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Angola avoids a debt crisis, but is it out of the woods?

Angola avoids a debt crisis, but is it out the woods?

Join Control Risks analyst Marisa Lourenço and Gerrit Van Rooyen from Oxford Economics Africa as they discuss the outlook for Angola’s economy in 2022 and how Angola managed to pull itself back from the edge of a fiscal cliff. They also discuss lessons for other countries in the region with mounting debt loads and if Angola’s government can still produce enough of its most precious commodity: oil.

Episode Transcript

Marisa Lourenço

Hi, everyone, I'm Marisa Lourenço, and I'm the lead analyst for Angola at Control Risks. I cover political, operational and security risk in the market, helping our clients unlock opportunity and navigate the risk environment. Today, we're going to be talking about the Angolan economy, including how it managed to turn itself around in the past few years, despite an excessive debt burden, depressed oil prices and the COVID 19 pandemic.

When it comes to economics and forecasting, Control Risks works closely with our strategic partner, Oxford Economics Africa, who specialises in providing forecasts and insights for major African economies, and I am very pleased to welcome their economist for Angola Gerrit Van Rooyen.

Gerrit, thank you for joining me today.

Gerrit Van Rooyen

Hi, Marisa, and thanks for having me on your podcast.

Marisa Lourenço

So, the Angolan economy has been in the news lately and for all the right reasons. In the past five months all three major credit ratings agencies, that’s Moody's, Fitch and S&P have upgraded their credit ratings and no longer considered it at risk of default. This is really remarkable news for an economy in which debt has exceeded revenue for years and which experienced at least a five-year recession between 2015 and 2020. Gerrit, how has the administration led by President João Lourenço managed to do this?

Gerrit Van Rooyen

Yes, so Angola was certainly in deep trouble in 2020, when oil prices fell to below $20 per barrel, and the local currency, the Kwanza, weakened sharply to an all-time low of over 650 to the dollar, and public debts soared to almost 130% of GDP. Over the last year, Angola's debt situation has improved immensely, to the extent that public debt is now estimated to have fallen to below 80% of GDP. And that's why we've seen this flurry of credit rating upgrades from the major rating agencies.

I think there are three main factors to highlight, Marisa. Firstly, the rebound in the oil price amid tight supply and research and demand oil prices rose for over 60% last year, and this provided a major boost to Angola's government oil revenues, which also rose by over 60% last year. That's despite the decline in local oil production.

Secondly, the currency also strengthened significantly on the back of the higher oil revenues. And because the majority of Angola’s debt is denominated in US dollars, the stronger exchange rate greatly helped to reduce the debt to GDP ratio.

And thirdly, fiscal discipline: the government has reined in unnecessary spending and its annual budgets have also been very conservative, predicated on a worst-case scenario for the oil price. This also has ensured that Angola continued to qualify for external finance from the IMF, which was vital during the worst of the pandemic.

Marisa Lourenço

It's quite impressive. And I think one of the key takeaways here is, definitely, the IMF can be your friend. Angola entered into an agreement with the international lender in December 2018. And it was an extended fund facility to be exact, and it successfully passed all of its reviews, which led to the disbursement of almost 4 billion US dollars over three years. Angola also qualified for relief from the debt service suspension initiative, or the DSSI, which was set up by the World Bank and G20 members to support countries at risk of debt distress following the outbreak of the Covid-19 pandemic.

And if we consider regional peer Zambia, which became the first African country to default during the pandemic at the end of 2020, it behaved quite differently to Angola. So, like Angola, it had also borrowed heavily to finance infrastructure projects and racked up quite a debt load. But unlike Angola, it did not benefit from external support from the IMF, mainly because it refused to rein in superfluous spending, prioritising politics ahead of the 2021 general elections rather than the economy. So, I think what we can see here, Gerrit, is that in addition to fiscal prudence, Angola's efforts to develop and deepen ties with major credit institutions have really proved invaluable.

Gerrit Van Rooyen

That's absolutely right, Marisa, but let's not forget that the government also broadened the tax base to boost non-oil revenues and it did this by introducing a 14% value added tax in 2019. It also raised the personal income tax rate for higher income brackets, and it levied additional excise taxes on important luxury cars and cigarettes.

