Moodys assigns provisional (P)Ba2 rating to Angola’s forthcoming US dollar-denominated bond offering

Luanda, Angola, Capital Markets in Africa — Moody’s Investors Service has today assigned a provisional long-term (P)Ba2 rating to the forthcoming bond to be issued by the Government of Angola. The obligation is a senior unsecured bond issue and ranks pari passu with all current and future senior unsecured indebtedness of Angola. This rating is in line with Angola’s issuer rating of Ba2.

This rating action concerns a new rating solicited by the issuer for a forthcoming issue that was not in the market at the time that the sovereign release calendar was published, and is therefore being released on a date not listed in that publication.

The provisional (P)Ba2 rating is based on the draft preliminary prospectus dated 19 October 2015. Moody’s will assign a definitive rating upon receipt of the final documentation.

RATINGS RATIONALE
The provisional rating on the forthcoming senior unsecured bond issue is aligned with the Government of Angola’s Ba2 issuer rating, which reflects the country’s limited institutional capacity and vulnerability to oil price volatility, but is supported by the economy’s robust medium-term growth prospects and the strength of the government balance sheet.

Angola is grappling with an oil price shock to its oil-dependent economy. It is better prepared than it was in 2009, and its policy response has been swift and far-reaching in an effort to protect its financial buffers and prevent a loss in competitiveness. Nonetheless, the external position has weakened sharply, and the fiscal position and growth prospects are being challenged in the near term, factors reflected in the negative outlook on the issuer rating. We now forecast slightly lower growth of 4% in 2015 and 4.7% in 2016. Substantial fiscal adjustment has already occurred, supporting a small surplus in H1 2015.

Rating support comes primarily from Angola’s oil endowment and rising oil production. The latter has allowed the country to generate a track record of fiscal surpluses and embark on a substantial increase in capital expenditure to diversify the country away from natural resource extraction. Further support for Angola’s rating comes from its large financial buffers: a strong government balance sheet reflected in low but rising debt burden and large foreign-exchange reserves that represent a credible buffer against economic shocks. Another credit positive is the sovereign wealth fund, which may be used to soften the impact of shocks to the country.

Constraints on Angola’s rating include very limited institutional capacity and a degree of uncertainty surrounding issues of political succession and continuity in economic policy given Angola’s short post-independence history. The current oil shock is a reminder of the country’s pervasive vulnerability to oil prices. Other risks stem from elevated non-performing loans and a high (but falling) level of financial dollarization.

ISSUER RATING OUTLOOK
The negative outlook on Angola’s sovereign issuer rating reflects our expectation that the sharp drop in oil prices will adversely impact the government’s budget, causing a rise in primarily external borrowing and a slowdown in real growth. While substantial fiscal adjustment has already occurred supporting a small surplus in H1 2015, the evolution of key credit metrics by end-2015 remains uncertain

WHAT COULD CHANGE THE ISSUER RATING — UP/DOWN
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 widening of the current account deficit; (2) preservation of the government’s fiscal buffers, including the foreign currency reserves and the sovereign wealth fund (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) 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.

GDP per capita (PPP basis, US$): 7,203 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.4% (2014 Estimate) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.5% (2014 Actual)
Gen. Gov. Financial Balance/GDP: -0.6% (2014 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.9% (2014 Estimate) (also known as External Balance)
External debt/GDP: 21.4% (2014 Estimate) 
Level of economic development: Moderate level of economic resilience 
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
Current Account Balance/GDP: 0.9% (2014 Estimate) (also known as External Balance)
External debt/GDP: 21.4% (2014 Estimate)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.