Angola boosted by firmer credit

Angola’s long-term foreign-currency issuer default rating (IDR) has been upgraded to B- from CCC, with a stable outlook, by Fitch Ratings, on significant improvement in its credit profile.

Fitch has upgraded Angola on significant improvement in its fiscal and external metrics underpinned by a return to positive economic growth, sound fiscal management and higher oil prices.

Oil prices have recovered sharply since the onset of the coronavirus disease 2019 (COVID-19) crisis and the probability of downside scenarios related to oil markets has declined.

Angola’s heavy dependence on oil, accounting for on average 34% of gross domestic product (GDP), 56% of fiscal revenue and grants and 96% external receipts during the five years to 2020 – has led to substantial improvements on key credit metrics.

Based on data up to November, Fitch estimates Angola’s central government (CG) debt to GDP ratio fell to 78.5% in 2021.

This is a marked improvement from forecasts of 126.9% at the September 2020 review and well below 123.8% of GDP in 2020. Fitch forecasts CG debt to decline further to 74.8% of GDP in 2022 and 73% in 2023.

The lower debt ratios are the result of substantially higher nominal GDP, up 32.4% in 2021. This partly reflects oil prices, a stabilisation of the kwanza, with the earlier depreciation an important driver for rising debt in previous years.

This is given foreign-currency denominated debt that makes up 70% of total debt and continued commitment to fiscal consolidation.

Despite the sharp reduction, Angola’s debt remains above the current B median, 68% of GDP. In addition to the CG’s debt obligations, state-owned enterprises’ debt was AOA2.6 trillion, 5.5% of GDP, at end of June 2021. Most of this is at Sonangol, the state-owned oil company.

Fitch estimates the CG cash surplus at 2.5% of GDP in 2021, and forecast a surplus of 1.1% of GDP in 2022, amid stronger GDP growth and broadly stable oil prices.

The rating agency expects expenditure to remain broadly stable relative to GDP. COVID-19 will continue to exert some spending pressure and we expect the government will avoid further fiscal consolidation ahead of 2022 elections.

The authorities have built a significant record of stability-oriented economic reform and fiscal consolidation under the IMF extended fund programme that concluded in 2021.

They have restructured the oil sector, moved to a more flexible exchange rate regime, and introduced value-added tax in October 2019. They have also lowered the non-oil fiscal deficit from above 50% of non-oil GDP before 2014 to 6.7% in 2021.

Maintaining adherence to fiscal prudence could become more challenging as social pressures could rise after five years of economic contraction. The election could also lead to a change in economic management but Fitch does not expect sharp reversals of previous policies.

 

Liquidity pressures have also eased considerably with the increase in oil export receipts accompanying the rise in global oil prices.

Fitch estimates a current account surplus of 8.1% of GDP in 2021, after 1.5% in 2020. The surplus will narrow to 7.4% in 2022 and 2.8% in 2023. This is on the back of slightly lower oil prices, leaving external balances in a comfortable position.

Gross international reserves increased to $15.4 billion in 2021 and Fitch expects a further increase to $15.9 billion in 2022. This is equivalent to 7.2 and 7.3 months of current external payments, respectively, up from $14.9 billion in 2020.

This includes the approximately $1 billion increase in Angola’s IMF special drawing rights allocation last August.

Pressure on external finances could intensify again if there is a sharp fall in oil prices, given rising external public debt service of $5.6 billion in 2022, $6.9 billion in 2023 and $6.5 billion in 2024.

After five consecutive years of economic contraction, Fitch forecasts GDP growth of 0.1% in 2021, accelerating to 2.1% and 3.1% in 2022 and 2023, respectively. This will be mainly driven by the non-oil sector.

Fitch expects oil production to fall to 1.13 million barrels per day in 2021 and 2022 from 1.27 million barrels per day in 2020.

Weak investment in the oil sector pose downside risks to this forecast and the return to annual oil licensing rounds will only start to affect production several years later, with take-up uncertain.

The low vaccination rate, 12.7% of the population are fully vaccinated, also poses a downside risk to GDP growth forecasts.

Angola’s ratings are constrained by structural weaknesses, most notably poor performance on governance and human development indicators. They are also constrained by the country being one of the highest levels of commodity dependence among Fitch-rated countries.

GDP per capita is well below the current B median. Fitch’s Brent oil price assumptions of $70/bbl in 2022 and $60/bbl in 2023 imply a supportive oil price environment over the next two years. This is despite high oil dependence being a credit weakness.

Angola has a record of high inflation and the earlier sharp depreciation of the kwanza drove inflation to 28.7% in 2021, the highest since 2016.

The National Bank of Angola raised its interest rates by 4.5pp to 20% in June and kept other parameters of its policy tight, leading M3 growth to turn negative. It also led overall bank credit to the economy is also contracting.

Combined with the stabilisation, and recent appreciation of the kwanza, this should lead to a moderation of inflation to 16% in 2022 and 10% in 2023.

Fitch would downgrade Angola if there were signs of a change in fiscal policy that reduces confidence in its forecast of continued debt reduction.

The rating agency would also lower the rating if there was a resurgence of liquidity pressures for example as the result of a renewed sharp fall in oil prices.

Fitch would upgrade the rating further if there was continued substantial reduction in debt levels combined with a reduced dependence of public finances on oil revenue.

A significant improvement in governance as reflected in the World Bank governance indicators (WBGI) would also lead to a further upgrade.

This comes after Angola’s foreign and local currency long-term issuer ratings were upgraded to B3 from Caa1, with a stable outlook, by Moody’s Investors Service, in 2021.

See rating rationale here