Download Angola : Budget in deficit despite high oil prices

Angola
July 2014
Angola
Budget in deficit despite high oil prices
With GDP growth of 5%-5.5% forecast for 2014-2015, inflation under control and oil prices above USD110, which should
maintain a current account surplus and keep its currency reserves stable, Angola appears to be enjoying the benefit of tail
winds. Even so, the murky state of its public finances and weak institutions restrict its access to the international capital
markets, and the government is using its future oil revenues as security to fund its investment programmes. This is a highrisk strategy because oil revenues remain vulnerable to a downturn in oil prices.
■ Fragile macroeconomic balance
With daily output running at 1.74 million barrels and oil exports
generating revenue of about USD70 billion in 2013, Angola is
Sub-Saharan Africa’s number two oil producer (joint second
with Algeria) behind Nigeria. In 2014, the start-up of Total’s
CLOV deepwater project should add another 160,000 bpd to
national output, while exploration activities to find new fields–
notably in pre-salt areas–make the outlook even brighter. The
government is expected to grant new licences that will
eventually give rise to several billion dollars in foreign direct
investment and most likely an increase in oil production (Q3
2014 BMI forecast of 2.17 mbpd by 2018). With plentiful
supply on tap, the country has successfully diversified its
customer base. The euro zone and the United States buy 15%
and 14% respectively of Angolan exports, while South Africa
buys 7%, India 9% and China 43%. Barring a shock affecting
production, prices or demand for oil – notably from China - oil
and gas exports are expected to maintain Angola’s ample
current account surplus and keep its foreign exchange
reserves at a healthy level (USD32 billion in March 2014,
equivalent to close to 8 months of imports).
1- Moderate GDP growth and single-digit inflation
In y/y %
▐Non-oil GDP ▐Oil GDP ▬ Inflation (R.H.S.)
20
16
14
15
12
10
10
5
8
6
0
4
-5
2
-10
2008 2009 2010
Sources: IMF, BNP Paribas
0
2011
2012
2013
2014f
2015f
generation) should support non-oil growth. The kwanza has
stabilised since 2011 but remains fragile. Like in early 2014,
any drop in oil production or oil revenue because of production
problems, would result in lower local USD supply and a
widening gap between the official and the informal exchange
rates, forcing the central bank to sell forex reserves or accept
some degree of kwanza depreciation. Inflation has stayed
below the 10% mark since September 2012, posting a record
low of 7.2% y/y in April 2014. However, the situation remains
fragile owing to the limited effectiveness of the monetary
policy, constrained by the still significant dollarization and the
relatively low level of financial intermediation.
Nonetheless, to finance its development and ensure its
macroeconomic balance, Angola depends entirely on the oil
bonanza – 47% of GDP, 97% of exports and 78% of budget
revenues. This reliance represents a major source of risk as
the country recently found out at its expense. Since the civil
war ended in 2002, Angola’s GDP has risen tenfold, reaching
USD122 bn in 2013. Even so, most of this expansion came
during the first six years after the war (2003-2008), during
which GDP growth averaged 15.4% p.a. on the back of
programmes to rebuild infrastructure and resuming oil
production (just 700,000 bpd in 2002). This trend was stopped
in its tracks by the late-2008 oil shock, which plunged the
budget and current account into deficits and triggered a
currency crisis (foreign exchange reserves fell by 40% and the
kwanza, the local currency, was devalued by 20%), obliging
the country to call on the IMF for a USD1.3bn three-year
Stand-By Arrangement (2009-2012). The economy has
returned to a path of moderate GDP growth (4.1% p.a. over
2010-2013). It is expected to grow by around 5%-5.5% p.a.
over 2014-2019, supported by rising oil production and public
investment. The positive externalities of public spending
(efforts to reduce logistical bottlenecks, increase in electricity
■ Rapid deterioration in public finances
The sensitivity of public finances to fluctuations in oil revenues
is a particular point of concern. The 3% drop in the average oil
price and the virtual stagnation in oil output due to
maintenance issues led to a sharp decline in government oil
receipts in 2013 (-7.7 percentage points of GDP). This was
enough to send the budget into deficit even though
government spending and non-oil revenues stabilised. Even
though capacity constraints will curb the planned capital
expenditure (in general, only 75% actually goes ahead), public
spending is set to increase in line with the ongoing 2013-2017
National Development Plan to modernise infrastructure and
diversify the economy. The gradual inclusion of the national oil
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Angola
July 2014
company Sonangol’s quasi-fiscal operations in the public
accounts will also raise overall public expenditure. As regards
public revenue, the oil price factored into the 2014 budget
(USD98) looks conservative enough but the 8.8% GDP growth
assumption underpinning the budget looks unduly optimistic
and the 1.8 mbpd budgeted oil production could be difficult to
achieve as it is already well in excess of the 1.6 mbpd
produced during the first four months of 2014. All in all, the
deficit is expected to increase to 3-3.5% of GDP in 2014-2015,
compared with a 5.1% surplus in 2012. Public debt is
expected to hit USD43 billion in 2015 (USD10 billion more
than in 2013), but this would remain sustainable at 31% of
GDP, 85% of which is medium- to long-term debt. However,
since 65% is denominated in US dollars (compared with 48%
in 2008), it is more vulnerable to a downturn in oil prices than
it was at the time of the last oil shock.