Marisa Lourenço

Again, that's in stark contrast to Zambia, which removed the 16% tax on fuel in January 2021. Despite that being a key source of revenue for the government. Taking all of this into account, Gerrit, what is the outlook now for the debt to GDP ratio for Angola for 2022?

Gerrit Van Rooyen

So, for 2022, we expect public debt to come in at about 78% of GDP, which is slightly better than our estimate for last year. And this improvement is supported by an expected government budget surplus of around 2% of GDP for this year, underpinned by the high oil price which we expect will average $86.2 per barrel this year, compared to an average of $70.7 per barrel last year.

Marisa Lourenço

Let's talk a bit about the privatisation programme now. In 2019, the government introduced PROPIV, which is a programme that seeks to sell 195 state assets by the end of 2022, including several of state-owned oil company Sonangol's assets, and then companies in the agribusiness, finance, transportation and telecommunications industries. The aim of this, of course, is to raise money for the state, which as we know is cash-strapped even if it is in a much better position now. It's also to unburden the state of the financial responsibility of having so many assets under its wing. How has that been progressing since it started?

Gerrit Van Rooyen

Well, quite slowly. Of the 195 assets that you mentioned, only 73 assets were sold by the end of January this year, raising only about $1.6 billion, which is less than 2% of GDP. However, the government hopes to pick up the pace this year by selling 62 smaller assets, which includes shares held by Sonangol in the Angolan investment bank, as well as shares in the Angolan debt and stock exchange, the Caixa Angola bank, and the insurance company ENSA Seguro. That slow start was in part due to delays caused by the pandemic. But even without the pandemic, the deadlines were much too ambitious, as the government underestimated the bureaucracy and due diligence involved to get these assets to market.

Marisa Lourenço

They certainly are ambitious. You know, if you look closely at PROPIV and what has been achieved, the reality is that it is typically small companies that have been put up for sale. So, for example, it has not been able to privatise the medium-sized state carrier business, TAAG airlines, and Sonangol, well, that's a much larger and more complex entity. Unfortunately, the government lacks the experience to achieve some of its larger aims. Also, you mentioned due diligence, and it's true that many Angolan state companies lack transparency, and accountability following decades of corruption. There are also only a few that really generate profit, which also damages the overall attractiveness.

Gerrit Van Rooyen

It's certainly been difficult. Nevertheless, we expect the government will press on with its privatisation drive. It's one of the ways in which the government is trying to attract foreign investment and encourage private sector activity, which are desperately needed to diversify the economy away from oil. And besides PROPIV the Lourenco administration has also introduced other initiatives, such as the Prodesi programme, which funds efforts to diversify exports and substitute imports. And it has also created the private investment and Export Promotion Agency of Angola called AIPEX. Prodesi is promoting exports in several industries ranging from food processing textiles, ICT and health to tourism. And over the past few years, has financed projects estimated at roughly $1 billion. Over the similar period, the Export Promotion Agency AIPEX also registered projects budgeted at more than $4 billion.

Marisa Lourenço

I feel like promoting privatization, beyond obviously trying to draw in private investment, is almost certainly a part of appealing to international finance institutions in the West, which I believe has been key to Angola's shifting foreign relations in recent years. For example, Finance Minister Vera Daves is very well respected in Washington and ties are strengthening with Germany, adding to a list of old EU allies like France and Portugal. And, of course, despite these larger ambitions not proceeding as planned, Angola is still has raised financing, as you've mentioned, some $1.6 billion. And you know, that's going into state coffers and adds to the stolen assets that the government has recovered since 2019.

Gerrit Van Rooyen

Absolutely. Marisa, I agree every little bit helps.

Marisa Lourenço

I'm curious about something. Things are going well for Angola on the economic front, but now I've heard that the government will return to international capital markets this year, most likely issuing a eurobond. Why would it want to take on more debt when it's just come back from shaky situation, and also when it still has a fairly high debt load.

