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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 1 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' 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. © 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. 4