Angolan Economy: Budget Proposal for 2017

Angolan Economy: Budget Proposal for 2017

Moderate economic recovery expected in 2017

Angola has faced a tough macro environment in recent years after oil prices began to free-fall in the second half of 2014. Economic growth slowed to 4.8% in 2014, 3% in 2015 and is expected to come to a near halt this year, as global economic conditions also became less supportive. This weaker performance compares with near double-digit average growth witnessed in the previous decade. The persistently low oil price environment has also led to increased macro imbalances, with a widening of the fiscal and external deficits in the period. The government assumes that growth will recover somewhat in 2017 based on an improved contribution from both the oil and non-oil sectors. As a result, the budget proposal includes a growth estimate of 2.1%, higher than its forecast of 1.1% for 2016. Moreover, consumer prices are expected to remain elevated, but should gradually trend downwards due to tight monetary conditions and the introduction of price control measures by the government.

Budget deficit projected at 5.8% of GDP (vs. 5.9% this year)

The 2017 budget proposal incorporates an average oil price assumption of US$ 46, 12% higher than the US$ 40.9 foreseen in this year's revised budget. Oil production is also estimated to recover to 1.82 million bpd from 1.79 million this year. This will support oil related revenue growth and help offset a lower contribution from income taxes and non-tax revenues. Regarding expenditures, the anticipated rise in spending levels will continue to be driven by higher current expenditures, as these will still account for more than a third of total spending. The government also plans to raise investment levels, but only moderately, and continue to cut fuel related subsidies. Overall, total revenues and expenditures are projected to increase 5.3% and 7.2%, respectively, from this year's revised budget estimates. They are also expected to account for nearly 18.6% and 24.3% of GDP, respectively, placing the 2017 budget deficit forecast at 5.8%. This is slightly lower than the 5.9% estimated for this year. Meanwhile, public debt is projected to reach US$ 62.8 billion from US$ 56.6 billion this year, and stand at 52.7% of GDP (vs. 61.9% in 2016). This fall in the public debt to GDP projection for 2017 came to us as a surprise and we believe it could be due to the assumption used by the government for the US$/AOA exchange rate.

An oil price of US$ 50 in 2017 would lift revenues by 4%

Oil prices have been quite volatile in recent weeks, as investors await the decision from the members of OPEC later this month on a much anticipated agreement to cut oil output. The successful implementation of such a deal would potentially drive oil prices higher over the medium-term and would be positive for oil exports like Angola. However, the failure to reach a deal later this month could bring oil prices back below US$ 40 in 2017. We have therefore carried out a sensitivity analysis to see the potential impact that different scenarios for the oil price would have on the government's budgeted figures for next year. As an example, if the average oil price reaches US$ 50 in 2017 (vs. the current assumption of US$ 46) and assuming all else equal, then total revenues would increase 4% (or US$ 890 million at the current exchange rate) from the government's current forecast. On the other hand, if oil prices average US$ 40 then revenue would be 6% lower (or US$ 1,335 million) than the current projection.