Lower oil prices have weakened the economy and induced countervailing measures from the authorities…
Oil accounts for around 98% of exports and 75% of government revenues. Therefore, current weak commodity prices (benchmark crude Brent -50% y/y in early September 2015) are limiting FX earnings, government receipts and overall economic growth. In 2012, fiscal and current account surpluses were +4.6% and +12% of GDP, respectively. In 2015, EH expects both accounts will record substantial deficits of -8.7% and -6% of GDP, respectively. Additionally, the kwanza (AOA) is under downward pressure and inflation is increasing. Annual average GDP growth in the ten years to end-2014 was +10% but EH forecasts +3.5% in 2015 and +4% in 2016.
In response to the economic impact of weaker oil prices the Central Bank tightened liquidity conditions by increasing the key policy interest rate and banks’ mandatory reserve requirements. Additionally, the government cut markedly its spending plans, including on goods and services and some subsidies and also on some non-essential capital projects. In the current fiscal year, the government is using an oil price of USD40/barrel in its revised calculations.
Financial support will be made available through the World Bank and the government is likely to increase lending and perhaps issue a Eurobond. Moreover, bilateral credit lines will be extended by, in particular, with China and Brazil. In need, the IMF will provide support.
…which, in turn, are increasing commercial and trading risks
With financial assistance likely to be readily available, the risks are unlikely to be sovereign. Rather they will be at a corporate level. The economic downturn and official measures to preserve stability, including project cancellation and/or delay, have increased payment disruptions and default risk. The construction sector, in particular, is being squeezed and insolvencies and company failures are likely to be increasing.
Planning for the future
The national development plan, Angola 2025, aims at limiting structural rigidities and enhancing economic diversification away from the upstream oil sector. The IMF suggests that this requires effective programmes to improve infrastructure, expand human capital and lower the cost of doing business in the country. The Fund also promotes greater transparency in the country’s financial accounts. It remains to be seen whether the sovereign wealth fund (SWF) will improve management of oil revenues. The SWF announced its broad portfolio investment strategy in September 2014 but current weak oil revenues may result in some of the fund being used to provide further domestic financial stability.