Angola’s vast oil reserves have helped it rebuild its shattered infrastructure and become one of the world’s fastest growing countries. But the country needs to develop the rest of its economy quickly to reduce its vulnerability to a fall in oil prices and tackle its high levels of poverty.

Angola has come a long way since 2002. Then, having just come out of a 27-year civil war that ground industrial output to a halt, ruined its infrastructure and rendered its health and education systems all but non-existent, it was an economic basket case.

Today, Angola’s economy of $95bn is the third largest in sub-Saharan Africa, behind only South Africa and Nigeria. Its gross domestic product (GDP) per capita, having risen seven-fold since 2000, is about $5000, which is far higher than in most of its neighbours.

Public investment since the end of the war has been huge, particularly in infrastructure. Billions of dollars have been spent rebuilding bridges, roads and railways. In Luanda, the capital, construction is happening at a frenzied pace, with people who live there saying the skyline changes every six months. A new parliament building, on a scale rivalling the US Capitol, and a $2bn land reclamation in the bay area, which includes the building of a six-lane highway and several hotels, are two of the bigger projects under way. “Anybody who was last here 10 years ago would be astonished by how much has changed,” says one businessman.

Escalating crude levels

All of this has been possible because of the country's offshore oil reserves. Angola’s daily production rose from 40,000 barrels of oil in 2002 to roughly 1.8 million last year, making it the second largest crude exporter in Africa after Nigeria. As a result, the economy, which expanded by an average of 11.6% in the eight years to 2010, according to South African investment bank Absa Capital, is one of the most buoyant in the world.

Oil dominates economic activity in the country. It accounts for 58% of GDP, 95% of export earnings and more than three-quarters of government revenues. These figures could even grow in the coming decade, with many predicting that the development of ultra-deep pre-salt blocks, similar to those found off Brazil’s coast, will see production rise to between 3 million and 4 million barrels of oil a day. “The oil sector keeps growing because they’re still finding new reserves. There’s much more to go,” says Pedro Calixto, a partner at accountancy firm PricewaterhouseCoopers in Luanda.

Angola is just as reliant on oil today [as in 2009]... Although the government understands the need to diversify its economy, it has failed to do that up to now

Alex Vines

The oil boom may have added $150bn to the government’s coffers in the past 10 years, but it has left Angola dangerously exposed to global commodity markets. It got a stark reminder of this in late 2008 and 2009 when a fall in oil prices, and subsequent capital flight, sent the country's economy into a slump. GDP growth decreased from 13% in 2008 to just 2.4% in 2009. A fiscal surplus of 9% in 2008 turned into a 10% deficit a year later. The government could not even pay its creditors and built up more than $7bn of arrears, mostly to Brazilian and Portuguese construction firms. The Angolan kwanza was hit too, losing one-fifth of its value against the dollar in the final quarter of 2009.

Since then, Angola has recovered along with global oil prices. The country's economy is forecast to rise more than 11% this year, the budget is back in surplus and foreign exchange reserves, having fallen to as low as $13.5bn during the height of the crisis, have been increased to $27bn. Almost all the arrears have been paid off, and the government’s efforts to curb inflation saw it fall to 11.4% at the end of 2011, the lowest level on record.

Policy-makers have done much to address systemic weaknesses since 2009. Tighter procedures for public contracts were introduced as many ministries were signing them without having the necessary funds in place, which added to the arrears. The governor of Banco Nacional de Angola (BNA), the country's central bank, and the finance minister were replaced in 2010 after the discovery of massive fraud at both institutions. The new BNA governor, José Massano, formerly head of Banco Africano de Investimentos, which is now Banco BAI, Angola’s largest bank, is widely respected by investors and has been praised for establishing a monetary policy committee and a benchmark interest rate for the first time.

Cursed by oil?

Many of these reforms came about as a result of the government signing a $1.3bn facility with the International Monetary Fund (IMF) in late 2009 to bolster its liquidity and support the ailing kwanza. The IMF, which released a final tranche of $133m in March this year, praised Angolan officials for restoring macroeconomic stability and enhancing accountability. The mere fact that they sought the loan, the country’s first from the IMF, encouraged investors, who saw it as a sign of the ruling administration’s desire to improve its management of public finances. “The agreement with the IMF was a huge boost to confidence,” says Victor Lopes, an Africa analyst at Standard Chartered. “It pushed the government to undertake reforms, at least at the budgetary level.”