Gerrit Van Rooyen

Well, while the government is running a surplus now, and it doesn't need additional debt to finance its current expenditure, it still has all these past debts that need to be settled. And this means the government will have to borrow more US dollar denominated debt. And this is likely going to be in the form of eurobonds, as the government has already said that it won't seek another IMF program. The advantage of issuing a eurobond is that the government can get lots of dollars with no strings attached. That's opposed to an IMF programme where the government has to meet certain targets and implement economic reforms. The disadvantage, however, is the risk that the local currency depreciates badly against the US dollar, which would worsen Angola's debt to GDP ratio because most of its debts is denominated in US dollars. And this would result in the credit rating deteriorating and raised the cost of acquiring new debt.

Marisa Lourenço

Interesting. So, the good news for Angola is that for 2022, its economy is safe. But the bad news is that this might not be the long-term outlook.

Gerrit Van Rooyen

Yes, that's right. Another concern we should consider is the ongoing oil production issues. Angola, as you know, remains heavily dependent on oil, despite all these efforts to broaden the tax base and diversify its production. And concerningly, oil output continue to decline in 2021, driven mainly by lower production from maturing oil wells, drilling delays amid the ongoing COVID 19 pandemic as well as technical and financial challenges related to deep-water oil extraction.

Marisa Lourenço

Of course, and I know that the technical and financial challenges mentioned above stem from Sonangol, which is struggling to overcome its large debt load after years of mismanagement under former President José dos Santos,

Gerrit Van Rooyen

It seems Angola is still paying for his past sins. But having said that, we are optimistic that activity in the oil sector will pick up in 2022. And that's on the back of new investment and new projects coming on stream which will hopefully start to turn the tide of falling production.

Marisa Lourenço

Let's consider some scenarios then as we wrap up, how about your best- and worst-case scenarios when going beyond 2022?

Gerrit Van Rooyen

So, let's start with the worst-case scenario first, so you can end off on a high note. So, in a worst-case scenario, there will be three things falling oil prices, falling oil production and the government losing its fiscal discipline. All of this could coincide with large external debt repayments coming due from 2023 onwards. It is our expectation that the elevated oil prices we're seeing now are unsustainable, given they’re partially underpinned by the Russia-Ukraine tensions. And oil prices could also fall further over the medium term as global crude supply catches up with the resurgence in demand. In fact, we forecast that the brent crude price will subside to $65 per barrel by 2024. And this alone will cause a stagnation in oil revenue growth during 2023 to 2024. And this could even turn into a decline in oil revenues if production continues to languish at the current level of just above 1.1 million barrels per day due to the operational issues.

Marisa Lourenço

Right. And then with the economy facing decline again because of these issues, populist measures could come into place as the government faces pressure from the electorate, and then that could see greater public expenditure trump commitment to fiscal reform.

Gerrit Van Rooyen

Yes, exactly. And also there won't be any IMF to keep them in line.

Marisa Lourenço

Let's hear the best-case scenario.

Gerrit Van Rooyen

So, in this scenario, we expect that oil production will rise gradually over the medium term and stabilise in the long term, thanks to new investment. And in fact, this positive scenario is actually part of our baseline forecast here at Oxford Economics Africa, which sees output recovering gradually from 1.1 million barrels per day in 2021 to about 1.3 million barrels per day by 2024. And furthermore, we also expect that the authorities will remain on the reform path, especially as we believe that MPLA and President Lourenço are expected to stay in power after the general elections this year. And also, while the government has ruled out further financial assistance from the IMF, the central bank is still planning to move to an inflation targeting framework with technical assistance from the IMF, which we believe is evidence of continued political will to stick to the economic reforms.

Marisa Lourenço

So, if I'm understanding correctly, you said that this best-case scenario is part of your baseline forecast. Does that mean that you consider this best-case scenario as actually the most likely one to happen?

Gerrit Van Rooyen

That's right. It must be said, however, that low oil production is a large downside risk. But nevertheless, we believe that there is a commitment to fiscal prudence and that the economic reform is clearly there. And this will not go away unless there's a major economic shock, like another oil price crash, which looks unlikely in the foreseeable future.

Marisa Lourenço

Fantastic. Gerrit, thank you so much for joining me today.

Gerrit Van Rooyen

Thanks Marisa it's been a pleasure talking to you.

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