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11 November 2019

The Angolan Economy: Budget 2020

The Angolan Economy

Poised for (modest) economic growth

Recession persisted in 2019

Economic activity in Angola is widely expected to contract for a fourth consecutive year in 2019, marking the longest (and worst) recession in the country since the end of the civil war in 2002. This performance came in the aftermath of a sharp decline in oil prices from a level clearly above US$100 during 2014-17 that led to significant underinvestment in the oil and gas sector in recent years. It resulted in much lower oil production and, subsequently, fewer receipts for the government’s tight coffers. The need to secure some fiscal adjustment meant that the local authorities had to aggressively reduce capex levels, only exacerbating the downturn in activity. Indeed, public investment remains a key source of growth of the non-oil sector, which now represents more than 65% of the country’s GDP (vs. less than 45% a decade ago). Meanwhile, inflation benefitted from persistently tight monetary conditions, slowing to below 18% from a peak above 41% at end-2016. This despite a sharp depreciation of the kwanza and the impact of adjustments in some administered prices.

Economic activity is expected to improve in 2020

The government expects that Angola’s economic recession will finally come to an end next year. The 2020 budget proposal recently presented to parliament includes a real GDP growth forecast of 1.8% in the period following an expected contraction of 1.1% this year. This assumption is based on a recovery in the oil sector (1.5%) from a very weak performance in recent years and activity in the non-oil sector to advance at a faster pace of 1.9% (vs 0.6% this year). The proposal also foresees average daily oil production increasing 3.4% to 1.437 million barrels as output from France’s Total oil project at the Kaombo Sul area stabilizes, and for oil prices to average US$ 55. This is the same price assumption included in this year’s revised budget that proved to be somewhat conservative. In the non-oil sector, the areas that are expected to see a more marked improvement include agriculture, fishing and retail.      

Budget proposal

The 2020 budget proposal amounts to AKZ 15,971 billion, representing an increase of 53.5% when compared with this year’s revised budget figure. It assumes a fiscal surplus of 1.2% and primary surplus of 7.1% of GDP, meaning that public accounts could be in positive territory for a third consecutive year in 2020. Unsurprisingly, the government expects to continue to rely more on fiscal revenues to finance planned expenditures. However, it is worth noting the sharp increase of 72.4% YoY in debt financing, especially in overseas markets. This trend witnessed in recent years has resulted in a marked increase in public debt levels, which are expected to reach 97% of GDP in 2019 (vs. 85% in 2018). These elevated public debt levels mean that over 60% of planned receipts for 2020 are likely to be allocated toward debt amortization and interest payments alone, or about double the allocation in 2016-17.

IMF program to help economic recovery

With the assistance of the IMF program, the local authorities are expected to remain strongly committed to addressing existing imbalances. A combination of tight fiscal and monetary policies is crucial to bring debt-to-GDP closer to a target of 60% after 2021 and inflation toward single-digits possibly sometime after 2022. Still, monetary policy should be supportive of much needed economic growth. The continued implementation of reforms to bolster business environment should help to improve activity in the non-oil sector, lowering Angola’s persistently high dependence on oil and reducing the risks to its economic outlook.