Angola boasts a significant endowment of natural resources, including oil, diamonds and gold, leaving it well placed to benefit from the global boom in commodities during the past few years. Double digit rates of gross domestic product (GDP) growth have been as healthy as anywhere in the world.
However, a lack of economic diversification, business practices that are tainted by a long history of war and a festering insurgency in the oil-rich enclave of Cabinda are lingering problems. These will need to be addressed if the development being enjoyed now is to become sustainable.
Opposing forces
The 2002 peace accord that ended almost three decades of civil war is likely to hold. Angola gained its independence from Portugal in 1975. This was followed by 27 years of civil war between the Soviet-Âsupported the Popular Movement for the Liberation of Angola (MPLA) and the National Union for the Total Independence of Angola (UNITA), which was supported by South Africa and the US. The MPLA controlled the coast and north-west of the country (including the capital Luanda), which allowed it to fund its side of the war through oil revenues. It was only after MPLA forces killed UNITA leader Jonas Savimbi in 2002 that a lasting peace accord between the opposing forces was finally signed.
The 2002 accord was intended to lead to general elections. However, MPLA leader Jose Eduardo dos Santos, who has been president of Angola since 1979, repeatedly postponed these elections, claiming that the necessary election infrastructure was not yet in place. ParliamÂentary elections are now scheduled for September and presidential elections for next year.
With no international support for a resumption of armed conflict and with its military structures largely disbanded, there is very little chance of UNITA resuming the civil war as it did after it lost the previous elections in 1992. It is instead in the process of redefining itself as a non-Âviolent political party, and its leader, IsaÃas Samakuva, has prioritised the deepening of democracy within the party.
UNITA’s leadership has, in the past six years, to a large extent been integrated into the Angolan political landscape, with several of its members now holding ministerial posts and provincial governorships. Among ordinary Angolans there is no desire for a return to the war years, and there is little doubt that the 2002 peace accord will be a lasting one despite a likely repeat election victory by the MPLA.
Much-needed agreement
A 2006 peace agreement reduced, but did not eliminate, the risk of violent attack by separatists in the oil-rich enclave of Cabinda. In August 2006, after a four-year campaign that significantly curtailed the capability of two major Front for the Liberation of the Cabinda Enclave (FLEC) factions, the Angolan government signed a comprehensive peace settlement with secessionist elements within Cabinda. The Memorandum of Understanding for Peace and Reconciliation in Cabinda was signed with the Cabinda Forum for Dialogue, a body consisting of representatives from one of the factions, FLEC-Renovada, civil society groups and the Catholic church.
However, the signing of the agreement was followed by some major disagreements over whether Antonio Bento Bembe, the FLEC-Renovada leader who negotiated the accord, had the authority to do so on behalf of both FLEC-Renovada and the other main faction, FLEC-FAC. As a result, a core element of fighters from FLEC-FAC refused to recognise the accord and vowed to continue fighting. In particular, a cadre of fighters loyal to FLEC-FAC’s exiled leader, Nzita Tiago, retreated to the north-eastern forests of Maiombe near to the border with Congo and the Democratic Republic of Congo.
Despite significantly reduced fighter numbers (some estimates indicate that 80% to 90% of FLEC-Renovada and FLEC-FAC fighters have demobilised or joined the army) the FLEC-FAC remnants enjoy considerable support within Cabinda’s rural areas and have the added advantage of being familiar with the terrain. Their ability to stage hit-and-run attacks against the army, onshore oil assets and oil workers is therefore still notable.
Following a March attack in which three army troops and a Portuguese engineer were killed, FLEC-FAC specifically threatened to target any expatriates that use the Angolan army for protection. Oil, construction and humanitarian workers often use the army for security when travelling in Cabinda.
Natural resource pool
Economic growth is spectacular, but is too dependent on extracting the country’s natural resources. Angola’s real GDP is projected to grow by about 24% in 2008, up from 18% in 2007. Inflation has been on a sharp downward curve, falling to 10% in 2007; five years earlier inflation had topped 100%. Oil production and its supporting activities contribute nearly 60% of GDP, 90% of exports and about 80% of government revenues. Production rose from 1.2 million barrels a day (b/d) in 2005 to an estimated two million b/d at the end of 2007.
Diamond mining has been another high-growth industry and constitutes the second largest source of export revenues, with about $1.1bn sales in 2006. Since 2005, the government has pursued joint ventures, especially with Chinese and South African companies, to improve local polishing, cutting and other value-adding activities.
As well as output from new kimberlite mines, this is likely to result in growing production and revenues this year. Mining and energy contributed to a current account surplus equivalent to 22.7% of GDP in 2007.
With this background, potential problems for the Angolan economy lie in its overdependence on oil and mining revenue, although poor fiscal accountability and a high real exchange rate also contribute to the negative pressures. However, we do not anticipate that these factors will hurt economic fundamentals in the coming three years.
Connecting with China
Increasing economic connections with China pose risks to non-Chinese investors. Angola has traditionally traded most extensively with the US and its former colonial ruler, Portugal. During the civil war, US firms dominated the oil industry, while Portuguese investors were present in the rest of the economy. However, China’s influence on the economy has increased significantly since the end of the civil war. In 2002, bilateral trade with China barely cleared $1bn but by 2007 it had swelled to more than $10bn. Angola ranks first among African countries in trade with China, while China is Angola’s third largest trading partner after the US and Portugal.
