Moody’s Downgrades Outlook on Angola to Stable
Moody’s Ratings has changed the outlook on the Government of Angola to stable from positive and affirmed the country’s foreign and local currency long-term issuer ratings, along with the foreign currency long-term senior unsecured ratings at B3.
The country’s senior unsecured foreign and local currency MTN programme ratings were also affirmed at (P) B3. Moody’s said Angola’s foreign and local currency short-term issuer ratings have been affirmed at Not Prime (NP).
According to the rating agency, the decision to change the outlook to stable reflects expectation of a slower pace of fiscal consolidation than previously anticipated, while the risk of a depreciation-led deterioration in debt burden and service remains elevated.
“We now expect the government to run modest fiscal deficits in the next few years, despite a supportive oil sector and stronger GDP growth in the near term.
“As a result, we expect the debt-to-GDP ratio will stabilize higher than previously anticipated, at slightly below 60% of GDP, albeit still much lower than at the end of 2020 when we rated Angola at Caa1.”.
Moody’s said improvements in external vulnerability are also more limited than previously expected, with currency volatility remaining high. Refinancing risks have decreased, but the government still faces a challenging debt profile, including significant repayments of bilateral debt.
Taken together, these considerations point to risks having become balanced at the B3 rating level, Moody’s stated.
Analysts said the affirmation of Angola’s ratings reflects the country’s relatively undiversified economy, despite reform and business environment improvement efforts in recent years, and the significant reliance on the oil sector for both government revenues and export earnings.
Other credit challenges include the relatively weak institutional framework, diminished debt affordability, and a high, albeit declining, public debt burden vulnerable to exchange rate and interest rate volatility.
“These challenges are set against the country’s significant oil and gas endowment, ongoing, even though moderating, fiscal consolidation efforts, ambitious plans to diversify the economy, and a reform agenda to strengthen institutions.”.
The credit profile of Angola also benefits from a significant current account surplus and solid levels of foreign exchange reserves which temper external vulnerability risk, the rating note added.
In the rating report, 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 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 still-limited policy effectiveness and transfer and convertibility risks given the track record of imposing capital controls and restrictions during the oil price shocks.
“The decision to change the outlook to stable reflects assessment that the government has adopted a slower pace of fiscal consolidation than previously anticipated at a time when debt service remains elevated, reinforcing its exposure to foreign exchange risk.
“Indeed, exchange rate volatility continues to pose some risks to Angola’s credit profile. Taken together, we conclude that the risks to Angola’s B3 ratings have become balanced from positive previously.
“While the debt burden has decreased from its peak at the end of 2020 when we rated Angola at Caa1, since 2023 adherence to the Fiscal Responsibility Law of 2020 has been less strict than anticipated.
“Despite higher oil production and prices than previously assumed and a stronger performance of the economy this year, the fiscal balance in both 2023 and 2024 is less strong than previously expected,” the rating note stated.
In 2023, expenditure in fuel subsidies increased significantly despite the partial reform implemented in that year. Interest payments were higher than anticipated in the budget, Moody’s said.
Analysts said the government will still run a primary fiscal surplus, as has been the case since the fiscal consolidation process started back in 2018.
“However, we have revised our estimates of primary surplus to 2.8% of GDP over 2024-2026 from around 7% estimated previously. In our forecasts we factor in the delay in the reform of most of the fuel subsidies for 2025”.
But savings from the fuel subsidy reform will partly be offset by government plans to increase capital expenditure prioritising projects with secured funding.
Including the expected fall in interest payments on government debt, public spending will fall to around 18% of GDP from around 20% in 2023.
Revenues, in turn, will also fall as a percentage of GDP. Nearly 60% of government’s revenues stem from the oil sector.
“We expect production to remain roughly at current levels of 1.1 million barrels per day, but prices are likely to fall from the high levels of 2023.
“With revenues at 16.5% of GDP in 2026, we expect a deficit of 1.4% of GDP in 2026, down from 2.3% in 2023.
“As a result, we now expect a more gradual decline in the debt burden. From 2025 onwards the debt-to-GDP ratio will remain only marginally below 60%, higher than Moody’s previous expectations at around 40%”, the rating note explained.
Angola’s fiscal slippage is noted to have contributed to foreign exchange shortages in 2024. After a 40% depreciation in 2023, the kwanza has depreciated again in 2024 (by 10% year to date).
The currency depreciated despite interventions in the market by the Treasury and the central bank, and despite changes in legislation that now require commercial banks to make available in the interbank market 30% of the USD liquidity they receive from oil and diamond companies.
High inflation and a weakening currency challenge fiscal consolidation efforts. At the end of 2023, nearly 80% of Angola’s debt was denominated in, or linked to, the US dollar.
Although the government receives part of its revenues in US dollars, debt levels are highly vulnerable to depreciation of the kwanza.
Inflation is currently running at levels close to 30%, up from around 20% at the beginning of 2024 and around 10% in early 2023. The central bank has introduced measures to control liquidity in the system and tighten financing conditions.
The government has announced plans to phase out fuel subsidies.
This would be a credit positive if fully implemented due to the significant fiscal savings the reform would generate. But as seen in other countries, these reforms face social opposition. In addition, if implemented, the reform will temporarily stoke inflation.
Amid high inflation and high external funding needs, currency pressure is likely to resume in 2025.
Tightening financial conditions would further challenge already weak debt affordability: at the end of 2023, slightly more than 30% of government revenues had to be used to cover interest payments on debt, well above the median of B3 rated governments at 9%.
The government also faces a challenging debt profile over the next two years, including significant repayments of bilateral debt, IMF repayments starting in 2025, and a Eurobond maturing in November 2025 with USD 864 million still outstanding of the original 1.5 billion.
Yet the government benefits from an improved debt management, which is reducing intra-year refinancing peaks and extending average maturities, and has not incurred costly issuance in 2024.
The government also benefits from significant support from multilateral development partners, attenuating refinancing risks. #Litigation Claims against Access Holdings Plc Hit N11.3Trn
