Angola suffers many of the problems that come with being a post-conflict and oil-rich country. Having only been at peace since 2002, when its destructive civil war ended, its infrastructure is still weak. With many of its adults having barely had an education, its businesses struggle to find skilled workers. And while oil has propelled the economy from being a basket case 12 years ago to the fifth largest in Africa today, it has left the country with huge inequality and done little to reduce joblessness.
Angola’s fragility was revealed when oil prices crashed in the second half of 2008. The country’s economic growth plummeted from more than 10% that year to just 2% in 2009. The current account swung from a surplus of 8.5% of gross domestic product (GDP) to a deficit of 10%, while the kwanza depreciated heavily. The government’s arrears to contractors soared to more than $8bn.
Making progress
Rectifying these weaknesses has been a priority for policy-makers. Most analysts have praised their efforts, saying that macroeconomic reforms in the past five years have greatly strengthened the country’s financial and economic position.
Crucially, inflation has been brought under control. Having been as high as 15% in 2010, it fell to single digits for the first time on record in mid-2012. This February, it measured 7.5%. Manuel Alves da Rocha, an economics professor at Luanda’s Catholic University, says this has been one of the country's most important developments since 2002.
Angola’s foreign exchange (FX) reserves have also been built up. They grew from $14bn in 2009 to an all-time high of $33bn at the end of 2012. And the government has tightened its spending controls to stop ministries going ahead with contracts when they lack the necessary funds.
Economists say that Angola is better prepared to cope with another short-term fall in oil prices because of the changes it has made. “The major problem in 2008 and 2009 was inadequate policy buffers because of an over-extended budget, inadequate foreign reserves and limitations in the government’s capacity to formulate and implement policies,” says Nicholas Staines, head of the International Monetary Fund (IMF) in Angola. “Now, [the government has] much higher reserves, more fiscal space to manoeuvre and is more prepared because its policy-making coordination is better.”
Deeper FX market
Angolan officials took another step towards bolstering macroeconomic stability last year when they implemented the final phase of an FX law for the oil and gas sector. Designed to increase the use of the kwanza in what is a heavily dollarised economy, the law makes oil firms pay their suppliers through the local banking system, rather than offshore as they tended to do previously.
Despite concerns among oil companies that domestic banks would struggle to process their payments on time, the transition has been smooth so far, with few disruptions to the oil industry. “One thing the central bank did very well was to implement the law in phases,” says Miguel Bartolomeu Miguel, head of Standard Chartered Angola, which got a banking licence last year. “That was the secret of its success. Before this law, most banks didn’t have oil and gas departments. They were given the time to create them. The oil companies were also given time to plan for the changes, which they knew about well in advance.”
The law is leading to more transactions in kwanzas and fewer in dollars, according to Celeste Fauconnier, an Africa analyst at South Africa’s Rand Merchant Bank. “It’s causing greater demand for the local currency,” she says. “The interbank market is functioning more efficiently to meet this demand, which is helping monetary policy become more effective.”
She adds that the law has deepened the local FX market by giving banks access to dollars – which they sell to their clients with import needs – from oil companies, whereas before they had to rely almost solely on the central bank.
The FX law comes alongside other measures to boost the country’s financial markets. The capital markets regulator, the Comissão do Mercado de Capitais, hopes to launch a secondary debt market later this year, followed by an equities market in 2016. There is plenty of interest in a debt market. Standard Bank Angola held the country’s first capital markets conference in March to bring together potential issuers and investors. Eaglestone, a sub-Saharan Africa-focused investment bank, has already obtained a brokerage licence, while Imara, a Bostwana-listed investment group, has applied for one.
In the pipeline
Bankers in Luanda are confident that a market for government bonds will develop and that companies will begin to issue corporate bonds. But they caution that it will take time for liquidity and issuance to pick up, especially given the absence of a big domestic investor base. Anthony Lopes Pinto, head of Imara’s Angola office, says the country’s insurers, who would normally be expected to invest heavily in a bond market, mostly sell short-term products, meaning they would not necessarily be able to buy long-term assets.
“They need to create more long-term products, such as life insurance,” he says. “But that takes time and would entail a paradigm shift among consumers. Angola is a consumption-orientated market. There’s very little saving.”
A major factor determining the success of the market will be whether foreign investors are allowed access to it. Although they can buy kwanza-denominated securities today, it is a laborious process, owing to Angola’s tight capital controls. Bankers hope that the launch of the secondary market will lead to the opening of the country’s capital account.
They say this will be done gradually, however, to minimise the fallout from external shocks. “In a country with a non-convertible currency, the opening of the capital account should be controlled,” says Jorge Ramos, head of investment banking at Banco Espírito Santo Angola. “But it’s very important that some kind of outside investment is allowed given the sheer number of projects under way that need financing.”
Yet for all Angola’s macroeconomic and financial reforms, plenty more are still needed. The IMF has long urged the government to make plans to enable it to cut fuel subsidies, which cost the equivalent of almost 5% of GDP last year, a hefty figure. “The government is committed to reducing fuel subsidies,” says Mr Staines. “The challenge is how to sequence it. You can only do it if you improve electricity provision. You also need some sort of social support system for those who would suffer the most.”
Arrears remain a problem, due to poor administration rather than financial difficulties. They totalled $6.1bn between 2010 and 2012. While most have been paid off, the IMF criticised the government in March, saying it “regretted the continued weaknesses in public financial management”.
The IMF was encouraged, however, by Angola’s 2014 budget, which introduced a definition of arrears and a requirement for ministries to settle them within 90 days. The budget also stated that the minister of finance had to sign off all central government contracts of more than $1.5m and local government ones of more than $1m. “The government wants to solve the problem,” says Mr Staines. “In the latest budget, it has taken more measures to improve the system.”
Tax reforms
Other reforms are under way to diversify the tax base beyond oil, which accounts for 80% of state revenues. Policy-makers have reduced tax exemptions that non-oil companies such as banks used to enjoy before the 2009 crisis. But non-oil revenues only amount to 9% of GDP, which is low by African standards. “The fiscal reforms the government has carried out since 2010 have not achieved the expected results,” says Mr Alves da Rocha. “Non-oil revenues have increased a little bit in recent years, but not by enough.”
The government will also have to do more to improve Angola’s business environment, which ranks as one of the toughest in the world. The country placed 179th out of 189 in the World Bank’s latest Ease of Doing Business survey. Companies complain about their high costs thanks to electricity shortages and the existence of a rentier culture, which makes it difficult for them to operate without close ties to members of the political and military elite.
“The government has made enormous strides with its management of the macroeconomy. The past 12 years have been revolutionary,” says Ricardo Soares de Oliveira, a lecturer at Oxford University. “But microeconomic reforms, even when they’re championed by senior policy-makers, tend to run against vested interests.”
For the government, these are increasingly important issues to deal with. The economy has slowed since its boom days. With oil production more or less stagnant, it seems unlikely to grow much faster than 5% or 6% in the next few years.
Worryingly for Angolan policy-makers, analysts say that should oil prices drop anytime soon, it will be difficult for them to fund the reforms and infrastructure improvements needed to diversify the economy. “Angola’s future hangs on the price of oil,” says Mr de Oliveira. “That’s more important than anything else. High oil prices are needed to finance the diversification and industrialisation of the economy.”
