The Angolan Economy: Budget Proposal for 2016

The Angolan Economy

Budget Proposal for 2016

Slower economic activity ahead

The Angolan government recently presented to Parliament its budget proposal for 2016. The document is currently being discussed and is expected to be approved in the not too distant future. The local authorities remain cautious about their outlook for 2016. Real GDP growth is projected to decelerate to 3.3% (from an estimated 4% in 2015) as a result of a weaker performance in the oil sector. Overall, activity in the oil sector is expected to expand at 4.8% while growth in non-oil related activity is forecasted to stand at 2.6%, supported by an improved performance in agriculture. These figures compare with projected rates of 7.8% and 2.4%, respectively, in 2015. 

A new reality amid lower oil prices

The budget proposal incorporates what we believe to be a conservative average oil price forecast of US$ 45 per barrel next year. And, as a result, the authorities are aware that in the current low oil price environment it remains crucial to rationalize public expenditure levels. At the same time, it is imperative to accelerate the efforts to increase non-oil related revenues. This starts with reducing the public wage bill to levels more consistent with a new revenue reality. Nominal wages need to be adjusted based on projected inflation and real wage growth depend on improvements in productivity levels. In addition, public investment projects need to be better prioritized and their execution more carefully monitored.

Fuel subsidy reform to continue

The government also expects to continue its fuel subsidy reform agenda started in September 2014. The lower international oil prices together with the three domestic fuel price increases since the reform began have reportedly led to the elimination of subsidies on most fuels while the ones still subsidized are done at much lower levels than in the recent past. The plan is to reportedly eliminate fuel subsidies completely by 2020. At the same time, the local authorities aim to improve social assistance to the poor in order to lower the impact of the gradual elimination of fuel subsidies.

Projected budget deficit of 5.5% of GDP

Looking at the figures in the budget proposal, the government expects revenues to reach AOA 3,515 billion and expenditures to stand at AOA 4,296 billion. This is roughly US$ 26 billion and US$ 31.8 billion, respectively, at today's exchange rate. It also translates to a projected budget deficit of 5.5% of GDP, which compares with a deficit of 4.2% expected in 2015. The local authorities are still planning to finance the majority of their expenses with fiscal receipts (55% of the total), namely taxes. However, they also expect to significantly increase the amount of borrowing in international markets in 2016. All in all, the government is expecting public debt levels to reach 49.7% of GDP next year, well above the 40.5% of GDP forecasted in 2015. These levels are sustainable for the time being. Yet, this higher debt trajectory does not come without risks, as we believe Angola remains vulnerable to potential future shocks, namely in the form of persistently low oil prices and a slowdown in some of its main trading partners (particularly China and Brazil).