Yet while the crisis undoubtedly spooked the government and made it realise the weakness of its economic model, Angola is still far from being insulated from swings in oil prices. “Angola is just as reliant on oil today [as in 2009],” says Alex Vines of think tank Chatham House. “Although the government understands the need to diversify its economy, it has failed to do that up to now.”

Angola has made attempts to broaden its energy sector. It will start to export liquefied natural gas this year from a newly completed $6bn plant, which will help vary its source of foreign exchange earnings.

Beyond energy, most of the country’s economic potential is nowhere near fully exploited. It has an abundance of mineral riches and is one of Africa’s biggest diamond producers, generating $1bn from exporting rough stones in 2010. Yet its deposits of other resources, such as gold, iron ore and copper, lie largely untapped.

Agriculture and services

Another sector that has big potential in Angola is agriculture. It makes up about 10% of GDP, which experts say is too small a proportion for a country with so much fallow arable land and whose rural population is mostly very poor.

Under Portuguese colonial rule, which ended in 1975, Angola had a thriving commercial farming sector. It was self sufficient in food production and a major exporter of cash crops such as coffee and cotton. But as a result of the destruction and displacement caused by the civil war, the majority of farming today is small-scale and subsistence in nature. Food mostly has to be brought in from abroad. “For a country like Angola to still be importing food makes no sense,” says Jolyon Ford of Oxford Analytica, a UK analysis firm.

Others add that while improvements in infrastructure, particularly roads, are helping the sector by ensuring farmers have easier access to markets, better agricultural research and more private investment in value-chain businesses, such as food processing companies, are needed too. “Angola has great agricultural potential,” says Elio Codato, country director for the World Bank. “During the colonial period it was a food exporter. It could regain that position. It’s just a question of redeveloping agriculture.”

Much of the services sector has thrived in the past five years, thanks in part to the rise of Angola’s middle class. Mobile phone companies are booming, generating more than $20 of revenues per subscriber each month, making the country Africa’s most lucrative telecommunications market, according to Imara Securities Angola, a corporate advisory firm.

The banking industry, which has probably benefited the most from the influx of oil money, has grown from having a paltry $3bn of assets in 2003 to $45bn today, more than double the amount in Kenya. ATMs, which were only introduced in 2006, are ubiquitous in the the country's larger cities, while the number of debit and credit cards has risen almost 10-fold in that period. “The financial system has been growing quicker than the economy itself over the past few years,” says Emídio Pinheiro, head of BFA, Angola’s third largest bank by assets.

Thanks in large part to the buoyancy of service companies, Angola’s non-oil sector is expanding at 7% to 8% annually, which is faster than the oil industry. But most analysts say this rate is too slow to make much difference to the overall economy and ensure it is no longer held hostage to world hydrocarbon prices.

FDI hope

Angola’s ruling party, the Popular Movement for the Liberation of Angola (MPLA), knows it needs to boost foreign direct investment (FDI) if it is to build a more sophisticated economy. Outside of the oil sector, in which the likes of the UK’s BP, Chevron of the US and France’s Total are major producers, and banking and telecoms, in both of which Portuguese companies are heavily involved, little private investment has taken place in Angola.

A new law was enacted last year to address this. It has given more clarity to the process of investing in Angola, including setting out specific tax incentives for each of the country's provinces (investment in the poorest ones will get the biggest breaks). It has also ensured that foreigners will be able to repatriate their profits, albeit with restrictions in the first three years of their investment. And it states that, apart from in some sectors such as banking, they do not need to take on local equity partners (although most are still likely to, given the difficulties of operating without them).

Commentators say the law should dispel any concerns that the country is largely closed to FDI. “The ball is in the court of foreign investors,” says Mr Lopes. “If they want to move to Angola and as long as they comply with the local rules, I don’t see any barriers [to them doing so].”

Yet investing in Angola is still arduous, even by the standards of Africa. While the MPLA has moved on from its espousal of a Marxist-Leninist ideology between the late 1970s and early 1990s, it has not shaken off all the relics of that period. As such, the economy remains highly regulated and power is still centralised with the presidency. “Angola is slowly turning into a normal capitalist society,” says Mr Calixto of PwC. “But there is still plenty of regulation from the past. You have to have a licence for any kind of activity.”

