The Angolan Economy - How much could oil prices impact 2016 accounts?

THE ANGOLAN ECONOMY

How much could oil prices impact 2016 accounts?

FACT: International oil prices have fallen markedly since their peak above US$ 114 per barrel in June 2014. According to Bloomberg data, the price of Brent crude oil averaged US$ 58 in 2015, but stood below US$ 38 at year-end. This represents a drop of nearly 49% and 67%, respectively, from the aforementioned high recorded nearly 18 months prior. Meanwhile, Brent prices remain depressed in the first weeks of 2016, reaching a multi-year low of US$ 27.8 on January 20th. Overall, oil prices have fallen a further 18% year to date and have averaged US$ 31.7 thus far. This is 45% lower than the average price in 2015. Consensus estimates suggest that oil prices are unlikely to see a rapid recovery in the short-term. This is chiefly due to the oversupply that still exists in the market and persistently high oil inventories. Again, consensus indicates that oil prices could eventually see a rebound to a more balanced equilibrium level above US$ 50 only later in 2016. However, this will require a more active stance from the major oil producers, namely in terms of production cuts.

OPINION: We recall that the Angolan government's 2016 budget incorporated an average oil price assumption of US$ 45 for this year. Although this is higher than the US$ 40 expected in the revised 2015 budget (the initial budget included a forecast of US$ 81), we first believed this to be a conservative forecast by the local authorities. It turns out that, based on the latest oil price performance, the year ahead should prove to be quite challenging for Angola. Moreover, we think the evolution of oil prices will dictate the local authorities' budget execution in 2016. We note that the country remains highly dependent on the oil sector for its fiscal revenues (estimated to account for 57% of the total in 2015 vs. 72% in the previous year) and as a source of international reserves (oil represents nearly 97% of total exports).

The uncertainty surrounding the outlook on oil prices led us to carry out a sensitivity analysis to see the potential impact that different oil price scenarios and implied tax rates for the oil sector would have on the government's total revenues in 2016. We assume that all other things would remain equal, namely the expenditures envisaged in the 2016 budget. We have therefore collected data on the performance of the oil sector over the last six years (2011-15) and present it in Table 1. Our sensitivity analysis considers an average oil price range of US$ 30-55, which we consider reasonable bearing in mind the short-term outlook for oil prices and an implied tax rate ranging from 30% to 40% based on the latest data collected. We also assume in our calculations the current US$/AOA exchange rate of 155 this year, but admit that another devaluation of the kwanza could happen before year-end. The results of our calculations are summarized in Tables 2 and 3 and detailed in Table 4 below.

According to our calculations, an average oil price of US$ 30 this year would have a negative impact of 16% on the government's budgeted revenue forecast (assuming an implied tax rate of 35.1% expected in the 2016 budget). In other words, it means that revenues would fall US$ 3,634 million short of expectations. In our worst case scenario (average price of US$ 30 and implied tax rate of 30%) revenues would get a hit of nearly US$ 4.7 billion while the budget deficit would reach 10.6% of GDP (vs. 5.5% expected in the 2016 budget). If oil prices were to recover to an average of US$ 50, for instance, then revenues would improve US$ 1,211 million from this year's budget and the deficit would stand at 4.2% of GDP.

OUTLOOK: Angola faces a challenging year ahead and the uncertainty around the outlook on oil prices presents considerable threats to the government's budget execution and its economic growth perspectives. We have lowered our real GDP growth estimates for 2016 to 3.2% (vs. 3.5% previously), as we expect non-oil growth to remain weak. This figure is marginally lower than the authorities' target of 3.3%. We then expect a modest improvement to 3.6% in 2017.

It is worth noting that the government recently accelerated its fuel subsidy reform, which is expected to bring important savings to the public coffers. Three increases in domestic fuel prices since September 2014 coupled with the latest introduction of a free pricing system led to the elimination of subsidies on most fuels this year. According to the 2016 budget proposal, the government forecasts subsidies of AOA 447 billion (or 3.1% of GDP) for the energy sector. This is US$ 2.8 billion at the current exchange rate. The authorities should also aim to improve the quality of public spending, namely by reducing current expenditure levels, which remain excessively high at 81% of total public spending in 2016 (or 24.5% of GDP).

Overall, we expect the government to remain focused on its social and infrastructure programs in the near term, particularly as we move into an election year in 2017, but some constraints are likely to exist due to the low oil price environment. This means that the local authorities could also postpone less crucial investment projects. Efforts to diversify the economy and broaden the non-oil tax base remain key challenges ahead. We do not see the announcement of a revised 2016 budget as imminent, but this scenario should not be ruled out if oil prices remain at these levels for too much longer.