Download 2015 Quarter 1

2015 Quarter 1
Inflation - Inflation averaged 7.3% in 2014, down from 9.1% in 2013. The headline figure trended higher after reaching a trough in June last year. However,
the upward momentum was not sustained and inflation remained remarkably stable between October and January. According to the Instituto Nacional de
Estatistica (INE), headline inflation increased to 7.73% y-o-y in February, up from 7.44% y-o-y in January.
Growth - The Angolan economy will face several headwinds this year on account of the decline in crude oil prices. The principal transmission mechanism in
this regard relates to the impact of lower crude oil prices on government expenditure. Public investment in agriculture and infrastructure development is a key
driver of non-oil GDP growth. We forecast real GDP growth will remain fairly stable at 4.2% in 2015, based on the assumption that average crude oil
production will increase slightly in 2015.
National development plan - The Angolan government has adopted a general policy framework which intends to diversify the economy away from the oil
sector by investing in infrastructure and improving the country’s business environment. Concerning the latter, the three main initiatives in this area relate to
reducing bureaucratisation, facilitating credit, and encouraging private investment.
OPPORTUNITIES
STRENGTHS
In addition to existing opportunities in the dominant hydrocarbons sector, vast
potential exists in the minerals sector.
Tremendous agricultural potential, with the country often considered to be of
the most fertile on the continent. Landmine problem is decreasing.
Enormous hydropower potential: The country could potentially generate up to
50,000 MW of electricity.
Opportunities exist in the development of transport and electricity
infrastructure.
Substantial natural resources ensure that strong prospects will continue for
economic growth and foreign direct investment (FDI).
Strong trade links with China. China has become the world’s leading buyer of
Angolan oil.
Although forecast to decline significantly on account of the oil price slump,
the foreign reserve position will remain strong.
The country’s sovereign wealth fund continues to invest locally and abroad,
aiming to diversify the economy and generate alternative revenue streams.
VULNERABILITIES
WHAT IS BEING DONE?
Economy remains heavily reliant on oil. This renders the economy vulnerable Progress is being made in terms of economic diversification, notably through
to fluctuating commodity prices and external demand.
the Fundo Soberano de Angola (FSDEA).
The financial sector is currently undergoing major reforms. A number of
A relatively underdeveloped financial sector. Although the sector continues to
changes have already been implemented with more to follow. Stock exchange
strengthen, development of capital markets remains slow.
and capital market planned for 2016/17.
Challenging business environment. Poor infrastructure, uncertain regulatory
It remains very difficult to do business in the country.
processes, and an inefficient bureaucracy. Corruption is rife.
Significant income inequality. The oil sector has few linkages with the real
Despite Luanda’s multibillion dollar infrastructure reconstruction programme,
economy.
change will likely be slow and limited for rural Angolans.
MEGA TRENDS
Population
19,088,106 (July 2014 est.); Age 15 - 64: 53.8%
Population growth rate (%)
2.78% (2014 est.)
Life expectancy at birth
Total population: 55.29 years; male: 54.16 years; female: 56.47 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 2.35%; People living with HIV/AIDS: 252,453 (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 71.1%; male: 82.0%; female: 60.7% (2015 est.)
and write)
Urbanisation
Urban population: 42.5% of total population (2013); Urban population growth: 5.0% (2013)
Population below $1.25 (PPP) poverty line 43.4% (2009 est.)
Unemployment rate
25% (2012 est.)
Employment (% of total)
Agriculture: 85%; Industry and Services: 15% (2003 est.)
Labour participation rate (% of total
population ages 15+)
70.0% (2013)
Business languages
Portuguese, Bantu
Telephone & Internet users
Main lines in use: 214,950; Mobile cellular: 13.29 million; Internet users: 3.65 million (2013)
Sources: CIA World Factbook; World Bank; Trading Economics, UNESCO, ITU, UNAIDS & NKC Research
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Total
Angola
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
189
144
140
158
149
0
Source: NKC Research
175
161
181
20
40
60
80
178
187
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
B+/Stable
BB-/Negative
Ba2/Negative
Standard and Poor’s (S&P) decided to downgrade Angola’s credit rating from “BB-” to “B+” in February. The outlook on the “B+” rating is stable. As a
result of a sharp revision in the credit agency’s crude oil price outlook, S&P now expects Angola’s fiscal and current account positions to deteriorate markedly
this year. According to S&P, the stable outlook reflects “the substantial fiscal and external buffers available to the government” which will allow “monetary
authorities to control the impact of a prolonged decline in oil prices.”
Fitch Ratings affirmed its “BB-” long-term foreign currency issuer default rating (IDR) for Angola on March 27. However, the outlook on the rating was
revised from stable to negative subsequent to Fitch incorporating a lower crude oil price assumption in its assessment of the country’s macroeconomic
performance. According to the agency, the recent sharp drop in international crude oil prices again highlighted Angola’s vulnerability to oil price shocks and is
expected“to result in a sharp drain on reserves, weaker economic growth and rising debt.”
