The Angolan Economy: Budget Proposal 2018

Budget Proposal 2018

Growth forecast of 4.9% for 2018 likely optimistic

The Angolan government believes that economic activity will improve significantly in 2018 from the performance recorded in recent years. Its real GDP growth forecast of 4.9% incorporated in the budget proposal is broken down by projections of 6.1% for the oil sector and 4.4% for the non-oil sector. We believe these forecasts to be somewhat optimistic bearing in mind Angola's current macroeconomic situation and immediate challenges. These include the need for the local authorities to implement additional fiscal consolidation measures, a persistently tight monetary policy stance and an exchange rate adjustment. The growth outlook in the longer-term will depend on the commitment to implement major structural reforms in the country. These will be fundamental to a rebalancing of the local economy away from its dependence on the oil sector and also improve the business environment in order to attract higher foreign investment in the country.

Fiscal deficit to decline further on higher oil sector related proceeds

The government estimates that the fiscal deficit stood at 5.3% of GDP in 2017, lower than the 5.8% projected in the budget proposal. This better than expected evolution was likely due to much lower spending levels that more than offset a more reduced contribution from revenues. Meanwhile, the government anticipates that a significant improvement in oil-related receipts this year (40.9% vs. 2017E), boosted by slightly higher oil prices and production, will help to reduce the fiscal deficit further in 2018. The current budget proposal foresees average daily oil production will increase 1.5% to 1.699 million bpd and a price of US$ 50 (vs. US$ 48.4 in 2017). We believe the oil price assumption is conservative, standing at the bottom-end of current consensus estimates for Brent. Non-oil revenues are also projected to see a (likely optimistic) rise of 39.9%, reflecting the continued efforts to improve tax collection outside of the oil sector. In terms of expenditures, it is worth noting the surge (of 36.2%) in interest payments again in 2018, representing 18.9% of total spending and 4.1% of GDP (vs. 2.8% and 1.2%, respectively, in 2014). Overall, the 2018 proposal foresees a budget deficit of 3% of GDP, which is an ambitious target aimed at continuing the fiscal consolidation efforts of the local authorities that will ideally place public debt back on a downward trajectory and below the debt ceiling of 60% of GDP.

A US$ 60 oil price would mean 10.9% higher revenues than current forecast

The execution of the 2018 fiscal budget remains highly dependent on the evolution of the oil sector, both in terms of its production and price. However, the evolution of oil prices is always quite uncertain and could be impacted by several factors, namely related to geopolitics or the ones that can affect the balance of supply and demand in the market. Due to this uncertainty, we carried out a sensitivity analysis to try to see the potential impact that different oil prices and implied tax rates for the oil sector would have on the government's forecasted revenues for this year. We note that in our analysis we assume an adjustment of 15% to the US$/AKZ exchange rate from 2017 levels, but all else to be equal, namely the expenditures envisaged for 2018. As an example, if the average oil price reaches US$ 60 (vs. the current assumption of US$ 50) then total revenues would be 10.9% higher (or US$ 2,515 million) than the current budget forecast. On the other hand, if the oil price averages US$ 45 then revenues would be 5.4% lower (or US$ 1,257 million) than the current projection.