in September 2013. These management and transparency
issues are exacerbated by logistical and technological
difficulties, which have curtailed the development of a capital
market and thus any prospect of improvement in the
government’s sources of financing. Initially scheduled for 2013,
the launch of a bond market was delayed until 2014 at the
earliest. Bodiva, Angola’s stock exchange, which was
originally unveiled in 2006, is now expected to start up in 2016
in order for its staff to be trained in the trading systems (with
the support of the LSE’s technical team). The launch of the
country’s first Eurobond, originally planned in 2009, delayed
until 2011 and then 2013, has now been pencilled in for the
second half of 2014, but could be postponed again. These
delays have not been explained clearly, which has served to
maintain Angola’s reputation for a lack of transparency on the
financial and economic fronts.
■ Economic policy lacking transparency
■ High political risk
The 2011 public accounts were not published until October
2013, while the president’s office and defence ministry do not
publish accounts at all (they are said to represent over 16% of
total spending, which would be equivalent to the total spend
on health, education and housing). The lack of accuracy and
transparency concerning the country’s public finances may
give rise to some nasty surprises, especially in terms of
bilateral debt with countries such as China and Brazil, a
proportion of these credit lines being secured by revenues
from future oil production. Even more worrisome, although the
payment arrears accumulated since the 2008-2009 crisis
(USD9 billion) were repaid, Angola amassed USD4 billion
(3.3% of GDP) in further arrears between 2010 and 2013,
mostly with suppliers working with the construction ministry.
The authorities claim to have repaid almost all of these
amounts in early 2014 by drawing on the government’s
deposits and by issuing debt. Even so, while the government
has announced plans to beef up information and control
systems for budget operations, new delays are likely going
forward owing to the slow progress made with managing the
public finances. In the meantime, these late payments will
continue to impair the quality of banks’ assets with nonperforming loans surging from 2.4% at year-end 2011 to 6.1%
Governance issues, opaque public accounts and the underdevelopment of physical and institutional infrastructure
(especially legal and financial) make Angola, a very difficult
place to do business (Angola ranks 179 out of 189 in the latest
World Bank survey, after Zimbabwe). The country is run by
the People’s Movement for the Liberation of Angola (MPLA),
the dominant political party that emerged victorious from the
long post-independence civil war. With political opposition
sidelined, the MPLA gained an absolute majority in the 2008
and 2012 general elections and is expected to hold onto
power in the elections scheduled for late 2016. That said, two
clans have emerged within the party and are battling to
succeed President Dos Santos (72 years old, in power since
1979): i) the clan, led by the President’s 36-year old son José
Filomeno de Sousa dos Santos, who is at the helm of
Angola’s sovereign fund, and ii) the clan led by Manuel
Vicente, former CEO of Sonangol and Angolan current vicepresident. Against this backdrop, the extremely low human
development indicators and rapid increase in income
inequalities pose a threat to political stability going forward.
Jean-Loïc Guièze
[email protected]
2- Public debt vulnerable in the event of an oil shock
Forecasts
In % of GDP
▬ Public debt (L.H.S.) ▐Gov. Balance (R.H.S.)
60
55
50
45
40
35
30
25
20
15
Oil shock
10
2011 2012 2013 2014f 2015f
15
3.9
5.2
4.1
4.8
Inflation (CPI, y ear av erage, %)
13.5
10.3
8.8
7.7
8.0
Cent. Gov . balance / GDP (%)
8.7
5.1
-1.9
-3.6
-3.2
Cent. Gov . debt / GDP (%)
33.7
29.3
26.6
29.2
30.9
Current account balance / GDP (%)
12.6
9.2
5.0
2.2
2.0
Ex ternal debt / GDP (%)
Real GDP grow th (%)
10
5
0
-5
-10
20.3
19.2
18.4
17.6
17.1
Forex reserv es (USD bn)
29
33
33
34
39
Forex reserv es, in months of imports
7.9
8.7
8.1
7.8
8.2
Ex change rate USD/AOA (y ear end)
95
95
97
98
100
f: BNP Paribas forecasts
2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f
Sources: IMF, BNP Paribas
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