The Angolan Economy - Revised Budget Proposal for 2016

The Angolan Economy

Revised Budget Proposal for 2016

Economic growth estimate cut to 1.1%

The Angolan government recently presented to Parliament a revised budget proposal for 2016. In this new document, the local authorities lowered their economic growth forecast for the country to 1.1% this year, a rate that is unseen in Angola in the post-civil war period, from a previous estimate of 3.3%. This revision came mostly from a more cautious outlook for the oil sector, with its growth forecast cut to just 0.8% from 4.8% in the initial budget (and 6.3% in 2015). On the other hand, growth in the non-oil sector was lowered to 1.2% after an already weak 1.5% expansion in 2015. This came after significant revisions in the growth projections for the manufacturing and retail sectors. Meanwhile, the government lifted its inflation forecast to 38.5%, the highest in over 12 years, as consumer prices remain under pressure after the reduction in fuel subsidies in January and the pass-through effects of the continued depreciation of the kwanza (already above 20% against the US$ and EUR year-to-date). This has triggered the BNA to raise interest rates by 500bp so far this year to the current 16%, providing more headwinds to the country's economic expansion.

Budget deficit forecast revised to 5.9% of GDP (from 5.5%)

The revised budget assumptions incorporate an average oil price of US$ 40.9 per barrel for this year, roughly 9% less than the US$ 45 previously assumed. However, the forecast for total revenues was only lowered by 0.9% to AOA 3,485 billion (or 20.6% of GDP). This modest revision was due to lower tax revenues, namely from the oil sector, that more than offset significantly higher than initially expected non-tax receipts. It is worth highlighting that tax revenues from the oil sector are now expected to represent less than half of the total tax receipts for the first time in 2016. On the other hand, the government now expects to spend 4.4% more than it initially planned with total expenditures raised to AOA 4,485 billion (or 26.6% of GDP). The new budget incorporates a marked increase of 17.8% in capital spending from the initial budget, as the local authorities expect to use the proceeds from external financing already secured in 2016 to raise public investment levels in the remainder of the year in the hope of restarting economic activity in the country and improve real GDP growth prospects.

Government debt (ex-debt to SOE) expected to reach 50% of GDP

The government is still planning to finance the majority of its expenditures with fiscal receipts (50.1% of the total). However, it also expects to significantly raise the amount of borrowing both in domestic and international markets. This is expected to lift government debt levels (excluding debt to state-owned enterprises) to around 50% of GDP this year (of which nearly 2/3 denominated in foreign currency) from an estimated 46.6% in 2015. The local authorities believe the country continues to have access to sufficient funding, namely from international sources. This was mentioned as the main reason for notrequiring funding from the IMF, although the country will continue its program of technical assistance with the Fund. However, it is clear that Angola's debt levels continue to rise at a very rapid pace and so careful monitoring is required. This is particularly relevant bearing in mind the growing debt levels denominated in foreign currency as well as the possibility of the kwanza depreciating further in the near-term, which could make it more challenging for the country to fulfil its debt commitments.