This bilateral trade is heavily skewed in Angola’s favour, with imports only making up about $400m of the $10bn. Angola temporarily surpassed Saudi Arabia as China’s number one oil supplier in 2006 (from January to March, exporting nearly 456,000 b/d). Angola’s state oil firm Sonangol and China’s Sinopec are jointly developing two new offshore blocks, estimated to contain a total of nearly five Âbillion barrels. This will likely establish Angola as China’s number two supplier, ahead of Iran.
During Chinese vice-premier Zeng Peiyang’s visit in 2005, the two countries signed nine major economic co-operation agreements. Three oil agreements were signed, mostly concerning joint projects between Sonangol and Sinopec, including a long-term partnership, offshore development plans and a new refinery.
One agreement dealt with technical industrial aid between the Angolan ministries of petroleum and geology and mining and the Chinese National Commission for Development and Reform.
A fifth agreement strengthened Âco-Âoperation on infrastructure development, and others covered economic and technical aid (for example, interest-free loans) and a $69m project by China’s ZTE Corporation to develop telephone networks in Angola in conjunction with MundoStartel. ZTE already has plans to invest about $400m in the country, most of which will go towards modernising and expanding the existing landline network. However, at least $100m of this will be invested in military telecommunications, the construction of a mobile telephone factory and a telecommunications technical training programme.
The spread of Chinese investment into arenas beyond oil and infrastructure is important for Angola’s economic development plan, as there is little in the Angolan economy to attract any significant sum of foreign direct investment and most Western investors deem projects there to be too risky.
China has also passed Portugal, Russia and Brazil as Angola’s biggest aid donor. This was evidenced in premier Wen Jiabao’s visit in 2006, when China agreed to provide an additional $2bn-worth of credit (through 12 different accords on energy, water, education, agriculture and media), on top of the $3bn already approved for national development and reconstruction. In addition, China has poured more than $150m into constructing or rebuilding regional hospitals in Huambo and the surrounding districts.
The growing role of Chinese companies in Angola has forced out many of the Portuguese firms that have traditionally dominated the local market, particularly in infrastructure, utilities and construction. Combined with the burgeoning Chinese population, imported to help with the legion of new projects, there is a growing entrenchment of China in Angola that looks increasingly permanent.
With this increasing engagement comes a greater ability to lobby and affect Angolan policies. Chinese firms will probably find it easier to set up shop, while others will have to struggle with the opaque business landscape that characterises the country. Additionally, China’s adherence to the norm of non-interference has provided Angola with a straightforward donor alternative to the transparency clauses demanded by the IMF, the World Bank and the Paris Club. In some cases, this has given the government the opportunity to shun monitoring conditions required by other lenders in favour of larger cash infusions from China.
Driving debt down
Large foreign reserves have eased currency inconvertibility and exchange transfer problems. Investors are required to seek approval from the Angolan central bank, Banco Nacional de Angola (BNA), before profits or dividends in excess of $100,000 can be transferred out of the country. BNA also has authority to suspend the repatriation of all or part of investors’ dividends in the interest of Angola’s balance of payments.
This provision has previously resulted in significant delays in remittances but it is less likely to be used now, given the extent of Angola’s current account surplus and foreign exchange reserves. Angola’s external balances have swung firmly into the black due to high oil prices and high export volumes of oil and diamonds. A current account deficit of more than 5% of GDP in 2003 was transformed into a surplus of 23% of GDP in 2007, with foreign exchange reserves exceeding $12bn.
The government has been substituting its IMF and Paris Club debts with oil-backed loans from the Chinese government, and Angola’s absolute debt remains at about $9.5bn. Extremely high rates of nominal GDP growth mean that the debt-to-GDP ratio continues to fall, however. Given this economic backdrop, currency inconvertibility and exchange transfer risks have diminished significantly in Angola.
Angola’s business environment is tough but the trend is towards improvement. By almost every measure, doing business in Angola is challenging, costly and financially risky. This is perhaps not a surprise for a country that endured a multi-decade civil war. For example, according to the World Bank, on average it takes 119 days to start a business in Angola compared to a regional average of 56 days. It takes 1011 days to enforce a contract through the legal system, compared to 643 days regionally.
Towards positive ground
The foreign firms drawn into Angola can expect a system that operates on bribery on the one hand and a stifling bureaucrÂacy on the other. This will likely be the case even after this year’s parliamentary elections with the political elite, almost as a whole, accustomed during the 27-year civil war to expect personal wealth as an outcome of public service.
But the most significant shift towards positive ground has already occurred – there is peace and no sign of resumption of large-scale civil war. Angola’s enormous reserves of oil, gas and diamonds, considerable hydroelectric potential and minerals, such as iron ore, phosphates, copper, feldspar, gold, bauxite and uranium, mean that it continues to attract investment interest. With the economy growing strongly, elections, and a strengthening civil society, which had been devastated by war, the outlook is for a steady improvement in private property protections and reduced corruption during the coming decade.
