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28 January 2019

The Angolan Economy

The Angolan Economy

Turning the Corner

Growth remained negative in 2018

The Angolan economy likely contracted for a third straight year in 2018 mainly due to a sharp decline in oil and gas production that reflect recent underinvestment in the sector. Inflation benefitted from persistently tight monetary conditions, slowing to c20% (from 30% in 2017). This despite a sharp depreciation of the kwanza and the impact of the adjustments in some administered prices. Meanwhile, higher oil prices more than offset lower production, lifting export receipts and helping to shift the current account back into a surplus. It also meant that oil revenues clearly exceeded initial projections and contributed to the government likely reaching a fiscal surplus. Moreover, the introduction of a new exchange rate regime allowed the spread of the official and parallel exchange rates to narrow to 20-25% (from 150% at end-2017).

Three-year arrangement with the IMF

Angola recently secured a three-year arrangement with the IMF under an Extended Fund Facility. The program mainly aims to (1) support the implementation of the government’s reform plan, (2) help restore external and fiscal sustainability and (3) promote economic diversification. It also consists of a financial aid package of US$ 3.7 billion for the three years, with US$ 990.7 million to be immediately made available. The program’s key policy commitments include (1) the implementation of fiscal consolidation measures in order to bring the debt-to-GDP ratio close to a target of 65%, (2) the liberalization of the exchange rate regime, (3) strengthening the local financial sector and (4) improving governance and business environment.

More favorable outlook for 2019-21

The IMF program is expected to help the Angolan economy recover in the next three years. Real GDP is projected to advance 2.5% this year and 3.2% in 2020-21, more in line with population growth in the country. An improvement in activity in the oil sector, as new oil fields come on stream (namely from Chevron, Eni and Total), is expected to boost growth in the next few years, while the implementation of reforms to bolster business environment should lead to a stronger pickup in activity in the non-oil sector. A combination of tighter monetary and fiscal policies will also aim to keep inflation levels on a downward path. That said, monetary policy should remain supportive of much needed economic growth. On the fiscal front, a continued fiscal retrenchment will help reduce the public debt burden from above 90% of GDP in 2018 to a level more in line with the 65% target during the forecast period.

Correcting imbalances and preparing the future

With the assistance of the IMF program, the local authorities are expected to remain highly committed to addressing the country’s current imbalances. A Macroeconomic Stabilization Program has helped strengthen fiscal accounts, lower inflation, reduce distortions in the FX market and is expected to improve financial sector stability. On the latter, we note that the BNA recently revoked the licenses of two banks after they failed to comply with more demanding capital requirements. The central bank is also expected to carry out asset quality reviews of local banks, which could lead to the recapitalization of weaker players and/or M&A. Meanwhile, the government hopes the implementation of a National Development Plan for 2018-22 aimed at tackling structural bottlenecks and promoting economic diversification and inclusive growth will help the economy exit this prolonged recession. It remains to be seen if 2019 will be the year when Angolan turns the corner and economic growth returns.