It probably won’t come before the elections, but I believe the Angolan government will soon do a Eurobond... Although it has high reserves, it realises it is useful to have a benchmark for Angolan risk in the market

Pedro Coelho

There is no one-stop entity to approach when carrying out FDI in Angola, as is increasingly the case in sub-Saharan Africa. Instead, would-be international investors first have to present a proposal to ANIP, the national agency for private investment. They then have to apply to the BNA to import capital, followed by registering their company and finally getting a licence granted by the relevant ministry. “Each step can only get done if the previous one is concluded,” says Mr Calixto. “The whole process can take five to six months.”

This contrasts with African countries such as Rwanda, where businesses can be registered in the space of a few days over the internet, instead of only in person.

Hurdles to development

There are plenty of other obstacles to starting a business or investing in the country. Corruption is the main one, according to the World Bank’s 2012 Ease of Doing Business ranking, in which Angola comes 172nd out of 183 – lower than Afghanistan and Zimbabwe. And it is getting worse, according to some. A recent survey by Chatham House showed that the number of firms in Angola that expected to have to ‘give gifts’ to secure a government contract rose from 37% to almost 60% between 2006 and 2010.

The country’s bad reputation for graft, particularly in the oil sector, where companies are often made to partner with opaque entities thought to be controlled by individuals within the ruling elite, deters potential investors. Some Western businesses are said by diplomats to fear that starting operations in Angola will taint their image.

Electricity shortages are also a big problem. Only about one-fifth of Angolans have access to power. Most businesses need generators, which are expensive to run. “Electricity fails every day,” says one businessman in Luanda.

Because of the lack of power and other barriers, Angolan manufacturing has yet to recover from the civil war. The sector makes up just 7% of GDP, meaning almost all goods have to be imported. Even items as basic as bottled water were shipped in from other countries until recently. As a result, Luanda regularly ranks as the world’s most expensive city, with four-star hotel rooms rarely available for less than $400 a night and rent for a modest two-bedroomed flat being as much as $4000 a month. “If you’re a poor person or even middle class, it’s extremely difficult to survive in Angola,” says Mr Vines. “It’s a really expensive country.”

Skill shortages

Perhaps the biggest problem for businesses in Angola, however, is the absence of skilled labour. A legacy of the war, during which most schools were shut or could not function properly, the average Angolan has had fewer than five years of schooling. This is improving, however. Primary school enrolment is above 85%, higher than the sub-Saharan African average, while more business schools and improvements at universities are leading to better tertiary education.

But companies still struggle to fill positions with Angolans. This is particularly a problem given the presence of localisation laws, which typically restrict the number of work permits a firm can get for foreigners.

Small businesses struggle to hold on to well-educated Angolans, often training them up only to see them move to better-paid jobs elsewhere, especially in the oil industry. “Rotation of people in companies is huge,” says Mr Calixto. “The country is growing so much that there are opportunities everywhere. If you are an Angolan with very good skills, you’ll have no shortage of lucrative offers.

“Life for non-oil sector companies here isn’t easy. They often lose skilled staff. We suffer that a lot.”

Stock market delays

Foreigners wanting to gain exposure to Angola through portfolio investment hope that the government will launch a maiden Eurobond soon. The sovereign, which was upgraded to the equivalent of BB- by Moody’s, Standard & Poor’s and Fitch in 2011 because of the swift recovery of oil revenues and reforms carried out under the IMF programme, has long considered a deal. With oil prices at $120 a barrel and a high budget surplus, Angola scarcely needs the money. And it is unlikely to consider issuing before elections scheduled in September.

However, establishing itself in the international capital markets could improve investors’ perceptions of Angola and encourage more FDI, as has been the case with other recent debut sub-Saharan borrowers, such as Ghana and Senegal. “It probably won’t come before the elections, but I believe the Angolan government will soon do a Eurobond,” says Pedro Coelho, head of Standard Bank’s subsidiary in Angola. “Although it has high reserves, it realises it is useful to have a benchmark for Angolan risk in the market.”