Moody’s Investors Service (Moody’s) affirmed Angola’s “Ba2” sovereign credit rating on March 3; however, the ratings agency decided to change the
outlook from stable to negative. Moody’s expects oil production will increase from 1.66 million bpd in 2014 to 1.83 million bpd in 2015. In turn, the ratings
agency expects this 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.” Furthermore, Moody’s highlights that public debt levels were relatively low at the end of 2014 and compare favourably to
similarly rated peers.
Infrastructure
Diversity of
the Economy
Fast improving;
but still fairly
limited beyond
Luanda
Narrow;
dominated by
hydrocarbons
sector
Banking
Sector
Continuity
of Economic
Policy
Generally stable, but
Relatively
with bouts of uneven
underdeveloped,
implementation of
but improving
IMF reforms
GDP
Growth
Key
Balances
Strong
Twin fiscal
and current
account
deficits
Foreign
Investment
Strong
Socioeconomic
Development
Forex
Reserves
Low
Sufficient, could
be pressured if
oil prices remain
low
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Daily Trading
Volume
N/a
N/a
N/a
N/a
N/a
N/a
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Limited
21-days to 182-days
(T-bills)
1-Yr to 20-Yr (Govt.
bonds)
N/a
N/a
Yes
Relatively underdeveloped
Macro-economic overview
Oil production plays an integral part in Angola’s GDP growth performance. Last year, economic growth was adversely affected by poor crude oil production
during the 2014 Q1 - Q3 period. The sector was marred by lengthy maintenance issues and supply disruptions at some of its fields, while rapid reservoir
depletion also resulted in lower production rates at some developments. According to oil production figures retrieved from the Energy Information
Administration (EIA) – note that the EIA’s figures include lease condensates – crude oil production averaged roughly 1.831 million bpd in 2013. During the
first three quarters of 2014, this figure had declined to 1.724 million bpd. The decline in crude oil production had detrimental effects on Angola’s fiscal and
current account balances; the former representing a key growth driver due to Luanda’s ambitious capital investment programme. As oil production started to
recover during 2014 Q4, a significant drop in global crude oil prices again put pressure on the country’s twin fiscal and current account balances, exacerbating
the situation. We estimate Angola would have recorded real GDP growth of 4.1% in 2014, down from 6.8% in 2013.
The Angolan economy will face several headwinds this year on account of the decline in crude oil prices. The principal transmission mechanism in this regard
relates to the impact of lower crude oil prices on government expenditure. Public investment in agriculture and infrastructure development is a key driver of
non-oil GDP growth. However, the sharp decline in global crude oil prices will result in Luanda being forced to rein in fiscal spending, and capital
expenditure will most likely be a core focus when authorities decide how best to trim the budget. Also, a scenario authorities will be keen to avoid is a repeat
of the poor performance of the oil sector in 2014. This will only serve to exacerbate the impact on the fiscus. On February 9, Macauhub reported that Luanda
projects crude oil production will increase by 9.8% in 2015 after authorities completed an inventory assessment of every oil well in Angola. We believe
Angola will record real GDP growth of 4.2% in 2015, based on the assumption that average crude oil production will increase to 1.89 million bpd (including
lease condensates) in 2015, up 7.8% from the level produced last year.
2
Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
8.5%
Service/GDP
31.3%
Industry/GDP
60.2%
The recent decline in international crude oil prices has raised some concern in relation to foreign investment in the hydrocarbons industry moving forward, as
margin pressure might force multinational oil companies to postpone investments to improve cash flow. On January 27, the Wall Street Journal reported that
BP’s chief operating officer (CEO) for upstream projects still viewed Angola as a high margin production area. As a result, investments in projects that are
near completion are likely to continue to some extent. Also, on February 4, an executive at Total confirmed that major oil projects underway in some of the
company’s African locations – Angola being amongst the locations mentioned – will not be affected by the decline in crude oil prices, according to Business
Day. In general, we believe foreign investment in Angola’s hydrocarbon sector will decline this year. Another important feature of Angola’s foreign direct
investment (FDI) landscape relates to outbound investments by the Fundo Soberano de Angola (FSDEA, the country’s sovereign wealth fund). We believe the
FSDEA might realign its foreign investment strategy and rather opt to finance some of the domestic projects cut from the 2015 fiscal budget. This will serve
the dual benefit of avoiding a delay in the rollout of critical infrastructure projects while preventing additional pressure on the balance of payments position.
We forecast net FDI will decline to $0.73bn in 2015, down from $0.93bn in 2014.
