Hit by the double blow of a sharp fall in oil prices and the coronavirus pandemic, Angola is facing a fifth straight year of recession — the deepest and longest economic slump in its modern history. Hopes remain, however, that a strong government commitment to structural reform and the support of a $4.5bn International Monetary Fund (IMF) financial assistance programme will lead to a modest recovery in 2021.
These twin shocks, combined with further depreciation of the kwanza, the Angolan currency, will inevitably affect asset quality in the financial sector — sub-Saharan Africa’s largest after South Africa and Nigeria. Banks in Angola nevertheless benefit from what the rating agency Moody’s describes as “a solid funding and liquidity profile” and “resilient profitability” to help them absorb losses.
Positive outlook
Besides the ongoing recession, Luís Teles, chief executive of Standard Bank Angola (SBA), says the country’s big challenges include “a lack of job creation or new private sector investment, and an economy that is still very dependent on a highly indebted government”. He remains confident, however, that SBA — part of South Africa’s Standard Bank Group, which has been operating in Angola since 2010 — will be able to build itself into a “future-fit bank capable of growing in the current environment”, becoming “more agile in serving customers and helping to drive Angola’s growth”.
Pedro Ferreira Neto, chief executive of Eaglestone, a financial services company that specialises in sub-Saharan Africa, says the more challenging economic environment will “present headwinds for Angola’s banking sector that are likely to be reflected in its results for the foreseeable future”. Another challenge, he says, will be “increasing regulatory pressure for local banks to grant more credit at a reasonable cost to the productive sector to help diversify the economy”.
Angola’s financial sector comprises 26 banks, three of which are state-controlled and six of which of foreign-owned, including a branch of the Bank of China. The six largest lenders account for more than 80% of total assets, deposits and loans. The average loan-to-deposit ratio of the sector was only 18% at the end of 2019 and the proportion of loans to total assets just 15%.
According to Moody’s, Angolan banks benefit from a buffer capacity “to withstand any extraordinary withdrawal of deposits”, with an average proportion of liquid assets to banking assets of 66%. They have also achieved a resilient level of profitability, with an average ratio of net income to tangible banking assets of 3.2%. Although Angola’s contracting economy limits the scope for lending, the rating agency notes that “banks continue to earn an adequate income from their foreign-currency-linked bonds” as the kwanza depreciates.
Prioritising non-oil
Daniel Santos, chief executive of Banco Millennium Atlântico (BMA), says lending more to businesses to help diversify the economy away from oil and expanding trade finance operations are among the chief challenges facing Angolan banks. “We need to increase exposure to our international counterparts in order to increase our trade finance business and offer our customers more financing solutions,” he says.
BMA, the result of a 2016 merger between the Angolan banking operations of Portugal’s Millennium bcp and Angola’s Banco Privado Atlântico, has itself established finance lines with Commerzbank ($30m), International Finance Corporation ($50m) and the African Development Bank ($40m).
The impact on Angola of the Covid-19 crisis and the subsequent fall in oil prices is reflected in government revisions made to the 2020 budget in July. The revised outlook assumes crude oil prices of $33 per barrel, a drop of 40% compared with the initial estimate of $55, and forecasts a cut of 10.7% in crude production to 1.28 million barrels per day by the end of 2020. This followed an agreement by the Organisation of Petroleum Exporting Countries-Plus in April to cut almost 10% of the world’s oil supply to prop up prices in the wake of the pandemic. The Luanda government has also revised its gross domestic product projection for 2020 downwards from growth of 1.8% to a contraction of 3.6%. Projected revenues are almost 29% lower than initially expected, mainly due to a significantly lower contribution from oil-related tax receipts.
Tiago Dionísio, Eaglestone’s head of research, says the Angolan authorities are trying to mitigate the impact of the pandemic partly by offsetting the big shortfall in revenue by cutting spending. “This ‘new reality’ will require an increased effort to accelerate improvements in the business environment and the implementation of reforms to generate economic growth, namely in the non-oil sector,” he says, adding that the involvement of the IMF “will remain crucial to these efforts, by helping to strengthen investor confidence”.
Angola plans to achieve a significant reduction in expenditure by cutting debt interest payments, which the revised budget forecasts at 20% lower than initially projected. This follows reports that Angola has reached a three-year debt moratorium agreement with China — by far the country’s largest bilateral lender — saving the state more than 36% in external debt servicing costs this year. The agreement is part of a G20-led debt standstill scheme for low-income countries known as the Debt Service Suspension Initiative (DSSI). The arrangement was launched in April to help them focus on tackling the health and economic crises triggered by the pandemic.
Angola, which has received about a third of all Chinese lending to Africa over recent years, stands to be the biggest beneficiary of the DSSI. According to the World Bank, about $2.6bn in repayments due in 2020 could be frozen, representing 3.1% of the country’s gross domestic product (GDP). Angola’s outstanding external government debt totals about $49bn, of which 45% is owed to China, according to Angola’s central bank.
Financial aid
Little more than a year after taking office in September 2017, Angolan president João Lourenço signed the biggest-ever IMF extended fund facility to be agreed with an African country. The key aims of the three-year programme are to diversify the economy, increase non-oil revenue and reform the currency. In mid-September, the IMF completed its third annual review of the programme, immediately disbursing another $1bn instalment of aid, as well as a $765m increase in total funding access to help Angola deal with the coronavirus pandemic.
Antoinette Sayeh, the IMF’s deputy managing director, said after the review that “timely implementation of banking sector recapitalisation and restructuring is essential to address financial sector risks”. She added that the Luanda authorities were preparing to address shortfalls identified during bank asset quality reviews. According to the central bank, the latest published review of 13 banks, based on the data available in December 2018, found that the system was “globally robust”, but that most lenders needed to improve their credit-risk procedures. It also led to state-owned Banco de Poupança e Crédito and Banco Económico being ordered to raise their capital levels to meet the minimum requirement.
