Moody’s affirms Angola Ba2 ratings, changes outlook to negative

London, 03 March 2015 — Moody’s Investors Service has today affirmed Angola’s Ba2 government bond rating and changed the rating outlook to negative from stable. The short term ratings remain unchanged at Not Prime.

Key drivers for today’s decision include:

• The rating affirmation at Ba2 is supported by Angola’s intrinsic economic strength and the government’s financial buffers.
• The negative rating outlook is driven by the downside risks stemming from the oil price decline to economic growth, government finances and the external payments position.

The rating action does not affect Angola’s foreign currency country ceilings, which remain unchanged at Ba1 for bonds and Ba3 for deposits. Angola’s local currency country risk ceiling remains unchanged at Baa3.

Rationale for the Rating Affirmation at  Ba2
Despite the sharp drop in the price of oil and the uncertainties surrounding its medium-term path, Angola’s sovereign credit profile displays a number of strengths. Real GDP growth will likely remain positive at around 3% in 2015, as Moody’s expects oil production to increase this year with new projects coming on stream and production likely to reach 1.83 million barrels per day (mbpd), up from an average of 1.66 mbpd in 2014. In effect, new capacity coming on stream this year and beyond will help cushion the economy against weaker oil prices and the large expected deceleration in the non-oil sector due, in part, to government spending cuts.

The government’s healthy balance sheet also supports the affirmation of the Ba2 rating, as illustrated by a government debt to GDP ratio of 23.0% at the end of 2014, which compares favourably with similarly rated peers. In addition to its relatively low level, the government’s current debt structure is favourable, split equally between domestic and external debt, with half of the latter being multilateral and bilateral to China. The strength of the government’s balance sheet is also supported by accumulated surpluses held by the National Treasury Reserve at the central bank of an estimated $8 billion. When including assets held by the sovereign wealth fund (SWF), the government’s aggregate fiscal reserves represent at least 10% of 2014 GDP.

Rationale for the negative rating outlook
The change in the outlook is partly a reflection of the adverse impact of the 47% drop in the price of oil from its peak in June 2014, given that Angola derives 75% of fiscal revenues and 95% of current account receipts from the oil sector. Moody’s expects that the price fall will cause the sovereign to move from a ‘twin’ external and fiscal surplus in 2013 to a twin deficit position in 2015.

On the domestic side, although the government is in the process of adjusting its spending, it still forecasts that a fiscal deficit in excess of -5.5% of GDP will emerge in 2015 as a consequence of the oil price shock. On the external side, Moody’s expects a $19 billion reduction in the trade surplus that will move the current account into deficit in 2015 to an estimated -5.9% of GDP. The overall balance of payments is likely to be in deficit by around -6.0% of GDP, negatively affecting the country’s official foreign exchange reserves, which stood at $27 billion at the end of 2014. If completed, planned external borrowing by the government should support the level of foreign exchange reserves throughout 2015 — taking the $5 billion SWF into account, import coverage is currently estimated at a comfortable 6.6 months.

Moody’s recognises the government’s planned response to the impact of the oil price fall, which if successfully executed, will somewhat mitigate the impact of the oil price fall. As well as announcing plans to bolster foreign exchange reserves through additional external borrowing, the government plans a sharp reduction in capital and current expenditure. However, the effectiveness and secondary impacts of this response are uncertain: a large budget adjustment entails execution risk and the ability of the government to secure all of the external funding it will seek is not guaranteed.

Finally, although not our baseline scenario, if foreign exchange reserves were to decline to a certain threshold, due either to significant draw-downs on the accumulated surpluses at the central bank or to a larger-than-expected balance-of-payments deficit, an adverse chain of events similar to that witnessed during the 2008-09 oil price shock could ensue. In 2009, the authorities were forced to abandon the currency peg after import coverage fell from five months at the end of 2008 to 3.6 months. Such a scenario could lead to a loss of confidence in the ability of the authorities to manage the currency, which could lead to a forced devaluation, more inflation, and a reversal in efforts (such as de-dollarization) to make monetary policy more effective.

What could change the rating
Upward pressure is unlikely to be exerted on the rating in the current context. However, several conditions could provide a return to the stable outlook, including (1) confidence that budget execution in 2015-16 will succeed in its intention of reversing the fiscal deficit by 2016 and containing the increase in the current account deficit; (2) preservation of the government’s fiscal buffers, including the foreign currency reserves and the SWF; (3) preservation of external and macroeconomic stability.

Downward pressure would be exerted on the rating in the event of (1) clear evidence that the deterioration in the government’s balance sheet caused by the oil price shock will be larger than currently expected; (2) for example with a substantial erosion of fiscal buffers that undermines confidence in the country’s external stability; (3) the emergence of the longstanding risk of significant political and/or social tensions that could hinder the country’s medium-term growth prospects.

Prompted by the factors described above, the publication of this credit rating action occurs on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

GDP per capita (PPP basis, US$): 7,978 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.8% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.7% (2013 Actual)

Gen. Gov. Financial Balance/GDP: 0.3% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 6.6% (2013 Actual) (also known as External Balance)

External debt/GDP: 18.7% (2013 Actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.