Angola Ratings Lowered To 'CCC+' On Increasing External Financing Risks Tied To Sharp Fall In Oil Price; Outlook Stable

  • Recent sharp falls in oil prices are accentuating Angola's external and fiscal deficits and increasing financing pressures.
  • IMF program support is likely to be insufficient to cover funding needs, forcing Angola to pursue external commercial sources, which are now difficult to access given the current turmoil in global markets.
  • We are therefore lowering our ratings to 'CCC+' from 'B-'.
  • The outlook is stable.

Rating Action

On March 26, 2020, S&P Global Ratings lowered Angola's long-term foreign and local ratings to 'CCC+' from 'B-'. We also lowered our short-term sovereign credit ratings on Angola to 'C' from 'B'.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Angola are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a sharp drop in hydrocarbon prices and our revised price assumptions for 2020 and beyond. The next scheduled rating publication on the sovereign rating on Angola will be on Aug. 7, 2020.

Outlook

The stable outlook reflects that, at this lower rating level, risks to the ratings on Angola will be balanced over the next six to 12 months.
We could lower the ratings should Angola's external buffers substantially decline more than we currently forecast, or access to external financing proves difficult, affecting its debt servicing capacity.
We could raise our ratings if government reforms were to result in higher economic growth, or if external buffers increase sharply, or fiscal balances were stronger than forecast, helping to stabilize government debt levels.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumption for 2020. This follows an earlier significant downward revision of its price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions in the Middle East. When we reviewed Angola last month (see "Angola," published Feb. 7, 2020, on RatingsDirect), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50/bbl in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC+'s failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed further reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC may engage in a price war to try and maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through the second half of 2020 and into 2021 as the most severe impacts from the coronavirus outbreak moderate.
While we note the Angolan authorities' significant efforts to reform the economy over the three last years, a combination of unfavorable global economic conditions and external shocks have undermined the potential positive benefits of these reforms, exacerbating already high fiscal and external metrics. Since 2017, the Angolan government has implemented various reforms--liberalizing the exchange rate, opening up the oil sector, reforming the banking sector, and initiating a process to privatize state owned companies. The authorities also entered into a three-year extended fund facility (EFF) program with the IMF in December 2018 and have so far completed two reviews, receiving over half of the program's US$3.7 billion. The IMF program has helped anchor policy and stabilize the external position.
In 2018 and 2019, Angola experienced twin surpluses in both its fiscal and external accounts thanks to policy adjustments. However, the liberalization and sharp depreciation of the kwanza has significantly weakened the government's debt ratios as a percentage of GDP and impaired its debt-servicing-capacity ratios. Net general government debt has increased from 50% in 2016 to about 114% in 2020, while interest payments to general government revenue has increased from 12% to about 45% of general government revenues over the same period.
We forecast the recent substantial fall in oil prices will this year result in wider current account deficits and heighten external funding pressures, especially given the volatile global funding environment. The oil sector continues to dominate Angola's economy, contributing about 25% of GDP, 95% of exports, and over 60% of fiscal revenues. A substantial decline in oil revenues will therefore lead to lower export and fiscal revenues, as well as lower GDP growth. We estimate that the sharp fall in export revenues will likely result in an overall current account deficit that averages 4.8% in 2020-2023.
A combination of financing items such as foreign direct investments, IMF disbursements, and debt issuance will be used to fund the external deficit. Amid volatile global debt markets, access to commercial issuances could prove difficult. While Angola has no immediate Eurobond maturities, the coupon payments for all outstanding Eurobonds are estimated at close to $700 million per year while external debt repayments on Chinese and other bilateral loans are sizable.
The large current account deficit in 2020 is also likely to lead to funding pressures. We therefore estimate that Angola's foreign currency reserves are likely to decline from about US$17 billion at end-December 2019 to US$13 billion by end-December 2020. In the medium term, as oil prices pick up back to $50/bbl in 2021, the current account deficit should narrow substantially and return to surplus by 2022. Gross external financing needs are likely to average 109% of current account receipts and useable reserves over 2020-2023 compared to an average of 82% over 2017-2019. The country's external debt, net of liquid assets, will average 166% of current account receipts over 2020-2023, compared with less than 88% in the previous three-year period.
As the oil sector contribution to GDP remains large, the fall in oil prices along with slower economic activity associated with the effects of coronavirus are likely to keep Angola's pace of economic growth in negative territory for the fifth consecutive year. We estimate a contraction of -1.5% in 2020 due to these shocks to Angola's economy.
However, oil prices should pick up from 2021, while Angola's oil production will remain broadly at current levels, supporting positive economic growth over the medium term. We forecast that real economic growth will recover to 1% in 2021, before accelerating to an average of at least 2% for 2022-2023. Nevertheless, partly owing to exchange rate effects and rapid population growth, we estimate that GDP per capita will decline to around US$1,800 in 2020 from around US$2,800 in 2019, and remain close to US$2,000 in 2020-2023. The economy will continue to contract on a per capita basis, with the 10-year weighted average at about -2.8% in 2020.
The IMF program has supported and anchored the authorities' fiscal reform efforts. For example, the authorities have stepped up efforts to improve non-oil revenues, including via value-added tax (VAT) introduced in October 2019. However, subsidy reforms including adjustments to fuel and electricity tariffs, and continued clearance of arrears to domestic suppliers, are still a work-in-progress. The loss of fiscal revenues associated with lower oil prices are likely to turn the fiscal accounts into a deficit for the first time in two years. After 2020, we expect small fiscal deficits averaging 1.7% of GDP on average in 2020-2023, owing to a pick-up in oil prices in later years and the broadening of non-oil revenue sources. Nevertheless, the change in net general government debt will average above 8% of GDP in 2020-2023 due to the effects of substantial currency depreciation, in 2020 in particular.
Angola's gross general government debt burden has been rising sharply. General government debt rose to 103% in 2019 from 88.6% in 2018 and 30% in 2014. The sharp increase from 2018 to 2019 was largely from the over 50% fall in the value of the kwanza; debt net of liquid assets will stand at 114% in 2020. We expect debt accumulation to slow down amid slower kwanza depreciation, assuming that the government maintains its fiscal consolidation targets. We now estimate that the government's gross debt burden is likely to decline toward 103% of GDP in 2023 on a gross basis, or 94% on a net basis (net of liquid assets). We estimate that liquid assets, comprising deposits held at the central bank and resident financial institutions, will fall to 9% of GDP in 2023 from around 12% in 2019. We also forecast that interest paid will average a relatively high 39% of revenues over 2020-2023.
Inflation in 2019 stood at 26.6% compared with 19.6% in 2018 as kwanza depreciation continued. Due to exchange-rate pass-through to inflation, we now estimate that inflation will remain elevated at around 30% this year. Inflation is likely to reduce slightly in 2021 as currency depreciation eases. However, the impact of VAT and other price adjustments is likely to keep inflation in double digits.

