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Monday, September 21, 2015 - 14:44
Over a barrel

The 6% devaluation of the kwanza by Angola’s central bank (BNA) in June has not alleviated pressure on the national currency, which reached an all-time low on mid-July, losing 18% since 1st January. Like many oil-producing countries, Angola is struggling due to low oil prices. Economic growth is being hurt by liquidity and currency pressures, rising inflation and fiscal constraints.
Says Anne-Sophie Fèvre at Coface, the high dependency of the country on hydrocarbons is increasing its vulnerability, with oil accounting for nearly 40% of GDP, more than 70% of fiscal revenues and above 90% of goods export earnings. Despite the efforts of diversification (mining, agriculture, construction) the Angolan economy and financing sources (foreign currency earnings, banking system) still rely heavily on the oil sector.
“The decrease in the oil price underlines the need to diversify the economy but deprives the country from the financial resources to invest to limit its oil dependency. While the financial situation is the country is being undermined, clear economic policy and political stability are the main assets to alleviate investor concerns and secure international financial support,” she says.
The main risks related to the lack of foreign currencies and depreciation of the kwanza are:
• Liquidity. A decrease in export revenues, due to low oil prices, has resulted in a lack of foreign currencies. The law passed in 2012 requiring foreign oil companies to pay suppliers and salaries in kwanza has further dried up the supply of dollars in some parts of the economy.
• The Angolan authorities have been forced to take measures to mitigate shortages of US dollars. Some restrictions were imposed on withdrawals and the allocation of foreign currencies has been prioritised for the payment of some goods (oil and first priority goods). Since end of June, a “special contribution” of 10% was imposed on bank transfers related to the payment of services to non-resident entities under technical assistance or management contracts (special contribution does not apply to salaries). Foreign-exchange restrictions are creating problems for Angolan companies to pay foreign suppliers.
• Exchange rate risk: The Angolan kwanza has been hit by low oil prices. It lost 4% in 2014 and the BNA devalued the currency by 6% in early June to preserve its reserves (about $27-billion or six months of imports). But the gap between the formal and informal markets (124 AOA/$ and 174 AOA/$ respectively on July 16th), weak oil revenues and high demand for dollars, put pressure on the kwanza which lost 12% between mid-June and mid-July.

“Depreciation is speeding up inflation,” says Fèvre, “a main source of concern for the government, which has managed for nearly two years to lower price growth after years of double digit inflation. Inflation rose 9.6% (y-o-y) in June, overreaching the forecasts of the Angolan authorities for the year (9%), in spite of two rate hikes by the BNA this year (+50 bp to 9.75% in June).”
Pressures on prices are being increased by spending cuts. Facing a sharp decrease in revenues, the Angolan government has decided to revise the budget based on a reduced oil price ($40/bl compared to $81/bl previously).
The progressive withdrawal of fuel subsidies (started in September 2014 and which should be effective by September 2015) and the freeze on public sector hiring, will contribute to limit expenditures. However spending cuts may not compensate for the huge decline of budget revenues (down by 85% y-o-y in May 2015).
Angola benefits from international support but the debt burden is increasing, she notes. The Angolan government has secured loans from China, the World Bank ($450-million) and plans to issue Eurobonds ($1.5-billion). Financing needs are growing and the depreciation of kwanza adds burden to public debt, denominated at about 70% in foreign currency.
Willingness to manage public finances and political/social stability are among the main assets for the country to ensure confidence of foreign investors and international institutions. In this respect, uncertainties over the succession of J. Eduardo dos Santos, leader of the MPLA at the head of the country from 1979, remain. The next elections are scheduled for 2017.
The strong political power exercised by the president (in business and media) prevent any opposition movement to emerge (Angolan police arrested in June about fifteen people on allegation of political rebellion). However, discontent is growing among the population facing the worsening economic situation, increasing poverty and widening inequalities.
Protests or attempts to protests and social unrest may increase. Any unexpected succession in the case M. Dos Santos’s decision to relinquish power or inability to stay before the poll may destabilise the country.

Copyright © Insurance Times and Investments® Vol:28.9 1st September, 2015
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