Post-conflict Angola is seeking to move away from its dependency on oil revenues and develop its other plentiful resources. However, the route is littered with challenges such as long-standing corruption, burgeoning red tape and social inequality, all of which are likely to hinder the government's progress. James King reports.

Since The Banker published its last special report on Angola in June 2015, the country’s economic situation has deteriorated markedly. The subdued oil price environment has forced the government to seek an International Monetary Fund (IMF) bailout – which at the time of writing was under negotiation – in response to widening current account and fiscal imbalances.

Declining oil receipts are also hitting gross domestic product (GDP) growth, which is expected to fall to just 2.5% for 2016, down from 6.8% in 2013. This environment is contributing to a foreign exchange crisis, rising inflation and higher interest rates, all of which have constrained the ability of Angola’s nascent non-oil sector to cushion the economic blow.

For the government, there is little left to do but engage in a meaningful process of reform. Here, the early signs have been encouraging as cuts to generous fuel subsidies and the introduction of investor-friendly tax reforms have drawn praise from a number of analysts. But, as is the case with other oil exporters, this reform agenda will take time. “The government has now started thinking beyond oil and there are moves towards diversifying the economy into primary areas including agriculture, livestock and aquaculture,” says Sanjay Bhasin, chief executive of Luanda-based Banco Económico.

Structural challenges

But developing local production capacity and growing the non-oil sectors of the economy will require a concerted effort to address Angola’s long-standing structural challenges. For one, levels of corruption and mismanagement are rife, according to non-governmental organisation Human Rights Watch. In addition, the IMF has noted that excessive bureaucracy poses a challenge to the private sector, as do often opaque investment and business laws that are in need of streamlining.

On most of these points, Angola has a poor track record. A number of international observers agree that the government of president José Eduardo dos Santos, who has held power since 1979, largely failed to address these structural issues and effectively pursue economic diversification when oil prices were high.

But in relative terms, the scale of Angola’s challenges appears more favourable compared with other oil-exporting countries. At 1.2 million square kilometres, Angola is about twice the size of France and is blessed with an abundance of non-hydrocarbon resources and agricultural potential. “Despite the macroeconomic challenges facing many of Africa’s key economies, hospitality, timber and mining, healthcare and agriculture remain some of the key sectors to investing in Angola,” says Jean-Claude de Morais, founder and chairman of the advisory board at Quantum Global, an African investment firm with interests in Angola.

Less divided populace

This economic potential need only be distributed among a population of 25 million. However, though levels of inequality are extreme and poverty rates are high, Angola does not suffer from the same degree of ethno-national cleavages that beset producers such as Nigeria.

“Compared to other oil-exporting countries, Angola’s diversification drive is likely to be less challenging. It has a small and relatively cohesive population, coupled with untapped economic potential in a number of sectors,” says Pedro Ferreira Neto, chief executive and founding partner of Eaglestone, an investment firm with interests across sub-Saharan Africa.  

In addition, the cradle-to-grave welfare system that exists across many of the oil-producing Gulf Co-operation Council countries, is absent in Angola. This means that any reform programme will require a concerted effort to address issues around governance, regulation and the performance of the public sector, rather than any wholesale renegotiation of the social contract.

This is not to say that reform will come easily, however. For one, Angola’s banking sector is likely to suffer in the cooling economic climate. Though the country’s banks now have about $79bn in assets, according to research from KPMG, their continued health will be paramount to the government’s reform agenda. “Angola’s banks have a big role to play in the country’s transformation agenda. Without a strong financial sector, serious change won’t be possible,” says Emídio Pinheiro, chief executive of Banco de Fomento Angola (BFA), the country’s largest privately owned bank by total assets.  

Yet a shaky real estate market, a diminished oil industry and a consumer class with limited ability to generate a substantial deposit base are likely to present challenges to the country’s lenders. These challenges are emerging as the sector faces a more demanding regulatory environment, with consolidation expected to accelerate in the coming years.

Meanwhile, a deteriorating current account balance has fuelled dollar liquidity concerns and downward pressure on the local currency, the kwanza, which fell by about 34% in the year to April 2016. The Banco Nacional de Angola (BNA), the country’s central bank, has employed its foreign exchange reserves to ease the devaluation process while utilising a priority list of goods for import that can access foreign exchange at the official rate. 

While this has been effective at slowing the loss of the country’s reserves, restricted access to foreign exchange has been problematic for the private sector. Moreover, the disparity between the official and black market rates remains marked, despite the BNA’s attempts to close the gap.  

At a critical point

Looking ahead, the challenges facing the Angolan government are twofold. On the one hand, it must stimulate the non-oil sectors of the economy, address the country’s gaping physical infrastructure shortfall and deal with issues of inequality and human capital development. On the other, it must rein in spending while controlling public debt in a lower oil revenue environment.

Mr Eduardo dos Santos has – not for the first time – stated his intentions to leave office by 2018. For the moment, it remains unclear how any power succession will play out, given that much will depend on the outcome of the country’s 2017 general election.

It is also uncertain what impact any political transition will have on Angola’s longer term fortunes. As such, the country’s political landscape may well change sooner than its economic outlook. What is clear is that Angola has entered a critical phase of its post-conflict development.


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