014, the oil industry contributes 95% of Angola’s exports, 45% of its gross domestic product (GDP) and 80% of government revenues.
As the price of oil slid from just under $100 per barrel in mid-July to $40 by late February, the Angolan government’s budgetary plans were slowly reduced to tatters. Having originally set out 2015's budget with a baseline of $80 per barrel, it was forced to issue a secondary budget in early March. This planned for a per-barrel minimum of $40, slashed public expenditure by 25% and increased the government’s budget deficit from 5% to 6.9%.
Oil wealth has fuelled Angola’s rise from a war-torn mess to its current status as a leading African economy. According to 2014 estimates, it boasts the continent's fifth largest national GDP, at $131bn, and the third largest in sub-Saharan Africa, trailing Nigeria and South Africa. Since the end of the three-decade long civil war in 2002, Angola’s economy has frequently hit annual growth figures of 10%, helping it repair much of the damage left by the conflict. Production of crude rose from 800,000 barrels per day in 2003 to 2 million in 2008.
Boom town
This boom has made Angola’s capital Luanda one of the most expensive cities in the world, home to a vast array of shiny new buildings and a burgeoning banking sector that has grown its asset base from virtually nothing 13 years ago to more than $60bn today.
However, even before the oil price collapse, the boom showed signs of petering out. Oil production has never matched its 2008 high. Technical problems and the relative difficulty of extracting much of the country’s remaining reserves mean production has remained static at 1.7 million to 1.8 million barrels per day since 2009, and is not expected to increase significantly in the coming years. If oil prices stay low and investment falls, production could get weaker still. The dip in oil prices experienced in 2008 and 2009 should have been a clarion call to diversify the economy, but progress down this road has been limited.
“Recent events have revealed the paucity of Angola’s non-oil economy,” says Markus Weimer, an independent consultant and Angola expert. “The reasons for this lack of diversification are many, including a lack of skills and education in the workforce, as well as the fact that despite years of investment, the country’s infrastructure is still lacking – especially when it comes to essential services required for business activity such as power, water and transport.” Adult literacy in Angola is just 70.4%, according to data collected by Unicef.
Ricardo Soares de Oliveira, a politics lecturer at the University of Oxford in the UK and author of Magnificent and Beggar Land – Angola Since the Civil War, is even more scathing in his assessment of government economic policy. He says: “On ‘diversification’, there is a huge gap between the government’s rhetoric and reality. There has been a recognition of the need for diversity for over a decade, basically since the end of the war, but nothing of any real significance has been done.”
Part of the problem is the sheer mass of red tape that domestic and foreign businesses must navigate to set up or expand in the country. The rigidity and inefficiency of the state’s bureaucratic machine stultifies new ventures and growth prospects in undeveloped sectors. The requirement for any new project to acquire ‘partnership’ from the regime enforces a clientelistic culture that is perceived as rewarding existing favourites and those with deep pockets. Angola’s reputation as one of the toughest business environments in the world was confirmed this year by a further slide down the World Bank’s Doing Business rankings, from 179th out of 189 countries in 2014 to 181st.
Debt and deficits
In the meantime, the government is having to adjust spending to the new oil price reality as best it can and cover the expanded budget deficit. Analysts indicate that demand for Angolan sovereign debt is still high, despite the country’s economic problems.
In February this year, president José Eduardo dos Santos of the ruling Popular Movement for the Liberation of Angola (MPLA) gave the green light to Goldman Sachs, BNP Paribas and Commercial Bank of China to act as bookrunners for the country’s debut Eurobond issuance. This foray into the markets has been delayed each year for the past three years, and success this time around would signal much-needed confidence in the state of Angola’s finances.
Other money-raising avenues are being explored. In mid-April, Angola began negotiations with French bank Société Générale to secure a $500m credit line. Loans from Goldman Sachs and London-based emerging market investors Gemcorp, each reportedly worth $250m, have also been secured, as well as €500m-worth of borrowing from Spanish bank BBVA.
The African Development Bank is also stepping in with $124m towards water and sanitation projects, and the World Bank has pledged $500m for improvements to agriculture. Angola has an established credit line with China, which is a recipient of much of its oil and mineral exports, and China set up a $2bn credit line to Sonangol, Angola’s state-controlled oil producer.
Dollar liquidity
Though its budget financing seems fairly secure, US dollar liquidity remains a problem in a country that, despite attempts to boost circulation of the kwanza, is still heavily reliant on the inflow of foreign currency supplied by the oil sector. With those inflows at a low ebb, the central bank must carefully husband its dollar supply to ensure that the import of essential foodstuffs, healthcare supplies and manufacturing equipment can continue unimpeded.
These dollars are generally distributed to the real economy through Angola’s network of commercial banks. This sector has been a huge success story for the country over the past decade, but the near collapse of Banco Espírito Santo Angola (BESA) in mid-2014 provided a useful warning that the industry’s foundations are far from secure. When BESA’s Portuguese parent ran into financial difficulties, the rot spread to its own balance sheet, which was found to be highly concentrated in loans to members of the governing elite and large Angolan corporates.
Many of these assets were underperforming or poorly documented, and the government was forced to inject $3bn of public funds to save the institution from total ruin. An asset quality review of the entire banking sector has since been launched by the national financial regulator.
For much of the past decade, the possible transition of power from Mr dos Santos to an anointed successor has been a popular topic of conversation among Angola’s chattering classes. The president has been in power for the past three-and-a-half decades, and, at 72 years old, is no longer a young man.
Last year it was rumoured that the process was close at hand, but Mr Weimer believes the recent economic instability has scotched these plans. “Any moves toward a political transition are now postponed. The president will not want to introduce any further uncertainty and potential instability into what is already quite a febrile situation,” he says.
Elections in 2012 gave the MPLA a solid grip on power, as it secured 72% of the votes and 175 of the 220 seats in the National Assembly. However, the vote was not deemed free and fair by many international observers, and the government frequently cracks down on investigative journalism and other forms of dissent.
