The Angolan Economy

Under (oil) pressure

Oil crisis of 2008-09 relived?

Angola was better prepared to face the current oil price shock at the end of 2014 than it was at the start of the previous crisis back in 2008-09. Foreign reserves at the BNA amounted to US$ 27.3 billion in December (covering about six months of imports) whereas at the start of the 2008-09 oil crisis they stood at US$ 17.5 billion (covering 3.5 months of imports). Inflation stood near 7.5% (vs. 13-14% in 2008-09) while the budget deficit ended 2014 at an estimated 3.1% of GDP, lower than in 2008-09. However, with oil still accounting for about 37% of the country's GDP, 98% of its exports and 68% of fiscal revenues in 2014, it is no surprise that the current sharp drop in oil prices is having a severe impact on many fronts, leading some to question whether Angola will end up requiring IMF assistance once again this time around.

Sharply lower oil prices hit local economy

Growth is slowing while confidence levels in the main sectors of the economy continued to fall in the first half of 2015. External accounts are deteriorating on the back of lower oil exports and a persistently high dependence on imported goods. Inflation has climbed once again to double-digits in recent months, reflecting in large part the impact of the depreciation of the kwanza, which the BNA is trying to contain through tighter monetary policy measures. The government has also had to cut back aggressively on fiscal spending, including investment, as seen in the latest budget report for 1Q15. 

Downgrade in economic growth forecasts

The Angolan authorities have cut their real GDP growth forecasts three times this year as a result of the current plunge in oil prices. They currently expect economic activity to expand 4% this year and 3.5% in 2016. The IMF remains more cautious though with an estimate of 3.5% for both years. Most of these revisions came in the non-oil sector, namely in construction, transport and energy. We believe the existing volatility in global oil markets could present further downside risks to Angola's economic growth outlook in the near future. One should also bear in mind the expected weaker performance of the Chinese economy going forward and the fact that China remains Angola's main trading partner.

Public debt increases as government secures more loans

The government announced that it plans to increase public spending in the second half of the year as more funds from recently secured loans become available. This means that public debt is expected to increase significantly this year, likely above 50% of GDP. Efforts to accelerate fiscal reforms are therefore required, namely by continuing to reduce fuel subsidies and increasing non-oil sector tax collection. This would help improve fiscal consolidation and contain the climb in public debt levels. That said, the local authorities are more than likely to continue to pay very close attention to spending on the social sector while critical infrastructure investment is expected to resurface in the months ahead, particularly as we move closer to the next general elections scheduled for 2017.