In addition to financial support and reform expertise, the IMF programme opens up Angola, a country known for its deeply entrenched vested interests, to wider scrutiny as the government seeks to tackle ingrained corruption. The issue has gained international attention following allegations made against Isabel dos Santos, daughter of the former Angolan president and Africa’s richest woman. An Angolan court has frozen her assets in a bid to recover more than $1bn of state funds that Ms dos Santos and associates allegedly failed to repay. Denying any wrongdoing, she has described the allegations as a “politically motivated witch-hunt” and is mounting a legal challenge against them.
“Combating corruption has been one of the trademarks of Mr Lourenço’s mandate and will likely remain so,” says Mr Ferreira Neto. “The Angolan authorities also remain determined to improve transparency, governance and the business climate, as these will help improve growth perspectives in the non-oil sector and reduce the country’s still large dependence on oil.”
Oil revenue accounted for 31% of GDP in 2019, down from 43% in 2010. Oil production has been declining for more than a decade and existing fields are expected to be exhausted within 20 years. Angola, Africa’s second-largest oil exporter after Nigeria, has proven oil reserves of only 7 billion barrels. A new 2020–2025 energy roadmap foresees oil discoveries of up to 57 billion barrels of crude oil and 27 trillion cubic feet of gas in a plan that involves $679m in foreign investment and $188m state investment.
Foreign investment
The government is hopeful that foreign investment will also play an important role in diversifying the economy and reducing overdependence on oil. Mr Dionísio says Angola has become more attractive to foreign investors since removing a requirement for their businesses to have a local partner and easing rules on repatriating investment profits. These and other business-friendly measures were introduced as part of a private investment law approved in 2018. “The Angolan authorities are aware that an economic recovery will necessarily rely on foreign direct investment, and that additional measures are still needed to protect property rights and make financial movements more flexible,” he says.
Mário Palhares, chief executive of Banco de Negócios Internacional, says new laws and foreign investment procedures have been approved to help combat corruption, including legislation relating to business competition and the oil and diamond sectors. “One of our objectives as a bank is to restructure internally in order to become more efficient and resilient, and back economic diversification,” he says. “We want to support viable projects that need finance to develop or to expand through mergers or acquisitions.”
Mr Teles of SBA advocates government engagement with existing overseas investors to obtain feedback on how regulations and the business climate could be improved. The best recommendations, he says, comes from foreign businesses that have already made “the investment journey” in Angola. He also suggests pitches targeting specific global companies that the government would like to invest in Angola. These firms could become “anchors of development” in particular sectors, he says, “creating job opportunities and helping to develop the small-scale businesses that form part of their ecosystems”.
Angola’s extensive privatisation programmes will also create opportunities for foreign investors. The government has scheduled the disposal of almost 200 companies by the end of 2022, although the pandemic has already led to some delays. In the financial sector, institutions up for sale include BCI-Banco de Comércio e Indústria (100%), as well as stakes in BAI-Banco Angolano de Investimentos (8.5%), BCGA-Banco Caixa Geral Angola (25%) and Banco Económico (39%).
The insurance company Ensa Seguros (100%) is also on the list, as well as Bodiva (100%), the company that runs Angola’s stock exchange. Sonangol, the state oil company and by far the biggest public-sector group, is being divided up and partly sold. Endiama, the state diamond company, also hopes to attract international partners and has set out plans to list an initial 30% of the group.
State drain
A September report by Igape, the body that oversees Angola’s state holdings, highlighted how some state-owned companies drain public resources, generating less revenue than they receive in subsidies. “The returns obtained demonstrate a corrosion of state assets at the company level due to the successive negative results of a significant group of companies,” Igape said in a statement reported by Angop, the state news agency. In all, 26 of 86 state companies assessed in 2019 failed Igape’s “health test”, the report said.
Recent ratings downgrades are a further reflection of the economic challenges facing Angola. In September, Fitch cut the country’s long-term foreign currency issuer rating from B- to CCC, citing “a sizeable increase in government debt, reduced external financing flexibility, as shown in a sharp rise in sovereign bond yields and declining external liquidity”. In the same week, Moody’s downgraded Angola from B3 to Caa1, saying the oil price and coronavirus shocks, together with “the related further depreciation of the currency, contribute to a significant weakening in Angola’s already weak public finances and fragile external position, despite tangible and continuing reform efforts”.
Following its downgrade of the country’s sovereign rating, Moody’s went on to downgrade the long-term deposit ratings of three Angolan banks — BAI, BFA-Banco de Fomento Angola and Banco Económico, on the “expectation of weakening standalone credit profiles for BAI and BFA amid the coronavirus pandemic and low oil prices, as well the Angolan government’s weakened fiscal capacity to support Banco Económico in case of need”. Moody’s said the rating actions also reflected “the large stock of government securities and loans that links the three banks’ credit profiles to that of the government”.
Safeguarding the stability of the financial sector is also cited by the IMF as critical to the success of its assistance programme, which includes measures to improve governance and credit-risk management at public banks. Mr Teles would like to see a reduction in restrictions in the foreign exchange market along with tougher enforcement of existing financial regulations, including penalties for banks that fail to comply, to ensure fair competition in the banking sector.
He also believes innovation should be an important driver of growth. “Access to new technologies, such as cloud computing, robotics automation and blockchain, as well as accelerating the rate of innovation in Angolan banking, are important challenges,” he says. “Outside investors clearly recognise Angola’s potential, as one of Africa’s largest states, to make a tremendous contribution to the continent. Making capital feel welcome and incentivising entrepreneurship would help to achieve this.”
