Angola is gradually recovering from a sharp slump triggered by the oil price shock of 2014. The upturn, still at an early stage, is underpinned by an improved outlook for the country’s dominant petroleum sector and the reform programme of a new president committed to stabilising an economy still recuperating from a prolonged period of stress.
Gross domestic product (GDP) growth is expected to rise above 2% in 2018 and reach a forecast 2.5% in 2019, up from 1% in 2017. Over the medium term, the International Monetary Fund (IMF) believes annual growth could pick up to about 5%, provided structural reforms are implemented as envisaged.
“The economy is starting up again,” says António Coutinho, chief executive of Standard Bank Angola. “Building and construction have restarted. It’s not in full swing yet – there are still cranes up in the air doing nothing. But it feels like something is happening.”
A mild recovery
No one, however, expects a rapid return to the years of double-digit economic growth that the country enjoyed previously. The prolonged decline in oil prices that began in mid-2014 dealt a heavy blow to an economy that depends on oil for more than 95% of its export earnings and about half of its fiscal revenue.
“The big drop oil prices exposed the extent to which the Angolan economy is dependent on a single commodity,” says Luís Lélis, chief executive of Banco Angolano de Investimentos. “Forecasts point to a mild recovery, but net international reserves, the exchange rate and inflation remain under pressure.”
Angola's GDP growth dropped from an annual average of more than 10% in the decade to 2014 to a contraction of 0.8% in 2016, according to IMF figures. While oil and gas production remained relatively stable, export earnings from the sector fell by more than two-thirds between 2013 and 2017.
The momentum gathering behind a moderate upturn is based on an improving outlook for oil prices. After a fall from a peak of more than $126 per barrel of Brent crude in 2012 to a trough of less than $32 in 2016, analysts are forecasting an annual average of $75 per barrel in 2018 and $80 in 2019. Given that oil prices are projected to decline over the medium term, the IMF sees the current favourable period as “a unique opportunity” to address Angola’s economic imbalances.
The uptick in oil prices has coincided with an important shift in Angolan politics. After 38 years as president, José Eduardo dos Santos did not run for re-election in August 2017. His designated successor, serving defence minister João Lourenço, won the vote and in September 2017 became the country’s first new president since 1979. At the same time, the ruling People’s Movement for the Liberation of Angola gained 150 of 220 parliamentary seats with 61% of the vote.
“It was a smooth, not forced, transition, which is very important,” says Mr Coutinho. “The new president has a very different view on where he wants the economy to go and there have been positive discussions around import substitution, bringing more investment in, diversifying the economy, tackling corruption and getting the government to work better.”
Anti-corruption measures
Mr Lourenço has moved boldly against entrenched vested interests. Within two months of his coming to office, Isabel dos Santos – the daughter of the former president and widely known as Africa’s richest woman – was dismissed as head of Sonangol, the state oil company, along with six other board members.
In January, José Filomeno dos Santos, son of the former president, was removed as head of Angola’s $5bn sovereign wealth fund and later charged with alleged fraud. The new president has replaced the governor of the central bank, the head of the government-backed diamond company and the boards of the country’s three state-run media companies. A specialist anti-corruption unit has also been created.
“There is clearly a strong political will to tackle corruption and increase transparency, which will help attract more investors,” says Pedro Ferreira Neto, chief executive of Eaglestone, a financial services company that focuses on sub-Saharan Africa. “That said, this is a huge challenge for the local authorities and it is obviously going to take some time before we see a material impact from the policies introduced by the new Angolan president.”
A focus on stability
In economic policy, Mr Lourenço has focused on restoring stability and improving governance. The government’s macroeconomic stabilisation plan (PEM), unveiled in January, sets out more than 100 fiscal, foreign exchange and monetary measures, aimed at budget consolidation, greater exchange rate flexibility, reducing public debt and settling payment arrears.
In April, Angola officially requested non-financial assistance from the IMF to help Africa’s second largest oil producer implement the PEM and adapt to lower oil prices. Talks on an agreement known as a policy coordination instrument are understood to be under way. Among other issues, the government wants to resolve a dollar liquidity squeeze that makes it difficult for foreign companies to repatriate profits.
“There is a general feeling that things are improving,” says Sanjay Bhasir, chief executive of Banco Económico. “The change in government has had a positive impact and this is the right time to capitalise on the momentum. The steps they are taking are relatively small, but they are in the right direction.”
End of the dollar peg
In January, Banco Nacional de Angola (BNA), the country's central bank, ended its exchange rate peg to the US dollar to adopt a more flexible exchange rate regime. “We have an exchange rate that does not reflect the truth,” José de Lima Massano, the governor of the BNA, said at the time. The move led to a 30% depreciation of the kwanza, the Angolan currency, against the dollar, while the spread between the parallel and the official exchange rate narrowed from 150% in 2017 to about 90% in March.
Daniel Santos, chief executive of Banco Millennium Atlântico, says the fall in oil prices led to an “exponential reduction” in net international reserves. “As a consequence, the kwanza has depreciated significantly over the past four years. This in turn led to substantial consumer price increases, given the economy’s high level of dependence on imports,” he says.
Some fear that loosening the exchange rate could push up inflation. The IMF, however, sees a decline from 26.3% in December 2017 to below 25% by the end of 2018, reflecting the impact of kwanza depreciation. The BNA has a set a medium-term target of bringing inflation down to single digits.
The government’s strategy is focused on supporting private sector-led growth by improving the business climate and encouraging diversification. The National Assembly has approved the country’s first competition law, involving the creation of a competition authority. The legislation seeks to address monopolistic practices in key sectors, including telecoms and cement, and to support competition in domestic markets.
Angola also ranks poorly against its sub-Saharan peers for ease of doing business. Contract enforcement, access to credit, ineffective insolvency measures and the heavy influence of the state in the economy are widely recognised as discouraging private businesses from investing. The IMF estimates efforts to improve governance and reduce opportunities for corruption could add two percentage points a year to the country's GDP growth over the medium to long term.
Pro-investment moves
A new private investment law was approved in Angola in July 2018, abolishing local partnership requirements and eliminating the minimum investment amounts previously required to access tax benefits and other incentives. The legislation also establishes sunset clauses for tax incentives. A presidential decree has also replaced three existing investment bodies with a new private investment and export promotion agency, Aipex.
“The new private investment and competition laws are evidence of Angola’s commitment to a market economy that is open to foreign investment,” says Jorge Albuquerque Ferreira, chief executive of Banco de Fomento Angola. “The creation of Aipex and an increase in Angola’s economic diplomacy are also welcome steps in the same direction.”
In addition to tax incentives, Mário Palhares, chief executive of Banco de Negócios International, says guarantees on the repatriation of returns on invested capital are a key factor for attracting foreign investment that needs to be addressed. “In an increasingly globalised world, capital has no nationality, but requires security, profitability and returns,” he says.
“The government’s key priorities include diversifying the economy by reducing the country’s dependence on crude oil and substituting imports with local production,” says Mr Ferreira Neto of Eaglestone. “This will create investment opportunities in several sectors, including agriculture, cattle raising, fisheries and tourism. The government also wants to liberalise the economy by limiting public sector involvement in infrastructure projects, introducing more public-private partnerships and privatising inefficient state companies.”