Local portfolio investment is very difficult, given the country’s tight capital controls, the absence of a stock market and restrictions on foreigners holding government bonds. “There’s nothing yet that’s investable,” says Anthony Lopes-Pinto, managing director of Imara Securities Angola. “Portfolio investment isn’t possible. It’s private equity or nothing.”

A stock exchange, named the Bolsa de Valores e Derivados de Angola (BVDA), was established several years ago, but its launch, initially delayed by the financial crisis, is yet to happen. Frustrated investors, who had hoped it would become operational early last year, are now pinning their hopes on 2013. “The official excuse is that the companies aren’t ready,” says Mr Lopes-Pinto of Imara, which has applied for a stock broking licence in anticipation of the exchange’s eventual opening. “There are a lot of companies that don’t have audited accounts or systems of control in place. But there are lots that do, especially the banks.”

Some think the recently restructured Capital Markets Commission will initially use the BVDA to list government bonds, rather than promote initial public offerings. While investors welcome attempts to deepen the local debt market, they say an equity market will have to be created if the MPLA is serious about diversifying the economy. Most companies struggle to get funding from banks, whose exposure to the private sector is small. And, when they can, interest rates in kwanza are often as high as 20% to 25%. Allowing them to list would give them access to a cheaper source of financing and enable them to grow. It would also improve the low corporate governance standards in the country.

Listing queue

Despite the oil sector’s dominance of the economy, investors believe that as many as 50 companies outside this industry are suitable for listing and that the BVDA could in time have a market capitalisation of more than $40bn, making it bigger than all sub-Saharan bourses bar those in Johannesburg and Lagos. Mr Lopes-Pinto says that several banks, which would likely make up the bulk of the exchange at first, are interested in going public and that, based on 2010 profits, five of them could realistically be valued at more than $1bn.

The telecoms and brewery sectors would also have high capitalisations. Mr Lopes-Pinto says Angola’s two main mobile operators, Unitel and Movicel, who have about 9 million subscribers between them, could together be valued at more than $2bn and the country’s biggest brewer, Cuca, at $2.4bn. He thinks these three companies and the banking sector alone would have a capitalisation in the region of $17bn.

Other big firms that could list include those in the hotel sector and construction companies such as the Angolan units of Brazil’s Odebrecht and Portugal’s Mota Engil – both of which have been contracted on hundreds of millions of dollars-worth of infrastructure projects in recent years.

Private equity funds are likely to target Angola over the next 10 years. So far, the only fund that is exclusively focused on the country is FIPA, most of whose investors are development agencies, including Norway’s Norfund and the European Investment Bank. Although small at only $39m in size and with a single investment limit of $8m, it aims to set a benchmark for future funds and has identified companies in sectors as diverse as advertising, fish-processing and waste management to put money in to.

Tiago Laranjeiro, head of Angola Capital Partners, which manages FIPA, expects its returns to be high, given the country’s rapid growth. “It is almost a demonstration fund,” he says. “Because it has not been done in Angola before, we need to get results that we can show to international investors. That will make Angola better known as an investment destination.”

Opportunities abound

Angola’s economy will probably remain one of the fastest growing in the world over the next 10 years, with rates of at least 8% being commonplace. High oil prices will continue to bring in billions of dollars of revenues for the government and stimulate local demand.

Yet despite Angola’s rapid expansion, it remains one of the poorest states in the world, with a life expectancy of just 51 and infant mortality far above the average for sub-Saharan Africa. “Angola’s social indicators are not at par with other countries that have similar levels of income. So Angola has a lot to do still,” says the World Bank’s Mr Codato. “The major problem is one of inclusive growth. The growth that the country has experienced is typical of oil-dominated economies. There has been lots of public investment. But the majority of people still live in very poor conditions.”

This will probably force the government to focus less on large-scale projects – Angola’s infrastructure is, after all, in much better shape than it was in in 2002 – and spend more on health and education. The private sector will also be encouraged to play a bigger role in the economy, especially outside the oil industry.

As such, investors, not least overseas ones, should have ever-more opportunities to put their money into Angola in the next decade. It may be one of the hardest and most frustrating places to do business, even for those used to Africa, but it is constantly, albeit slowly, opening up to outsiders and being liberalised economically. It presents one of the most exciting opportunities on the continent, offering both scale and long-term, rapid growth. Those that get into the country earliest will likely be the ones who benefit the most.

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