Angola

Crony financing does not pave the way to long-term growth

D4

HIGH RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD 124.209bn (World ranking 57, World Bank 2017)
Population 29.78mn (World ranking 46, World Bank 2017)
Form of state Republic
Head of government João Lourenço
Next elections 2022, legislative
  • Relatively peaceful elections
  • Despite bordering DR Congo, there are no significant threats to security from external forces
  • Membership of OPEC. Second largest oil producer in Sub-Saharan Africa, with proven reserves sufficient for more than 20 years at current rates of extraction
  • In addition to hydrocarbons, possesses significant natural resources through its mining (including diamonds) and agricultural sectors
  • Considerable FDI inflows from advanced and emerging economies
  • High debt
  • Low export diversification: oil accounting for 98% of export revenues. Vulnerability to volatility in global markets and to potential large swings in oil prices
  • Rebuilding and reconstruction of economic and social communities after a debilitating civil war require considerable resources
  • Persistent pockets of high poverty
  • Perceptions of corruption and lack of transparency in oil accounts. Limited confidence in the country’s leadership and low investment from advanced economies in the non-oil sectors
  • Data provision remains uneven

Angola is in a major recession

Angola entered in 2018 its 3rd year of deep recession, expected to end only in 2020 (-3% growth in 2018 and -1% in 2019). The major deterioration of public finances implied a sharp increase of public (80% of GDP in 2018) and external (65% GDP in 2018) debt. It also triggered large amounts of arrears to local corporates. The links between public finance, state-owned banks and state-owned enterprises also triggered a banking crisis (NPLs at 30% of total loans). The large depreciation of the Kwanza (-50% in 2018) played negatively and the import cover decreased markedly from above 10 months at end-2016 to 4 months in September 2018, with additional downside risks.

Angola’s economy is oil-dependent and prone to boom-bust cycles. When prices are high capital flows, credit grows, and public spending is robust. And when the economy performs well so does re-construction of what used to be for many years a war ravaged country. Yet an oil bonanza hinders the incentives that are crucial to reform the economy.

 

Poor governance took its toll

As a result, Angola is ranked almost at the bottom of the World Bank Doing Business survey (173rd out of 190). It clearly explains current economic difficulties, since enforcing contracts (186th), getting credit (184th) and trading across borders (174th) are the three categories in which the country performs worst. It explains why the economic crisis impacted the corporates through a credit crunch and why the country was unable to diversify its exports. Despite many promises, the government was unable to implement enough reforms to improve the business climate and the country remains in a low confidence trap. Arrears to corporates (more than USD 5bn) are a key weigh in the current environment. As a result, even higher oil prices in 2018H1 did not trigger higher growth, since output targets were missed.

Despite bilateral financing (mainly from China who grants Angola with 30% of its lending in Africa), liquidity needs increased a lot and the proceeds of a USD 3bn Eurobond issued in May 2018 were spent in only 5 months. Moreover, bilateral financing does not enhance growth, since it supports the old oil-driven growth model. Under such unbalanced circumstances, public and external debt rise markedly.

 

 

IMF lending to come: not enough?

The peaceful political transition from President Dos Santos’ regime to J. Lourenço is good news. This should help the Angolan economy to recover from its near stagnation and subdued growth. The loan agreed with the IMF (USD 3.5bn over 3 years) is also good news, since it shows some willingness to rebalance the economy along with the IMF's conditions.

However, the amount to be borrowed seems quite low compared to the heavy financing needs faced by Angola, and we see some risks for the program to be off-track since IMF conditionality is difficult to fulfill in this kind of economy with bad growth prospects and low governance indicators.

The main issue is the lack of policy changes and the state-owned enterprises'/state-owned banks' close relationship. It had crowding-out effect on the private sector and increased the procyclicality of financing during the growth period, as well as during the recession through a credit crunch driven by the current banking crisis.

 

 

 
 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 46%
1
15% Portugal
India 6%
2
13% China
Spain 6%
3
12% United States
United States 5%
4
6% South Africa
China, Taiwan Province of 5%
5
5% Brazil

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 97%
1
9% Other industrial machinery and parts
Crude fertilizers other than division 56, and crude minerals 2%
2
8% Road vehicles
Fish, crustaceans, molluscs and preparations thereof 0%
3
6% Specialised machinery

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings