Support capital market activity, provide valuable insight on countries, sectors or companies in SSA.
10 July 2020

Angola: Oil and pandemic lead to sharp budget cuts in 2020

Angola could face its worst recession ever

The Angolan government has revised its budget for 2020 to reflect the impact from the latest sharp drop in oil prices and the Covid-19 pandemic on fiscal accounts. The revised budget includes (1) a new assumption for crude prices of US$ 33 per barrel, representing a 40% reduction from the initial estimate of US$ 55 and (2) a projected cut of 10.7% in crude production to 1.28 million bpd (by year-end), the lowest level since 2005, to reflect the latest oil supply reduction agreement signed by OPEC+. The government also anticipates the Angolan economy will remain in a recession in 2020, significantly cutting its real GDP forecast to -3.6% from an initial projected growth of 1.8%. If confirmed, Angola would once again underperform the average of Sub-Saharan Africa, which the IMF expects to contract 3.2% in 2020. This would also be the fifth straight year of economic contraction, marking the longest period of recession in the country and the worst in Angola’s history.  


Revised budget assumes overall deficit of 4% of GDP

The fiscal projections included in the 2020 revised budget point towards an overall deficit representing 4% of GDP and a primary surplus of 2.2% of GDP for this year. These figures compare with a budget surplus of 1.2% and primary surplus of 7.1% of GDP in the initial budget presented by the government in late-2019. These revisions reflect a sharp reduction in projected revenues (-28.9%) for the period, which came mostly from a significantly lower contribution from oil-related tax receipts (-47.1%). The government expects to partly offset this major shortfall in revenues by lowering expenditures (-8.7%). In particular, debt interest payments are now expected to stand 20.5% below initial projections following a reported three-year debt moratorium agreement with China (by far Angola’s largest bilateral creditor). This alleged deal, which has been reported in the local press but is yet to be officially confirmed by the government, would see Angola save more than 36% in external debt servicing costs this year. Further details about this agreement are yet unknown, namely the impact that it would have on future budgets.


Public debt could reach 123% of GDP this year

The government stated that public debt reached about 113% of GDP in 2019 and could increase to 123% of GDP this year if current global economic conditions do not change. It added that the country’s economic downturn witnessed in recent years is placing public debt levels on an unsustainable path. This makes it imperative to adopt measures to invert this trajectory. For this reason, the government reiterated its commitment to continue to implement fiscal consolidation measures, aiming to bring public debt levels down to 65% of GDP over the medium-term.  


Herculean task required from the Angolan authorities

Angola has clearly been hit with a double-whammy of markedly lower oil prices and the Covid-19 pandemic that is impacting the global economy quite hard. The revised budget for 2020 reflects this new reality, which is undoubtedly grim and will require a Herculean task from the local authorities to execute their projected fiscal targets set for this year. If confirmed, a debt moratorium with China will bring some much needed breathing space for the government to help navigate these challenging times as well as to prepare the Angolan economy for what will hopefully be the turnaround year in 2021.