Key Statistics

Table 1

Angola Selected Indicators
AOA mil.2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. LC)14,32413,95016,55020,26226,77832,26830,83036,12040,52744,745
Nominal GDP (bil. $)1461161011221068860646973
GDP per capita (000s $)5.44.23.54.13.42.81.81.92.02.0
Real GDP growth4.80.9(2.6)(0.1)(1.2)(1.1)(1.5)1.02.02.8
Real GDP per capita growth1.2(2.5)(5.8)(3.4)(4.5)(4.3)(4.6)(2.2)(1.3)(0.5)
Real investment growth10.13.6(9.5)(0.1)3.03.03.02.52.52.5
Investment/GDP27.534.227.224.129.729.526.922.421.020.9
Savings/GDP24.925.424.223.636.734.48.319.921.922.0
Exports/GDP44.729.828.129.036.438.228.442.944.443.3
Real exports growth(7.0)(32.7)(9.1)0.7(14.6)(6.9)1.43.02.73.3
Unemployment rateN/A35.035.035.035.035.035.035.035.035.0
External indicators (%)
Current account balance/GDP(2.6)(8.8)(3.1)(0.5)7.04.8(18.6)(2.5)0.91.1
Current account balance/CARs(6.1)(29.7)(10.8)(1.8)17.711.6(58.1)(5.3)1.92.4
CARs/GDP42.229.828.329.439.541.832.047.348.847.6
Trade balance/GDP21.010.714.416.523.623.89.125.628.428.2
Net FDI/GDP1.99.3(0.4)(7.2)(6.5)(5.5)9.5(1.0)(2.0)(1.8)
Net portfolio equity inflow/GDP(0.7)(0.9)(0.0)(0.0)0.10.00.00.00.00.0
Gross external financing needs/CARs plus usable reserves85.394.489.482.775.586.4120.9105.9104.6104.1
Narrow net external debt/CARs9.535.384.082.783.298.2228.2153.8141.8141.3
Narrow net external debt/CAPs8.927.275.881.2101.1111.1144.4146.0144.6144.7
Net external liabilities/CARs11.547.192.4101.477.681.0221.5148.2132.8128.3
Net external liabilities/CAPs10.836.483.499.794.291.6140.1140.7135.5131.4
Short-term external debt by remaining maturity/CARs23.840.454.937.026.135.872.648.545.445.0
Usable reserves/CAPs (months)5.97.49.28.06.35.96.95.24.64.6
Usable reserves (mil. $)27,73524,41924,35318,22816,17017,33713,70712,47512,84513,083
Fiscal indicators (general government; %)
Balance/GDP(5.7)(2.9)(3.8)(6.3)2.00.7(4.0)(1.0)(0.8)(1.0)
Change in net debt/GDP9.610.829.617.634.326.018.45.74.96.1
Primary balance/GDP(4.7)(1.1)(1.7)(3.0)6.67.34.67.77.46.8
Revenue/GDP30.724.117.517.521.921.419.022.023.023.0
Expenditures/GDP36.527.121.423.819.820.723.023.023.824.0
Interest/revenues3.37.412.319.120.730.945.439.535.533.7
Debt/GDP30.145.066.068.288.6103.1127.2114.4107.0103.3
Debt/revenues98.0186.6376.8389.8405.0481.9669.3520.2465.4449.0
Net debt/GDP13.024.250.058.578.591.1113.8102.896.593.6
Liquid assets/GDP17.120.816.09.710.112.013.311.610.59.7
Monetary indicators (%)
CPI growth7.35.530.729.819.626.630.020.015.010.0
GDP deflator growth3.6(3.5)21.822.633.821.8(3.0)16.010.07.4
Exchange rate, year-end (LC/$)102.86135.32165.90165.92308.61482.23550.00580.00600.00630.00
Banks' claims on resident non-gov't sector growth0.717.7(2.2)(1.5)9.526.715.015.015.015.0
Banks' claims on resident non-gov't sector/GDP20.524.820.516.513.614.317.316.917.418.1
Foreign currency share of claims by banks on residentsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Foreign currency share of residents' bank deposits35.533.832.532.748.254.745.040.040.040.0
Real effective exchange rate growth4.72.0(4.1)24.6(25.0)(16.1)N/AN/AN/AN/A
Sources: Banco Nacional De Angola, Ministry of Finance, Instituto Nacional de Estatistica (Economic Indicators), International Monetary Fund, Bruegel, Banco Nacional De Angola (Monetary Indicators), Ministry of Finance, International Monetary Fund (Fiscal Indicators), Banco Nacional De Angola (External Indicators).
