Moody's Upgrades Angola's Ratings, Says Debt to Fall Steadily
João Lourenço, Angola President

Moody’s Upgrades Angola’s Ratings, Says Debt to Fall Steadily

Moody’s Investors Service has today upgraded the Government of Angola’s foreign and local currency long-term issuer ratings to B3 from Caa1 and maintained a stable outlook stable. The global ratings agency indicate the expectation that the nation’s fiscal metrics, liquidity and funding risks to improve in the coming years.

“The decision to upgrade the ratings is driven by Moody’s assessment that Angola’s sovereign credit profile is improving to be consistent with peers at the B3 rating level.

“Stronger governance, in particular in the quality of the country’s executive and legislative institutions, albeit from weak levels, is reflected in various aspects of the credit profile, which Moody’s expects to last.

“Fiscal metrics, as well as liquidity and funding risks, are likely to improve. Higher oil prices compared to last year, and a stable exchange rate will allow the positive impact of fiscal consolidation efforts and structural improvement in debt and public finance management to be visible in a downward-trending debt burden.

“Additionally, the stability of Angola’s external position through fluctuations in oil prices indicates somewhat more resilience than peers at the Caa1 rating level”, Moody’s said.

It also explains that the stable outlook reflects a view that the credit risks to the current B3 rating are balanced between the potential for more positive developments on Angola’s fiscal metrics, liquidity risks and external position.

“if reforms continue and oil prices remain supportive; against a still high government debt burden which remains vulnerable to renewed episodes of kwanza depreciation, a renewed oil price shock or a more rapid global transition to low carbon than Moody’s currently assumes”, the Ratings agency added.

Angola’s local currency and foreign currency country ceilings have been raised to B1 and B3 from B2 and Caa1 respectively.

The two-notch gap between the local 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 foreign currency ceiling the local currency ceiling reflects limited policy effectiveness and transfers and convertibility risks given the track record of imposing capital controls and restrictions during the oil price shocks”, it said.

GOVERNMENT DEBT TO FALL STEADILY

Supported by the oil price recovery and a stable exchange rate, Angola’s fiscal and debt metrics are set to improve significantly, from weak levels, the ratings noted. 

Assuming that oil prices remain around $65/barrel this year and next and around $45-65/barrel in the medium term, with a relatively stable kwanza, Moody’s expects the government debt-to-GDP ratio to decline to 95% this year and below 80% in 2023, from 122% in 2020.

While oil production is unlikely to grow significantly, Moody’s recognised that the country’s non-oil GDP has been recovering from the immediate shock of the pandemic.

Specifically, the non-oil economy will continue to strengthen and contribute the bulk of real economic growth, at around 3%, in the next few years. High nominal GDP growth will contribute significantly to reduce the debt burden, as long as the kwanza remains broadly stable

The recovery in the non-oil economy, it said, will also further support non-oil revenue — and as a result strengthen resilience to oil price volatility — that has been constantly growing since 2017, to an estimated 10% of GDP in 2021 from 7.4% of GDP four years ago, despite the economic contraction observed during that period.

This is mostly due to an array of reforms to strengthen the country’s public finances, including the introduction of a VAT that replaced an old consumption tax and is expected to account for around 10% of revenues in 2021 from 5% in 2018.

Additionally, the fiscal rules included in the fiscal responsibility law passed in 2020 prescribe a limit to the primary non-oil deficit at 5% of GDP by 2025, which means, given the current interest burden and the level of the oil revenues, that the budget is likely to be in surplus in the future.

Moody’s expects that Angola will adhere to its fiscal rule, which is more achievable after years of expenditure consolidation, even beyond the elections next year.

Fiscal prudence is also reflected in a 2021 budgeted oil price at $39/barrel, far below current oil prices, and Moody’s expects a similar approach to the management of public finances to be maintained.

As a result, Moody’s expects that debt-to-GDP will approach 60% of GDP by 2025, while the debt-to-revenue ratio will fall to around 300% from 586% last year. Debt affordability will improve accordingly: Interest payments-to-revenues will decline to around 20% in 2025 from 32.6%.

LIQUIDITY, FUNDING RISKs TO DIMINISH

Liquidity risk has been a key credit constraint for Angola over the last few years, said Moody’s in the report. In 2020, lower oil prices and large domestic debt repayments contributed to government borrowing requirements (GBRs) rising to close to 18% of GDP from 12% in 2019.

Government borrowing requirements would have been even more challenging to fund last year without the significant reduction in external debt service (estimated at $2.5 billion in 2020 negotiated with some bilateral lenders), financial support from the International Financing Institutions, with an additional $750 million disbursed by the IMF on top of its existing financial package, the drawdown of $1.5 billion from the Sovereign Wealth Fund (SWF), and the rebound in oil prices observed in the second half of 2020.

“While Angola will continue to benefit from debt restructuring by some bilateral lenders in 2021 and 2022 (for an estimated $4.5 billion over the period), the return to fiscal surpluses and significant steps to pay down short-term debt in the last few years lower GBRs to below 10% of GDP, broadly in line with the average of B3-rated peers at 13.7% of GDP”.

Fiscal consolidation and the lengthening of debt maturities will mitigate liquidity pressure when, starting in 2023, external payments start to increase again although Moody’s expects the overall government borrowings to remain at around 10% until 2025.

EXTERNAL POSITION TO STRENGTHEN

With the oil price recovery, the improvement in Angola’s external position is illustrated by the stabilization of the exchange rate. After years of adjustments and the liberalization of the exchange rate, the kwanza has been relatively stable at around AOA650 per dollar since the final quarter of 2020 (it was AOA165 at the end of 2017).

Additionally, the gap with the parallel exchange rate has been reduced to less than 5% which further evidence improvements in the country’s external position.

Moody’s expects the current account surplus to exceed 5% of GDP in 2021 and to remain in surplus in the coming years. This is explained in part by the rebound in oil prices but also by the structural reduction in the import bill.

The latter is due to the significant depreciation of the kwanza over the recent years and the imposition of customs tariffs on goods for which the government wants to promote local production.

Moody’s expects Angola’s gross official foreign exchange reserves to reach at least $16 billion at the end of 2021 (corresponding to around 11 months of imports cover) from $14.9 billion in 2020, having declined by $3 billion last year.

This does not include Angola’ SDR allocation from the recently increased allocation for all IMF members, estimated around SDR1 billion, and any share of the government fiscal surplus that may be kept at the Banco National of Angola (BNA) as part of the reserves.

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As current account surpluses accumulate as and more than offset capital outflows, Moody’s expects that reserves will reach $21 billion by 2025, providing significant coverage of imports and external debt payments.

Moody’s Upgrades Angola’s Ratings, Says Debt to Fall Steadily