Real GDP Growth & Net FDI/GDP
4.0
7.0
Source: NKC Research
6.0
2.0
5.0
0.0
4.0
-2.0
3.0
-4.0
-6.0
2.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
Angola’s external balances are forecast to look substantially different this year, mainly as a result of markedly lower crude oil prices. While we forecast an
increase in oil production, this will be more than offset by the decline in crude oil prices. More specifically, we forecast crude oil exports will decline from
$61.3bn in 2014 to $38.3bn in 2015. On the positive side, diamond exports are forecast to increase to $1.27bn in 2015, up from $1.24bn in 2014. Regardless,
we predict total exports will decline to $44.7bn, down from $67.8bn last year.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
2016F
Vehicles
Machinery & boilers
Iron & steel
Main Imports: % share of total
2014E 2015F
2016F
Vehicles
21.36
23.42
24.17
Machinery & boilers
18.56
20.00
20.10
Iron & steel
9.66
10.60
11.01
Electrical & electronic equipment
9.12
10.17
10.64
2014E 2015F
2016F
Electrical & electronic equipment
Crude oil
Main Exports: % share of total
Diamonds
Crude oil
90.36
85.58
90.90
Diamonds
1.83
2.85
2.57
Refined Oil
0.99
1.13
1.11
Gas
0.92
1.34
1.36
Refined Oil
Gas
Source: NKC Research
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0
We believe imports will also decline in 2015. Firstly, the weak kwanza will make imports more expensive in local currency terms and if one considers that
some traders will be forced to turn to the parallel market – where the exchange rate is substantially weaker – this effect becomes even more pronounced. Also,
foreign exchange shortages will adversely affect imports as traders will struggle to obtain foreign currency to procure foreign goods. Finally, the fact that
government is likely to rein in capital expenditure on account of the crude oil price shock will result in certain infrastructure-related projects being postponed.
Imports of various materials and machinery used for this purpose could decline as a result. We forecast imports will decline to $27.8bn in 2015, down from
$29.2bn in 2014. The trade balance is forecast to narrow to from $39bn in 2014 to $17bn in 2015.
Turning to the invisibles, we believe the deficit on the income account will narrow in 2015 as income repatriation declines in line with smaller profits in the oil
industry, due to margins being squeezed on account of lower crude oil prices. The services deficit is also forecast to narrow while we predict the current
transfers deficit will widen slightly. Taking all of the above into account, we forecast Angola’s current account balance will turn negative and amount to a
deficit equivalent to 9.7% of GDP in 2015, compared to a surplus of 1.4% of GDP in 2014.
3
Current Account & Budget Balance
(% of GDP)
30.0
15.0
20.0
10.0
10.0
5.0
0.0
0.0
-5.0
-10.0
Source: NKC Research
-10.0
-20.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
On January 26, Reuters reported that, on account of the sharp drop in international oil prices, Angola’s cabinet is in favour of a revision of the country’s 2015
fiscal budget. More specifically, cabinet requested that Parliament revise the benchmark oil price to $40/bbl, down from the previous assumption of $81/bbl.
The revised 2015 budget allows for a fiscal deficit equal to 7% of GDP. The fiscal budget was subsequently approved by Parliament on February 25. The fact
that authorities are pro-active in addressing the oil price shock is positive. A revision to the 2015 budget was certainly warranted, seeing as the original
benchmark oil price was unrealistic given recent oil price developments. Furthermore, Angola has not lowered domestic fuel prices; instead, Angolans
endured a 20% increase in fuel prices at the end of December. This signals a more aggressive strategy in relation to reducing fuel subsidies, which should ease
at least some of the pressure on the fiscus. Regardless, Angola looks set to record a fairly large fiscal deficit in 2015 on account of the impact of lower crude
oil prices on fiscal revenues. We forecast the fiscal deficit will widen from 3.2% of GDP in 2014 to 8.1% of GDP in 2015.
Average CPI (% change, y-o-y)
16.0
Source: NKC Research
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
The Monetary Policy Committee (MPC) of the Banco Nacional de Angola (BNA) has decided to raise the country’s benchmark interest rate at its meeting on
March 30. More specifically, the policy rate was increased by 25 bps to 9.25%. The MPC also decided to raise the standing lending facility rate from 9.75% to
10%. Headline inflation increased to 7.73% y-o-y in February, up from 7.44% y-o-y in January. Meanwhile, the kwanza exchange rate has remained under
pressure, trading roughly 4.5% y-t-d weaker by March 30. We doubt the 25 bps interest rate increase announced by the BNA will be sufficient to ward off
current inflationary pressures stemming from the depreciating kwanza. Absent any positive food price shocks, we believe inflation will continue to trend
higher on average during 2015. We forecast inflation will average 8.75% in 2015, up from 7.28% in 2014. Furthermore, we expect interest rates will be raised
further in the coming months, with the central bank opting to stick to a gradual hiking cycle characterised by periodic interest rate increases in the region of
0.25 - 0.5 percentage points.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Sikander Sattar – designation is Partner
Tel +351917233263
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
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such information or opinions.
© 2015 KPMG Angola – Audit, Tax, Advisory, S.A., an Angolan company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. Printed in Angola.MC7204
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon
such information or opinions.
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