Will Angola pay back holders of its foreign currency debt?
March 31, 2017
Change, especially political change is something Angola is defiantly not used to, couple that with low oil revenues, a deep currency depreciation and growing public unrest due to suspicions of a rigged election, it is no wonder why holders of the country’s foreign currency debt are sweating. Political risk is on the rise for Angola in 2017, but as they say, an informed investor is a composed investor. The following five indicators are key in understanding the economic and political dynamics on the ground.
1) Oil revenue
In 2015, foreign currency inflow generated by oil exports was at $33.4 billion, a 44.5% decline in relation to the same period the previous year. With lower revenues expected in the face of an 8% increase in public expenditure, led by capital and social expenditures, the fiscal deficit is expected to widen to 6.8%, from 5.5% in the initial budget.
The additional deficit will be financed mainly through domestic borrowing. Public debt has reached $48 billion, with $4.4 billion due within the next 12 months. Furthermore, the Chinese oil for development barter barging will mean less oil to sell.
2) Ratio of interest payment obligations to export revenue
If exports are falling or if prices are falling (e.g. oil), then less money is going into Angola since 97% of Angola’s export revenue comes from oil. This will have a huge hit on the government purse. The government is taking less in tax and vat revenues, thus less able to pay back debts.
The total government debt is roughly $46.72 billion, then times that by the current rate at which they finance their debt provides an estimate of their interest repayments. The question with a ratio like that is: what is the critical point which suggests default is most likely?
3) Currency depreciation and inflation
Annual inflation reached 35.3% in July 2016, reflecting the 40% depreciation of the kwanza against the dollar since September 2014. Inflation has accelerated to 31.8% (y-o-y) in June and is currently at its highest level since 2004.
It is also the highest in Southern Africa, exceeding by more than 10 points the levels of Malawi, Zambia and Mozambique. Meaning more cash is required to pay back the debt, especially as the currency debt is held in American dollars.
4) New loans by World Bank
The World Bank (WB) hands out loans to countries facing poverty, therefore new foreign currency loans from the WB to Angola could indicate Angola will repay their debt. An important point to highlight is that Angola’s partnership strategy for fiscal year (FY) 2014-2016 is now at an end, following a WB loan of $650m to Angola.
According to World Bank figures for 2015, Angola has $27.991 billion in outstanding debt which will strain their ability to pay back debt, unless a negotiated write off or other measures are implemented.
5) Political will
Long time President Jose Eduardo dos Santos announced that he was stepping aside to allow for new leadership. This transition of power comes with uncertainties in predicting what the new establishment priorities will be and assessing the economic policies of new political candidates and current central bankers in Angola. Every political and economic strategy needs to have the political will to see it through. Gauging what kind of leadership will emerge and what priorities they will focus on is key.
Angola should achieve its inflation and exchange rate targets in 2017, however economic stress could likely lead to the International Monetary Fund offering a bailout package, which the government will likely turn down as the current leadership is betting on a $44 billion budget based on 2.1% economic growth with an assumed 5.8% budget deficit.
The budget projects a $46-per-barrel oil price in 2017. Oil revenues should be up as a result of price increases and production control. Resulting in confidence that the government will pay holders of its foreign currency debt in the next year.