Angola: Angola Angola struggles with contingent liabilities

Economic Overview

Long-term growth prospects diminished

Angola’s economy has undergone a major structural shock in response to the persistence of low oil prices. Growth is expected to reach 1.5% in 2016, 0.5% in 2017 and 2% in 2018 (see chart 1). Due to operational inefficiencies associated with the state-owned oil operator Sonangol, oil output has not grown significantly over the last two years. In fact, it fell short of the government’s 1.8 million b/d target. Oil accounts for 97% of total exports and makes up over 75% of government revenue. The shock has deteriorated Angola’s macroeconomic stability. The local currency - kwanza - depreciated by 40% against the dollar since September 2014. This drove up inflation, which may reach 30% y/y in 2016. China is the country’s most important external partner. It has lent over USD20bn to Angola since 2002 and has 50 state-owned and 400 private companies operating in the country. As China transitions to be more consumer-driven, it is pivoting to vibrant services and manufacturing economies while scaling down its exposure to resource-rich countries with poor governance such as Angola . 
 

Deterioration of public finances

Angola’s officially reported public debt is slightly below the 60% cap stipulated by law. However, if one includes fiscal liabilities parked in Sonangol, public debt is closer to 78%. It could rise to 90% in 2017, up from 40% in 2014 (see chart). This contingent liability has key implications for long-term debt sustainability. Reluctance to tap IMF assistance is bad news as public debt dynamics are hardly sustainable. Fiscal consolidation is lacking (fiscal balance -7% in 2017).
 

Political and developmental challenges

In a surprising statement, Angola’s ruling MPLA has announced that President Dos Santos would not seek re-election in 2017. Dos Santos is the second longest-serving leader in Africa having ruled the country since 1979. Dos Santos’ government has come under increasing scrutiny with urban protestors demanding political reform, and criticizing the enrichment of Angola’s elite. President Dos Santos appointing his son to head the country’s sovereign wealth fund, and his daughter to head and restructure Sonangol, further fuelled resentment. 
Meanwhile, social unrest risks are elevated. The veteran leader’s departure is unlikely to usher in wider political reform, and the government has had to cut social expenditures by 10% in 2016. Despite the country reaching middle-income status according to the World Bank, it is ranked as one of the world’s most unequal countries. More than half of Angolans live under the poverty line.