Angola’s Outlook Turns Positive on Oil Export Advantage

Angola’s Outlook Turns Positive on Oil Export Advantage

Angola is popping up its macroeconomic performance as the oil market favours the country’s fiscal performance amidst the global energy crisis. Its local currency has also gained against the United States as export earnings strengthened.

Analysts however spotted that overdependence on hydrocarbon earnings remains a downside for revenue sustainability.  In the recent times, the country outpaced Nigeria to become the largest exporter in Africa.

In note, Moody’s said Angola remains highly vulnerable to oil price volatility as demonstrated in the past oil shocks of 2015 and 2020, which have almost totally depleted its financial buffers. In 2021,

The country’s hydrocarbon sector still accounted for 30% of the total GDP, 60% of total government revenue, and more than 90% of total exports of goods and services.

In a rating note, Moody’s posits that fluctuations in oil prices tend to be reflected in sharp changes in the exchange rate which has a very large impact on the debt burden given Angola’s reliance on foreign-currency debt.

More generally, this very high dependence on the hydrocarbon sector explains Angola’s very highly negative exposure to global carbon transition, the rating note explained.

It added that the country’s credit profile could come under pressure in the case of an accelerated global carbon transition, especially if the government fails to further diversify export earnings and its revenue base away from the oil & gas sector and rebuild material financial buffers able to withstand a prolonged period of financing pressures.

Moody’s said Angola’s capacity to implement these changes is constrained by the country’s weak, although improving, institutional framework. In a new rating note, Moody’s changed the outlook to positive from stable and affirmed the B3 foreign and local currency long-term issuer ratings of the Government of Angola.

Africa’s largest crude oil exporter debt to gross domestic product settled at 66.7% in the fiscal year 2021, though bedridden with high debt service costs, a similar pattern was seen across the region. 

Since 1983, Angola has defaulted in meeting its bonds or loans obligations.  Analysts said Angola’s economic fundamentals, including its economic strength, have materially improved amidst higher global prices of oil.

It is noted that the country’s fiscal or financial strength, including its debt profile, has materially increased while Moody’s thinks Angola’s susceptibility to event risks has not materially changed.

Angola’s governance is rated weak, reflecting in particular weak control of corruption and rule of law.  The rating note observes that data transparency and availability, albeit improving, remain limited.

For example, it said Angolan banks lost their dollar-correspondent banking relationships in 2016 because of their failure to meet international standards relating to shareholder structures and money laundering, resulting in increased transaction costs and delays.

However, structural improvements related to the management of public finances, including the implementation of a clear and achievable fiscal rule into the law, support the country’s institutional framework.

Meanwhile, Moody’s said decision to change the outlook to positive from stable reflects its assessment that robust economic growth prospects and significant revenue growth supported by elevated oil prices afford the government the opportunity to continue implementing reforms that can solidify its fiscal strength, liquidity and external position further and point to stronger creditworthiness.

From a longer-term perspective, the current environment also provides the opportunity for the government to continue its diversification agenda, ultimately assisting in navigating carbon transition risks.

The decision to affirm the ratings at B3 reflects Moody’s view that, despite the continuing improvement in both fiscal and current account positions, Angola’s credit profile remains constrained by its vulnerability to oil shocks due to its rigid economic structure and weak institutional capacity.

Policy continuity and the reform agenda of the newly reelected government will invariably take time to reduce Angola’s structural vulnerabilities.

Angola’s local currency (LC) and foreign currency (FC) country ceilings remain unchanged at B1 and B3 respectively.

The two-notch gap between the LC ceiling and the sovereign rating reflects a certain degree of unpredictability of government actions, the relatively large, albeit declining domestic footprint of the government in the economy, as well as the exposure of the economy to hydrocarbons.

The two-notch gap between the FC ceiling the LC ceiling reflects limited policy effectiveness and transfer and convertibility risks given the track record of imposing capital controls and restrictions during oil price shocks.