Adjustments: General government debt adjusted by including debt of Recredit
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Angola Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment5Angola has a fairly clearly defined political structure, albeit with limited checks and balances and power concentrated in the hands of the ruling party and the executive. There was a fairly smooth transition in August 2017 within the same governing party with Mr Lourenco taking over as president, changing the guard within the party, and embarking upon a reformist path and engaging with the IMF. Nevertheless, we believe it will take time to improve relatively weak institutional and governance indicators, and to deliver sustainable public finances and economic growth. Transparency has traditionally been low due to perceptions of vested interests and interference by political institutions in the full and free dissemination of information. However, the new government is attempting to improve transparency.
Economic assessment6Based on GDP per capita (US$) and growth trends as per Selected Indicators in Table 1.
Weighted average real GDP per capita trend growth over a 10-year period stands at -2.3%, which is well below sovereigns in the same GDP category.
External assessment6Based on narrow net external debt and gross external financing needs/(CAR + useable reserves) as per Selected Indicators in Table 1.
The country is exposed to significant volatility in terms of trade, due to its dependence on hydrocarbons.
The sovereign’s external data lack consistency, given the level of stock-flow discrepancy and the lack of transparency in the sovereign wealth fund.
Fiscal assessment: flexibility and performance6Based on the change in net general government debt (% of GDP as per Selected Indicators in Table 1).
The sovereign has a volatile revenue base, since more than half of general government revenue is based on the hydrocarbon sector.
Vast post-war rebuilding needs as well as off-budget financing in the past (which has left a legacy of arrears). Angola is classified as ‘medium human development' level by UNDP HDI.
Fiscal assessment: debt burden6Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in Table 1.
About 60% of gross government debt is denominated in foreign currency.
The banking sector’s exposure to the government is over 30% of its assets.
Monetary assessment5The kwanza was a soft peg and has transitioned toward a managed floating regime. Monetary policy credibility is still weak, but may be improving. Inflation track record has been poor as per Selected Indicators in Table 1.
Despite significant liberalisation, the sovereign still applies some foreign exchange restrictions.
Indicative ratingb-As per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility-1
CCC criteria applied. Angola’s credit metrics are weak and exacerbated by the sharp decline in oil prices this year which could make debt servicing challenging over the next 12 to 24months.
Final rating
Foreign currencyCCC+
Notches of uplift0Default risks do not apply differently to foreign- and local currency debt
Local currencyCCC+
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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