Angola’s New Road

The oil-rich Southern African country bets its economic revival on an IMF bailout and a fresh pair of hands.

Africa’s second-largest oil producer is betting that a recently finalized economic plan backed by the International Monetary Fund will put it on track to diversify its economy, attract global investment and prop up its currency. It’s an ambitious set of aspirations—essentially, a new road to economic development—for Angola, which in recent years has seen steep inflation, negative foreign direct investment (FDI) and uncertain revenue flows from its dominant oil sector.

With IMF approval of the government’s Expanded Financing Program secured late last year, the first piece of good news is that Angola’s currency, the kwanza, is expected to gain ground marginally this year after closing 2018 with an inflation rate of 20.5%. Bolstering that forecast are new, investment-friendly policy measures that economists expect will boost economic activity along with the value of the kwanza.

The $3.7 billion IMF funding facility supports a Macroeconomic Stabilization Program with three main goals: fiscal consolidation, aimed at bringing government debt to safer levels; promoting exchange-rate flexibility, to make the economy more competitive; and reducing inflation.

“The approval allowed for an immediate disbursement of around $990 million, with the rest of the funds scheduled to be phased in over a period of three years,” notes FocusEconomics in a February economic outlook note on Angola. “Against this backdrop, growth is expected to resume this year, amid falling inflation and improving non-oil sector activity, before picking up further in the medium term.”

A FocusEconomics panel of economists now projects GDP to expand by about 1.3% in 2019 and 2.4% in 2020. In 2018, Angola’s economy experienced a 0.1% slump.

Energy Shortfall

Should that turnabout come to pass, Angola’s biggest industry must step up. Foreign investment in the oil and gas sector has been a mainstay of the economy, says Christopher Thomas, an economist at FocusEconomics; but oil production fell in November from the previous month. Coupled with a steep drop in global oil prices, that signaled a further deterioration in the country’s vital sector, just as the IMF was issuing its seal of approval on the government’s economic plans. Thomas nevertheless expects oil production to recover to 1.64 million barrels per day in 2019—from November’s 10-year low of 1.42 million barrels per day.

Perhaps more troubling, “FDI inflows in Angola have been negative for the last two years,” says Astrit Sulstarova, chief for investment trends and data at the United Nations Conference on Trade and Development (Unctad), underscoring that this is indicative of “a substantial repatriation of investments” by foreign firms. “This comes after the country received relatively high FDI between 2013 and 2016, averaging $5.41 billion annually. The net inward FDI in 2018 in Angola was -$5.1 billion compared to -$7.4 billion in 2017.”

Putting the decline in context, Sulstarova notes that Angola is among the five biggest economies in Africa and “has traditionally been an attractive FDI destination for foreign firms due to the oil and gas sector.”

The kwanza has also weakened, depreciating by as much as 46.5% against the US dollar in 2018; although it strengthened in the first few days of 2019. The currency is susceptible to commodity price fluctuations, although the central bank recently relaxed the amount of foreign currency Angolans can purchase and spend abroad as the foreign-currency situation improves. President João Lourenço has adopted a tough stance on corruption and is tightening the screws on financial leakages after setting up a committee to probe public investment in state companies.

Bullish OnLourenço

The air of cautious optimism that hangs on despite falling FDI and bad news on the oil and gas front focuses a good deal on Lourenço, largely seen by economists at major institutions as keen to enact reforms and take a new approach to how Luanda conducts business, following years of corruption allegations and a generally poor perception of the previous administration. Angola is considering plans for privatizing a variety of entities, including ports, railways, the national airline, state oil company subsidiaries, Banco de Comercio e Industria (BCI) and insurer Ensa.

Lourenço has been at the helm for less than two years since replacing José Eduardo dos Santos, who stepped down after 38 years as leader of the country in 2017. The deal with the IMF is widely seen as signaling Angola’s move toward political stability after uncertainty and instability within the ruling party during the past few years.

Key opportunities for investors include the 2019 bid rounds for onshore and offshore oil blocks announced in October 2018. Lourenço has placed particular emphasis on promoting foreign investment in the hydropower, biofuel and agricultural sectors through broad economic reforms, helping to broaden investor interest away from fossil fuels. In April 2018, for example, the government removed a requirement that foreign investors have an Angolan partner; and it has strengthened oversight of infrastructure projects and updated laws around procurement.

“There is increasing interest from Chinese investors, including those interested in investing outside the traditional oil and gas sector,” says Sulstarova. An Unctad report notes potential for a revival of FDI inflows “a stronger link between foreign investment and local economic fundamentals on a sustainable basis based on how the implementation of the new investment law is perceived.”

The financial sector will play a key role in facilitating trade and development of the oil industry as well as helping to funnel offshore investments into other economic areas. However, the National Bank of Angola is closely monitoring developments in the country’s banking sector, having already deregistered two smaller lenders, Banco Mais and Banco Postal, after they missed a December 31 deadline to boost their capital reserves.

The bank’s governor, José de Lima Massano, says he will review the assets of Angola’s remaining 27 banks. He cautioned that some institutions may have to raise their capital buffers, “given the magnitude of their loan portfolios and the deterioration of credit quality.” The process will begin in April.

Standard Bank is among the big foreign institutions that have been funneling investment into Angola as well as facilitating trade with new investors from China and other nontraditional source countries. “China is a significant bilateral trade partner for Angola and has contributed to the country’s development with trade and investment,” says Luis Teles, CEO of Standard Bank Angola.

China Looms

Communications and electronics giant Huawei has already undertaken investments of $60 million, largely on implementing 3G and 4G technology to improve communications infrastructure, and is planning for larger investments in Angola in the near future. The large multinational oil companies, including US oil giants ExxonMobil and Chevron, have had a sustained presence; and French and UK companies, including Total and British Petroleum, are also present.

Outside the oil sector, the companies most active in Angola are from Portugal and Brazil, due in part to their historical ties; while South African companies in construction, retail and banking are also active, largely owing to regional proximity. Russia and a few others also register a presence.

“We are seeing a new trend of increased Chinese private-sector investment (i.e., not only state-owned enterprises) coming to Angola, as well as Chinese companies starting to invest in local production facilities, which is a natural evolution from the previous Chinese-funded infrastructure projects,” says Teles.

Investors are also closely eying opportunities in the impending plans to privatize state enterprises. Further development of local capital markets will enable more funding solutions.

As regional and international investors size up opportunities in Angola, however, pressure is likely to grow for the government in Luanda to prioritize a business-friendly policy stance. Investors are likely to demand more indications that an environment conducive to investment will be sustained, before they jump in to help this resource-rich country leverage its oil and gas patrimony into a healthier, more diversified economy in the long run.