Angola: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant oil production and liquefied natural gas producer
- Significant economic potential: diamonds, iron, gold, leather, agriculture, fisheries, hydropower
- International financial support
- Vulnerable to an oil price reversal
- High unemployment, high social inequalities, and regional disparities
- Deficient infrastructure
- Fragile banking sector
- Conflict with separatists in the Cabinda enclave
Declining oil sector weighs on activity
After four years of contracting GDP, precipitated by falling oil prices and prolonged by declining production in mature fields, activity will continue to be dampened by the gloomy outlook for this sector, which accounts for 40% of GDP. The decrease in crude production, due to insufficient investment in exploration activities in recent years, is not expected to be offset by the ramp-up of the Kaombo project’s two production and storage units, which came onstream in 2018 and 2019. The expected decline in oil prices in 2020 will put additional pressure on oil revenues, on which the country is highly dependent due to the lack of economic diversification, which limits public investment, particularly in infrastructure projects. Private consumption will likely be affected by persistently high inflation and a significant tax burden, which will squeeze household purchasing power. IMF support, along with measures to make resource management more transparent, may attract foreign private investors, but the infrastructure deficit, slow and inefficient institutions, and endemic corruption remain key obstacles. Reflecting its very unfavorable business environment, Angola dropped four places compared with 2019 to come 177th out of 190 in the Doing Business 2020 ranking.
Risk of over-indebtedness still significant
Since December 2018, Angola has been under an IMF program, which was a prerequisite for obtaining a USD 3.7 billion Extended Credit Facility (3.6% of GDP). Accordingly, it should continue to exercise prudent fiscal management. The introduction of excise duties on many products is expected to generate higher revenues, while cuts to fuel subsidies and transfers to national companies should lower expenditure. Spending is dominated by debt service, which accounts for almost half of revenues, while social spending is another major item. A decline in oil revenues (60% of total revenues) would make it impossible to reduce the budget deficit, which is financed by bilateral (mainly China) and multilateral sources, as well as by bond issues (Eurobonds). The 2019/2022 privatization program, which is being overseen by the World Bank and includes the oil company Sonangol, could also contribute to the financing. After peaking in 2019, mainly due to the depreciation of the kwanza, public debt, which is more than 80% denominated in foreign currencies, is expected to decline in 2020. Nevertheless, the risk of over-indebtedness remains substantial, as the debt is highly vulnerable to currency depreciation and changes in oil prices. The banking sector is in precarious health as asset quality has deteriorated after years of low activity (NPLs represent 30% of loans).
After the large surplus in 2018, due to the recovery in oil prices, the current account is close to balance again due to the shrinking of the trade surplus. Weak oil prices and low production are reducing export revenues, with oil exports accounting for more than 92% of the total. The upturn in imports, linked to oil investments, combined with kwanza depreciation, is also a factor. The service and income deficits, which are closely related to oil activity, may narrow slightly in line with the sector's moderate activity levels. Remittances from foreign workers in Angola continue to contribute to the transfer deficit. Bilateral and multilateral financing, as well as FDI, will cover the small current account deficit comfortably. Despite falling by half between 2013 and 2018, foreign exchange reserves are sufficient to cover more about five months of imports. Full liberalization of the exchange rate, which was introduced in October 2019 by scrapping the 2% fluctuation band, and the kwanza’s subsequent 20% depreciation eased the pressure on the external accounts, but did not reduce the gap between the official and parallel market rates, thus heralding continued depreciation.
Despite reforms, socio-economic challenges remain
Since taking office in 2017, President João Lourenço has taken many steps to reduce the influence of his predecessor, José Eduardo dos Santos (who held power for 38 years), and his family on the country's economy. However, while judicial investigations targeting the children of former President dos Santos, Isabel, and José Filomeno dos Santos, have sent a strong signal in the fight against corruption, the country will struggle to rid itself of the family’s influence. More generally, major socio-economic challenges remain, as do multiple sources of social unrest within a population suffering from poverty, persistent inequalities and poor access to housing, education, and health services. Externally, relations with China will remain strong. The President may also seek to bolster ties with neighboring countries, including through the African Continental Free Trade Area, which was ratified by the Angolan Parliament in May 2019. Relations with the Democratic Republic of Congo are expected to improve with new presidents in both countries showing willingness to create a partnership relationship.