Angolan Economy – An uphill struggle in 2015 says Chief Economist, Tiago Dionisio

Tiago Dionisio, Chief Economist with Eaglestone Securities          

Lower oil prices hit 2014 GDP growth and fiscal accounts Angola is Sub-Saharan Africa’s second largest oil producer after Nigeria and its economy remains highly dependent on the oil sector. Official figures show that the oil sector accounted for nearly 37% of the country’s GDP, 98% of its total exports and more than two-thirds of government revenues in 2014. As a result, it is no surprise that the rapid fall in oil prices witnessed since mid-2014 has had a profound effect on the overall performance of the country. The impact of lower oil prices has not only hurt the oil sector, but has also spread to other sectors of the local economy. The government’s fiscal accounts have been severely affected, leading authorities to introduce a revised budget for 2015 earlier this year only three months after its initial budget proposal received parliamentary approval. Moreover, central bank figures show that net international reserves have fallen to the tune of US$ 430 million per month since the oil crises began, standing at US$ 24.9 billion in June (covering about six months of imports), while the local exchange rate has depreciated 28% in the period (21% this year alone) against the dollar. Regarding economic activity, the latest figures indicate that growth in the country slowed from 6.8% in 2013 to a projected 4.8% in 2014. This slowdown in activity resulted not only from a contraction in the oil sector, but was also due to the more subdued expansion in the non-oil sector. In particular, GDP in the oil sector contracted 2.6% last year after average oil production declined to 1.67 million barrels per day (bdp) from 1.72 million bdp in 2013. This lower production was reportedly due to operational problems in the sector. On the other hand, non-oil GDP growth slowed to 8.2% from 10.9% in 2013 mostly from a much slower expansion in the agriculture and energy sectors. Meanwhile, in terms of the fiscal accounts of 2014, they showed that government revenues were impacted by a combination of the fall in oil production and lower oil prices (average of US$ 104 per barrel vs. US$ 107.7 in 2013), which was particularly evident in the last quarter of the year. They amounted to Kz 4,323 billion (US$ 43.9 billion), representing an 11% YoY fall and 9% less than initially budgeted. Oil related revenues accounted for 68.5% of the total receipts. This was significantly lower than the 74.9% in 2013 and 81.2% in 2012. In addition, total revenues stood at 37.6% of GDP, down from 40.2% in 2013 and 46.5% in 2012. On the expenditure side, the Angolan government saw an annual fall of 3% in total spending to Kz 4,682 billion (US$ 47.6 billion), as it accounted for 40.7% of GDP (0.8% higher than in 2013). Current expenditures continued to represent the lion’s share of government spending, or 69% of the total (vs. 71.4% in 2013 and 73.6% in 2012). In particular, fuel subsidies made up a large share of total spending (roughly 10% in 2014) and have consistently represented about 4-5% of GDP in recent years. All in all, the fiscal deficit stood at Kz 360 billion (US$ 3.7 billion) in 2014, or 3.1% of GDP. A revised budget for 2015 In its revised budget for 2015, the Angolan government lowered its economic growth forecasts to 6.6% this year from a previous estimate of 9.7%. It expected the oil sector to expand 9.8%, down from an initial forecast of 10.7%. This assumption was based on a new average oil price projection of US$ 40 per barrel, which is half of the price foreseen in the initial budget document. The government continued to assume that oil production will increase to 1.83 million bpd this year. However, the non-oil sector suffered the biggest revision to a 5.3% growth rate (vs. 9.2% previously). This was due to lower growth projections in the agriculture, manufacturing, construction and services sectors. The local authorities also foresaw a fiscal deficit of Kz 807 billion (or 7% of GDP). This estimate is lower than the 7.6% initially planned, but it remained well above the deficit of 3.1% in 2014. As expected, the new budget assumed a significant reduction in revenues that the authorities hope to accommodate with lower expenditures in all sectors. Specifically, revenue estimates were cut by 36% from the previous budget projections (oil related revenues were revised downwards by 59%) while spending was lowered by 33% (public investment was cut by 44%). More funds continue to be allocated to the social sector (32.5% of total expenditures), but spending on defense and security (15.5% of the total) still outweigh the amount invested in education and health (13.5% of the total). The government hopes that the implementation of several tax reforms approved in 2014 will improve tax collection outside of the oil sector. These include revisions to the corporate tax rate and the minimum threshold of household income eligible for taxation. Other measures like the recently announced tax on foreign exchange transfers could also help improve the government’s coffers. On the other hand, the government continues with its fuel subsidy reform. The Angolan authorities are expected to end petrol subsidies later this year and continue to increase the price of other fuels. The aim is to allocate these funds to other expenditures, namely in the health and/or education sectors. Non-oil related receipts are expected to jump 27% this year and to surpass the contribution of the revenues coming from the oil sector. The lower revenue contribution expected in 2015 means that the government has to rely more on debt markets (both domestic and international) to finance its spending plans. The revised budget foresees a significant increase in public debt levels this year, which in dollar terms should reach US$ 47 billion (from an estimated US$ 36.5 billion in 