The first year in office of the new president Joao Lourenço’s reveals a rather positive shift in economic policies, given his determination to clean up politics and the scope of the economic reforms engaged so far. The abandon of the currency peg has eased some pressures on the fx market though they still remain important. The financing package recently signed with the IMF will help to implement structural reforms aimed at diversifying the economy by fostering the development of the private sector. Nevertheless, the overall near-term economic outlook remains embedded in international oil price developments due to the lack of economic diversification. Additionally, the still ailing banking system keeps on straining the private sector. Therefore, the recovery is bound to be very gradual at best due to the persistence of major macroeconomic imbalances.
Despite the new government’s positive shift in economic policy and the upturn in oil prices, the country still faces several challenges. The oil sector is deteriorated, foreign currency liquidity is exposed to high tensions, the household purchasing power is being eroded and the banking system is facing severe difficulties. This is evidenced by the sovereign spread on foreign-currency debt, which continues to be higher than global emerging market one, thus keeping the borrowing on the international capital markets relatively expensive. The IMF financial support, after almost two years of cooperation, is a very welcome measure which could reassure economic agents. The Angola government’s economic policy has clearly changed but the recovery will take time.
Economic reforms are ongoing
Since taking office in September 2017, President Lourenço has made significant reforms to improve financial sector transparency, enhance efficiency in SOEs, liberalize the foreign exchange rate regime, and pursue a more business-friendly trajectory in order to improve international investors’ perception of the country’s business climate. In its first year in office, the new government’s agenda that focused on anti-corruption and free market economic reforms have sent positive signals of political change.
In April 2018 the ruling party, the People's Movement for the Liberation of Angola (MPLA), called for an extraordinary congress in September 2018 that marked a political transition of the party’s leadership (the last vestige of Dos Santos hegemony) to the new president who thereby gained uncontested authority with Angola’s political elite and businessmen.
After changing several key political and economic positions to remove the Dos Santos legacy, the government undertook several reforms to attract new investments and faster potential growth.
Most of them have been made to support private sector development. After the simplification of administrative red tape to attract FDI (issuance of visas and residency permits), progress has also been made in getting electricity, promoting competition and combating monopolies. A new law was approved on non-resident investment with the elimination of the minimum commitment of USD 230,000 and the obligation to associate with a local partner holding an equity stake of at least 35%. In order to govern interactions between government and investors, the Agency for Private Investment and Exports (AIPEX) has been created. Moreover, about 74 state-owned companies[1] are on the privatization list.
The government also seems to be driving some moderate improvement in transparency and the reduction of corruption[2]. An anti-corruption unit was created in March 2018 and several high-profile officials from the previous administration were dismissed and prosecuted. If the prosecution for fraud and final arrest of the former president’s son suggest that the Dos Santos family’s influence has waned significantly in the past year, the arrest of a few high profile individuals will not be sufficient to resolve the endemic levels of corruption within key Angolan institutions.
However, according to the World Bank 2019 Doing Business ranking, Angola has progressed by only two notches (to 173 from 175 out of 190 countries), mainly due to some improvement in obtaining electricity, registering property and trading across borders. Likewise, small positive achievements are registered in the Governance Index related to voice and accountability, government effectiveness, political stability and control of corruption. Despite this, the Angola’s business environment remains burdensome.
The new foreign exchange policy has improved fx liquidity. After abandoning the dollar peg in January 2018, the central bank has gradually depreciated the kwanza (AOA) in a controlled manner through a series of auctions. Starting from October 2018, the volume of foreign currency has increased and the central bank stopped direct sales of foreign currency, which will be handled by authorized retail banks. At the same time, the approval of legislation to facilitate the repatriation of funds held abroad aims to reduce the shortage of hard currency.
Lastly, the hydrocarbon sector has also been the subject of deep reform with the passing of a new legislation to define clear and transparent rules for the development of gas reserves as well as some tax cuts for marginal oil fields (those with smaller reserves or with specific technical challenges). In addition, President Lourenço created the new National Oil & Gas Agency. This agency will take over the attribution of oil concessions and the management of production sharing agreements that were previously managed by Sonangol.
A renewed relationship with the IMF
Relationships between Angola and the IMF have been historically tense owing to the fund's criticism of Angola's opaque resource management. Only in 2009, during the last oil price crash, Angola took on a USD 1.4 bn stand-by arrangement (SBA) for the first time to help it manage liquidity challenges.
Angola authorities seriously started again in 2018 to cooperate with the IMF, which considers the current political transition to be an extraordinary break in Angola’s recent history, following the ambitious reforms launched to address macroeconomic and structural imbalances.
More precisely, they are implementing: (i) a Macroeconomic Stabilization Program (MPS) and (ii) the National Development Plan for 2018–22 to address structural bottlenecks, promote human development, public sector reform, economic diversification, and inclusive growth.
The key objectives of the MPS are: i) strengthening of fiscal and debt sustainability, (ii) modernizing the monetary policy framework and exchange rate policy, iii) reducing financial sector vulnerabilities and iv) fostering private-sector-led growth and economic diversification by improving governance and the business environment.
To support the implementation of these reforms, the Angolan government asked for an IMF support program, which was officially signed on the 10th of December 2018. The USD 3.7 billion three-year extended arrangement under the Extended Fund Facility allows an immediate disbursement of USD 990.7 million, while the remaining amount will be disbursed over the remainder of the facility period, subject to semi-annual reviews.
Moving forward, the IMF facility will ease fx liquidity pressures in the near term and send a strong signal on policy stability that is likely to reassure economic agents.
A standstill economy
The sharp decline in oil price from the record high in 2011-2013 has derailed Angola’s economic performance from the 4.5% average level recorded between 2011 and 2015. The real GDP growth strongly slowed down at 0.9% in 2015 and finally entered into recession in 2016 (-2.6%).
Despite the progress that has been made since the arrival of Joao Lourenço’s new government and the upturn in crude oil prices during the first three quarters of 2018 the Angolan economy is expected to report its third consecutive year of recession. It is confirmed by the overall economic sentiment, measured by the “Indicador de Clima Economico” (ICE), which remains in negative territory. According to the recently released data form the National Statistics Institute, the economy contracted by 2.7% year-on-year in Q1/Q3 2018, posting the third consecutive quarter in recession. This contraction is still attributed to the decline in extracting and refining activities, which account for 33% of GDP, as well as trade and construction (close to 20% of GDP).
The oil sector (accounting for 35% of GDP in 2018) continues to face the consequences of both the freeze on most oil exploration projects (considered too expensive) and the massive layoffs to reduce operating costs. Oil production has declined continuously, from 1.8 m barrels per day (b/d) in 2015 to 1.49 m b/d in December 2018, mainly due lack of investments in offshore fields, which are quite costly to maintain, while others have reached maturity production peak and production has started to decline. The period of near-paralysis was also due to deteriorating relationship between Sonangol and the majors’ oil companies.