Angola: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Sharp slowdown in activity in 2016
Despite an increase in oil production, Angolan activity would remain subdued in 2016. Cuts in public spending may lead to the postponement of public investments projects and weigh further on the construction and services sectors. Agricultural production is expected to remain constrained by weak infrastructures and weather conditions. Private investment is likely to be curtailed by high interest rates and restrictions on accessing foreign currency.
Household consumption would be hit by booming prices
Inflation reached historically high level in June (32%), mainly due to the impact of the kwanza's depreciation against the dollar and higher domestic fuel prices following the removal of fuel subsidies. The government’s decision to impose price limits on basic items and tight monetary policy (the Bank of Angola raised its interest rate from 14% to 16% end of June 2016) may moderate annual rise which is expected nevertheless to exceed 20%.
Worsening budget and current account imbalances
The budget deficit is likely to continue widening in 2016. Given the importance of the oil sector to State revenues (75% of the total), the decrease in oil price has a major impact on receipts. The government has taken measures to limit the deepening of the deficit, cutting spending by 20% and its budgetary oil price assumption (to $41/barrel, from $45 previously) in July 2016. The kwanza's depreciation (18% against the dollar between January and mi-July 2016) is expected to partially neutralize the impact on the budget, expressed in local currency, of the low oil price. Nonetheless, to reduce spending, especially, on welfare and security will be difficult, as it could trigger deterioration in the social climate. Furthermore, the sharp rise in guarantees provided to public-sector companies, could put pressure on the budget due to the worsening financial situation of some publicly-owned entities.
Public debt, more than 60% of which is denominated in foreign currencies is expected to rise on the back of the kwanza's depreciation. The Angolan government's decision to suspend talks with the IMF over a lending facility and announcement that the country borrowed USD 11.5 billion between November 2015 and June 2016, may cast doubt on the ability of the State to meet its financial obligations and worry investors.
The current account balance is likely to continue to deteriorate in 2016, despite a slight expected increase in oil exports (more than 90% of revenues), impacted by higher price of imported goods, especially food, due to kwanza's depreciation.
Faced with the fall in foreign currency income associated with the lower oil price, the BNA has devalued the kwanza three times since June 2015, and restricted the allocation of foreign exchange, resulting in longer payment periods for many businesses. The pressure on the exchange rate could increase, given the fall in oil prices, the worsening current account balance and the gap between the official exchange rate (165 AOA per dollar) and that on the black market (above 500 AOA per dollar in June 2016). The level of foreign exchange reserves is still satisfactory (about USD 20 billion accounting for about 6 months of imports in April 2016).
The lack of foreign currency liquidity and the economic slowdown is expected to continue to put pressure on the banking system, which is very reliant on the oil sector. The rapid increase in non-performing loans reflects the sector's worsening situation.
Social tensions and shortcomings of the business climate
Since its independence, the country has been led by José Eduardo dos Santos and his party (MPLA). The size of the opposition, although increasing, is still too small for a change to be envisaged. Next general elections are scheduled for 2017 and the President Dos Santos (73-year-old) has announced that he will step down in 2018, without laying out any succession plan. Then, tensions between the main opposition party (UNITA) and the ruling MPLA, already high (violent clashes reported in May 2016), are expected to increase. Given the political and economic hold the president and his party have, a chaotic succession could destabilize the country. Meanwhile, popular discontent over inequalities and poverty, strengthened by the economic slowdown and faster inflation, is intensifying social tensions.
Governance is a weak point of the country, due, in particular, to widespread corruption (Angola is ranked 202nd out of 215 on the World Bank's indicator).