Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaJuly 1 2016

Will IMF bailout bring injection of optimism to Angolan economy?

Falling oil receipts and a foreign exchange crisis have hit Angola’s economy hard. A recent Eurobond issue, a prospective IMF loan and the restructuring of state oil company Sonangol should help the government fund much-needed infrastructure improvements – but any recovery is likely to be slow and hard won. James King reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Angola National Bank embedded

Angola’s immediate economic outlook is challenging. The fortunes of Africa’s largest oil producer have collapsed as subdued commodity prices have exacted a brutal toll on its fiscal and current account balances. The International Monetary Fund (IMF) expects gross domestic product (GDP) growth of about 2.5% in 2016 – though research from BNP Paribas suggests that the country is on the brink of a recession, with GDP forecasted to contract by -1% this year.

The 2016 state budget, passed by the Angolan parliament in December 2015, was altered in March as the government slashed spending by 20% and revised its average oil price assumption for the year down from $45 per barrel to $38 per barrel. Even with this intervention, the authorities are expecting a budget deficit of 5.5% of GDP, a marginal improvement on the 7.5% recorded in 2015. “Given where the price of oil is, I don’t see Angola’s situation improving in the next 12 to 18 months,” says Sanjay Bhasin, chief executive of Banco Económico.

Foreign exchange crisis

Meanwhile, falling oil receipts and the decision by some international lenders to cut the supply of dollars to the ailing economy have created a severe shortage of foreign exchange in the country. The Banco Nacional de Angola (BNA), the central bank, responded in early November 2015 by limiting dollar sales to commercial lenders. 

This policy continued in the first half of 2016, with the BNA further rationalising the amount of dollars available to commercial banks in order to shore up its declining stock of hard currency reserves. By the end of February 2016 total reserves were $24.3bn, down from $27bn in 2014, according to BNP Paribas. “The BNA is trying to maintain its reserves above $20bn, covering the equivalent of six months of imports,” says Pedro Ferreira Neto, chief executive and founding partner of Eaglestone, an investment firm with interests across sub-Saharan Africa.

This situation has been particularly damaging for Angola's private sector. Lacking sufficient access to US dollars, imports have waned in a market with limited local production capacity. As such, Luanda’s skyline is dotted with unfinished construction projects as developers lack the requisite materials to finish the job. For the time being, there is little prospect that this situation will change.

“Angola’s foreign exchange crisis has meant that many companies are unable to import goods to support their local production. This has resulted in a low level of economic activity, which is directly hitting the banks,” says Mr Bhasin.

IMF bailout

Looking ahead, much will depend on the outcome of an IMF bailout. Between June 1 and June 14 2016, an IMF team visited Luanda to begin negotiations over a three-year loan facility, which international and local press valued at about $4.5bn. According to a statement from the Angolan finance ministry, the initial discussions covered fiscal, monetary and exchange rate policies in the country.  

“The finance minister has made it clear that Angola’s discussions with the IMF are not just about money but more about technical and structural assistance. It’s an indication that external advice is welcome,” says Mr Bhasin.

Angola’s expected IMF bailout follows the successful issue of the country’s debut Eurobond in November 2015. With a yield of 9.5% and a maturity of 10 years, the $1.5bn transaction was heavily oversubscribed and provided the government with a much-needed boost in a challenging economic climate. It also played into the authorities’ plans to deepen Angola’s relationship with the international capital markets. 

“Angola’s Eurobond issue was very successful. The pricing was very attractive,” says Emídio Pinheiro, chief executive of Banco de Fomento Angola.

Sonangol restructuring

While the investment community has hailed this issuance and the government’s discussions with the IMF as positives, reforms are also taking place elsewhere. In May 2016, Isabel dos Santos, the daughter of the current president and Africa’s only female billionaire with business interests throughout Angola and beyond, was appointed head of state oil company Sonangol.  

The move comes at a pivotal time for Sonangol, as it undergoes a government-backed restructuring. This will ultimately lead to the creation of two new entities, one that will act in a regulatory capacity and another that will act in an administrative function for the company’s business interests. Sonangol, meanwhile, will retain its exploration and production mandate. In the process, a number of the state oil giant’s non-hyrdocarbon interests are to be divested.

“As part of its restructuring efforts, Sonangol will be divesting from its non-oil and gas holdings. These include large stakes in a number of the country’s banks,” says Mr Neto.

This process could help to generate additional funding for the energy giant. And though discussions around economic diversification dominate Angola’s financial landscape today, the role of the oil economy will remain paramount. Following the completion of much-needed maintenance work on the country’s key oil production infrastructure in 2014, oil output is expected to increase in the coming years, jumping from about 1.67 million barrels per day in 2014 to 1.85 million barrels by the end of 2016.

Oil importance

According to the Organisation of the Petroleum Exporting Countries, Angola surpassed Nigeria as Africa’s largest oil producer in the first quarter of 2016. “Angola is always going to have a large oil sector and it will continue to play an important role in the country’s economic development, even when prices are low. There must be a competitive oil sector in this country,” says Mr Pinheiro.

The increases to oil production will bring little reprieve to Angola’s current account in the coming years, however. According to research from Eagleston Securities, current account deficits will exist between 2016 and 2020. This is despite an expected reduction in total imports as the effects of more prudent government spending with respect to non-essential infrastructure and project outlays kick in.

Though the authorities are being more careful with the public purse, the importance of infrastructure development has not been lost on the administration. “Similar to most governments across the world, including those in mature economies, the Angolan government has made necessary adjustments to public expenditure while still prioritising the building of schools and hospitals, affordable housing, roads, electricity and providing access to clean water,” says Jean-Claude Bastos de Morais, founder and chairman of the advisory board at Quantum Global.

New investment laws

As a means of addressing Angola’s infrastructure funding shortfall, the government is pushing hard to attract foreign investment. The formation of a new investment body, the Agency for the Promotion of Investments and Exports, harmonises the promotion of investment opportunities, the legal investment framework and other functions under its direct authority. Mr Bastos de Morais adds that the introduction of a new private investment law requires the government to grant approval to a new investment within 20 days of the submission of supporting documenation.

“Angola is keen to attract foreign investors to help support the pace of development. These large-scale projects are a critical component in the nation’s drive towards economic diversification. The government has adjusted the minimum capital requirements for FDI and commenced its first public-private partnership, allowing the country to push ahead with major public infrastructure projects,” says Mr Bastos de Morais.

These positive reforms have been welcomed by market participants. In part, the measures are expected to contribute to non-oil GDP growth, which the IMF expects will reach 7% by 2020. For the time being, however, high interest rates and limited access to foreign currency continue to stymie private sector investment. Though recent months have seen a surge in the local production of some primary goods, there is some way to go before Angola will reap the benefits of its more business-friendly approach to both local and international investors.

For now, the government’s immediate priorities are to restore macroeconomic balances, build up reserves and diminish the non-oil fiscal deficit, according to research from Eaglestone Securities. In addition, the government must reduce the differences between the official and black market exchange rates, introduce various financial sector support mechanisms and continue to help the population through human capital development spending.

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Angola