2014). In other words, it means that public debt is expected to increase to 45.8% of GDP from 31.2% in 2014. Local authorities cut growth projections (again) The BNA recently issued its inflation report for the first quarter of 2015. In this report, the central bank lowered real GDP growth projections for this year to 4.4% (from the 6.6% in the revised budget approved in February). This estimate is now more aligned with the projections of several international institutions, which suggest that growth may decelerate to about 4%. The central bank now projects that the oil sector will advance by 7.8% and the non-oil sector by 2.9%. These compare with the previous estimates of 9.8% and 5.3%, respectively. The growth assumptions are based on (1) an average exchange rate of 112.5 kwanzas to the dollar, (2) an average oil price of US$ 53 per barrel (45% lower than the 2014 average price) and (3) an inflation rate of 9%. Financing in overseas markets Angola has reportedly secured loans from several financial institutions in recent months. These include Société Générale (US$ 500 million), BBVA (US$ 500 million), Goldman Sachs (US$ 250 million) and Gemcorp Capital (US$ 250 million). Moreover, in early July, the World Bank announced that it was providing Angola with US$ 650 million consisting of a loan of US$ 450 million and a policy-based guarantee of US$ 200 million. According to the World Bank, Angola had requested this financing back in September of last year. It also stated that about half of the funds would be targeted at supporting public expenditure, financial management and procurement while the rest would be focused on tax policy and administration, macroeconomic management, poverty strategy and social safety nets. The US$ 200 million guarantee may be used to help the government access additional loans in international markets. Some press reports also continue to suggest that Angola may issue a debut US$ 1.5 billion Eurobond in the near future, but this has been a recurrent topic that has yet to materialize. Meanwhile, the Angolan president, Mr. José Eduardo dos Santos, recently visited China, the country’s main trading partner and responsible for 47% of Angola’s exports in 2014. Angola reportedly exports half of its oil to China, securing nearly 15% of the latter’s oil requirements. This visit rose a lot of speculation about what Mr. dos Santos would request the Chinese authorities, namely in terms of a possible financial package that would provide Angola with some breathing space to face the current challenging period. However, no official figures were disclosed by the authorities regarding any fresh money for Angola. In his speech to the Chinese president, Mr. dos Santos asked China for a moratorium of two years or more on repaying loans and for China to maintain its key role in building infrastructure in Angola. Relations between both countries were surely strengthened after this visit and its outcome is something to monitor closely going forward. International reserves and exchange rate In 2013, the BNA introduced several measures aiming to reduce dollarization in the Angolan economy and address the severe foreign currency shortages in the retail market. The most important measure was the oil sector foreign exchange law. The law requires companies operating in the oil sector to settle all domestic transactions, including taxes and payments to local suppliers, in local currency purchased from domestic banks. This effectively channeled the supply of dollars entering the non-oil sector through commercial banks. These measures had an initial positive impact, but Angola remained heavily dollarized, with the dollar still widely used as a unit of account and for transaction purposes. However, while a decade ago, nearly three fourths of deposits and two-thirds of loans to the private sector were denominated in foreign currency, both ratios have recently fallen to levels below 40%. Angola derives most of its foreign exchange reserves from the export of oil. As such, it is no surprise that the current fall in oil receipts has had a significant impact on the level of international reserves in the country and has also put additional pressure on the local currency. The most recent available data from the BNA shows that net international reserves have fallen 17% since June of last year (or nearly US$ 430 million per month). Reserves stood at US$ 24.9 billion in June 2015 and cover about six months of imports. They fell more markedly in the third quarter of last year and in the first months of 2015. The exchange rate of the kwanza against the dollar has also come under increased pressure in recent months, with the local currency depreciating 28% against the dollar since mid-2014 and 21% this year alone. The official exchange rate currently stands at about 126 kwanzas to the dollar while on the streets the dollar can trade in excess of 180 kwanzas. The depreciation of the Angolan currency has had some impact on consumer prices, particularly bearing in mind the country’s large dependency on the import of most of the goods that it consumes. Inflation reached 9.61% in June and is fast approaching double-digit figures, a level not seen for nearly three years. Meanwhile, the BNA has increased the ratio of required reserves in national currency for the third time since the last quarter of last year. In November, the central bank raised the reserve requirements from 12.5% to 15%, reversing a decision it had taken earlier in the year that aimed to increase lending and financial intermediation in the country. A second increase took place in February of this year (15% to 20%) and more recently a third increase lifted this ratio to 25%. These increases have been taken to try to encourage demand for local currency that would prevent a more pronounced devaluation of the kwanza and further increase in inflation levels. by Tiago Dionisio, Chief Economist, Eaglestone Securities