RATINGS RATIONALE

The first driver supporting Moody’s decision to change the outlook to positive from stable is the improvement in Angola’s fiscal and debt metrics supported by elevated oil prices and continuing fiscal consolidation.

This rebuilding of buffers provides the opportunity for the government to take further measures to shield its finances from fluctuations in oil prices to a greater extent and further solidify its fiscal strength.

Moody’s expects the country’s debt to GDP ratio to reach 51% by the end of 2022, down from 78% in 2021 and 123% in 2020. All related fiscal metrics, including debt to revenue and interest payments to revenue, have similarly also improved (expected to reach 225% and 14.9% respectively, in 2022 against 586% and 32.6% in 2020).

Moody’s expects Angola’s fiscal surplus to average 2.5% of GDP from 2022-2025 and be resilient to moderate oil price volatility given the conservative budgeted oil price and the expectation that the authorities will abide by the Fiscal Responsibility Law. 

Moreover, the recent and orderly re-election of President Lourenço for a second mandate substantially dispels political uncertainty over the next five years, ensuring policy continuity and is likely to reinforce the resolve of reform-minded staff within the administration. The authorities’ fiscal prudence and consolidation efforts are likely to see government debt decline below 40% of GDP by 2025.

Even if oil prices ease from their current levels, Angola’s macroeconomic stability is likely to be supported by robust growth prospects and declining inflation. Moody’s forecasts economic growth of 3% this year, accelerating to 4.2% on average during the period 2023-2026 driven by the higher oil proceeds and improved dollar liquidity.

Non-oil GDP is also benefitting from better budget execution, including increasing capital spending and the prospect of gradually expanding oil production after years of structural decline.

Moody’s expects oil production to increase to 1.25 million barrels per day (mbpd) in 2023 from 1.18 mbpd forecast in 2022. Inflation is also expected to decline to 14% in 2023 and move towards single digits by 2025 from an estimated 17% in 2022 and 27% in 2020.

External, Liquidity to Improve

The second driver for the change in outlook to positive is the continuing improvement in the country’s external position as well as the reduction in liquidity risks.

Prolonged elevated oil prices will provide the opportunity for the authorities to further strengthen the official foreign currency reserves and continue to implement their policy of reducing the stock of debt.

The strengthening of Angola’s external position is evidenced by the strong appreciation of the kwanza against the dollar over the past 12 months to around AOA 440/USD in October 2022 from AOA 628/USD in September 2021.

This reversal after several years of sharp depreciation was made possible because of the liberalization of the exchange rate implemented with the help of the IMF program. The improvement in dollar liquidity is likely to be sustained if oil prices remain elevated.

Moody’s expects the current account to reach a surplus of 11.9% of GDP in 2022 (after 11.2% in 2021) and remain in surplus, averaging 6.8% of GDP from 2023-2025 reinforced by the government’s import substitution initiative.

Consequently, gross official foreign reserves are likely to continue to improve and potentially reach $22 billion in 2025 from $16 billion in 2021. READ:Angola Cuts Benchmark Interest Rate to 19.50%

With the strong improvement in the government balance sheet, Angola’s liquidity risk is likely to continue to decline. Moody’s expects relatively modest gross borrowing requirements of around 6% of GDP in 2022 reflecting the higher fiscal surplus.

Given that the government is likely to continue to repay some maturing debt using fiscal surpluses, the government gross borrowing requirement is likely to remain around 8% of GDP until 2025.

External funding will also benefit from the partial accumulation of fiscal surpluses over the next few years, which offers the possibility for the government to rebuild some financial buffers given that there is no maturing Eurobond before 2025.

Domestic funding is likely to continue to benefit from declining yields offered by the banking system. This trend is supported by the reduction in government issuances on the domestic market and the steady decline in inflation levels in Angola.

Domestic liquidity risk also benefits from the ability of the government to opportunistically issue more domestic debt instruments with longer maturities purely denominated in kwanza.

# Angola’s Outlook Turns Positive on Oil Export Advantage#

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