Angola | Moody’s downgrades Angola’s rating to B1 with negative outlook

Luanda, Angola, Capital Market in Africa — Moody’s Investors Service has today downgraded the long-term issuer and senior unsecured debt ratings of the Government of Angola to B1 from Ba2 and assigned a negative outlook. The short-term issuer ratings have been affirmed at Not-Prime (NP).

The key drivers of the downgrade are:

1. The government’s financial position and the country’s external position have deteriorated sharply due to the shock stemming from the structural downward shift in oil prices.
2. Angola’s high reliance on hydrocarbons and lower for longer oil prices are also pressuring its economic strength by greatly reducing the country’s near-term growth prospects, a key credit support in the past.

The negative outlook reflects ongoing imbalances in the foreign exchange market which, in light of the diminished options for replenishing them, will continue to put downward pressures on official foreign exchange reserves and on the currency.

This rating action closes the review initiated on 4 March when Moody’s placed the ratings on review for downgrade.

In addition, Angola’s long-term local-currency bond and deposits country ceilings were lowered to Ba1 from Baa3. At the same time, the long-term foreign-currency bond ceiling was lowered to Ba3 from Ba1 and the long-term foreign-currency deposit ceiling was also lowered to B2 from Ba3.

RATINGS RATIONALE

FIRST DRIVER — FISCAL AND EXTERNAL POSITIONS HAVE DETERIORATED DUE TO THE DROP IN OIL PRICES

The structural shock to the oil market is weakening Angola’s government balance sheet, and economy, and therefore its credit profile. Between 2013 and 2015, the country moved from fiscal and external surpluses to twin deficits. Revenue as a percentage of GDP declined by 16 percentage points and the fiscal position moved from a surplus of 0.3% of GDP in 2013 to a deficit of 1.6% of GDP last year. During the same period, the country’s current account balance relative to GDP moved from a surplus of 6.7% to a deficit of 5.7%.

The fall in the oil price has laid bare structural weaknesses in the government’s balance sheet and in the economy, and put into sharp relief the policy dilemma the government faces. While the roughly 56% depreciation in the exchange rate against the US dollar since the start of 2015 has helped to preserve foreign exchange reserves and to some extent contained the adverse impact of the oil price shock on the government’s revenues, this has been at the cost of higher inflation—which has risen from 7.7% in December 2013 to 23% in March 2015 – also partly due to the removal of fuel subsidies and the increase in administrative prices – and weakening government debt metrics. Due mostly to the depreciation, debt servicing costs have increased very sharply from 2% of total revenues in 2013 to 8.2% of total revenues in 2015, and the foreign currency proportion of Angola’s total government debt increased to 51% in 2015 from 40% in 2013. The share of foreign currency debt will rise further to 53% in 2016, increasing Angola’s budgetary vulnerability to a further deprecation of its currency.

Other debt metrics have also deteriorated. Despite the policy response to adjust the budget to lower oil prices, Moody’s forecasts that Angola will continue to run deficits in 2016 and 2017. That, alongside further expected currency depreciation, will lead to a further increase in government debt levels. The government’s debt-to-GDP ratio has nearly doubled over the past two years, increasing sharply to 47% in 2015, from 25% in 2013, and is forecast to rise further in 2016 to more than 50%. While Moody’s notes that foreign-currency assets in Angola’s Sovereign Wealth Fund of US$5billion and liquid fiscal reserves of US$9.7billion in March 2016 still represent a substantial fiscal buffer in comparison to total general government debt of US$49 billion at end 2015, the latter were lower than US$12 billion in December 2013. Despite these fiscal buffers, the country’s key credit metrics are now more aligned to those of B1-rated peers. In particular, at 47% of GDP and rising, the level of government debt is now higher than the median of 41% of GDP for Ba-rated countries, and more consistent with the median of 48% of GDP for B1 rated countries.

SECOND DRIVER — ANGOLA’S HIGH RELIANCE ON OIL AND LOWER FOR LONGER OIL PRICES HAVE LOWERED THE COUNTRY’S GROWTH POTENTIAL SIGNIFICANTLY FOR THE COMING YEARS

Angola is highly dependent on hydrocarbons to drive economic growth and to finance government expenditure. Oil and gas account for over 97% of total exports and roughly 45% of GDP, and also provide around 67% of consolidated government revenues.

The decline in oil prices has hit the non-oil economy hard, with non-oil GDP growth falling from 10.9% in 2013 to 1.3% in 2015, mainly due to the contraction in government spending. And the decline in oil prices has contributed to delays in capital investments in the oil sector, meaning that the government’s objective of increasing oil production to 2 million barrels per day is unlikely to be achieved before 2020. Given the decline in oil prices and Moody’s forecasts for lower-for-longer oil prices going forward, the rating agency now expects Angola’s economy to grow at 3% in 2016-2017. Furthermore, over the medium-term, Moody’s expects growth to average 4%, down from an average of close to 5% between 2010 and 2013 and very sharply below the 16% recorded on average in the five years prior to that.

In addition, Angola’s economic size (proxied by its nominal GDP in dollars) has also declined due to the depreciation of the kwanza, to US$122 billion in 2015, from US$125billion in 2013, and is forecast to decline further to US$113 billion in 2016. Lower GDP in dollar terms makes it harder for Angola to service the rising share of foreign-currency debt.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook primarily reflects ongoing pressures on the Kwanza and on official foreign exchange reserves which arise from imbalances in the foreign exchange market, and which raise somewhat the risk of a balance of payments crisis. The government’s options for replenishing reserves have diminished, however, discussions are underway with the IMF for a possible loan facility, which if successful could provide a boost to reserves. While Angola plans reforms that would enhance growth in the non-oil economy and increase its balance sheet flexibility, those plans are unlikely to bear fruit in the near-term and do not offset the downside risks posed by external pressures.

WHAT COULD MOVE THE RATING DOWN / UP

Downward pressure could be exerted on the rating of the government of Angola if signs of an emerging fiscal or balance-of-payments crisis were to emerge. Those signs might include a further sustained fall in the price of oil, and increased pressure on the exchange rate and foreign-currency assets, as well as a marked worsening in the fiscal balance for which no clear reversal was in sight, or further stress in and/or /support required for the banking system. The emergence of social unrest and deterioration in the domestic political environment, resulting in disruptions to oil production and/or foreign investments in the economy, would also be highly credit negative.

Upward pressure on the rating could develop with the reduction in external vulnerabilities for example through a replenishment of foreign exchange buffers that contributed to stability in the foreign exchange market, and therefore the government’s debt metrics.