Angola: Another year of recession, mounting debt - Capital Economics
Africa Economics

Angola: Another year of recession, mounting debt

Africa Economics Update
Written by Virag Forizs

The Angolan currency’s recent fall will push up inflation and increase the debt-to-GDP ratio even further. While we don’t think that default is an imminent risk, the government will have to tighten fiscal policy. Consequently, GDP is likely to contract for a fifth consecutive year in 2020.

  • The Angolan currency’s recent fall will push up inflation and increase the debt-to-GDP ratio even further. While we don’t think that default is an imminent risk, the government will have to tighten fiscal policy. Consequently, GDP is likely to contract for a fifth consecutive year in 2020.
  • The kwanza has fallen 17% against the US dollar since early October. (See Chart 1.) In part that appears to be due to increasing divergence between the official and black market rates, which seems to have forced the National Bank of Angola (BNA) to loosen its grip on the currency. The kwanza continued to weaken after the BNA heeded the IMF’s call for greater exchange rate volatility by abandoning its currency trading band. In recent days however, the kwanza has rebounded a touch, suggesting that the central bank has intervened to curb the currency’s decline. It now stands at AOA456/$, down from AOA378/$ on 1 October.
  • We think that the kwanza has bottomed out. For one thing, Angola’s current account surplus – at 6% of GDP in 2018 – suggests that the currency doesn’t need a large correction. And the country’s real exchange rate has dropped below its long-term average. While exact currency movements are difficult to predict, we think that the kwanza will stabilize at AOA450/$ by end-2019.
  • There are several implications for the economy. Price pressures are almost certain to rise in the coming months, as imported goods become more expensive due to the depreciation of the currency both on the official exchange and the black market. We think that inflation will rise from 16.5% y/y in September to a peak of 32% y/y in Q3 2020, prompting 450bp of interest rate hikes over 2020 and stifling growth.
  • We don’t expect a large boost to net exports. The non-oil sector is very small and won’t be able to meaningfully benefit from the improvement in competitiveness. Oil, which is priced in US dollars, makes up 92% of Angola’s exports. Oil production has been falling this year and chronic underinvestment means that the downward trend is set to continue.
  • Admittedly, the government’s budget balance will improve, as the rise in the local currency value of oil revenues more than offsets the higher cost of servicing external debt. But, given Angola’s debt burden, there will be no scope for fiscal loosening. Indeed, with almost four-fifths of total debt denominated in foreign currency, the debt-to-GDP ratio will probably surpass 100% this year. (See Chart 2.)
  • We think that the risk of a default in the near term remains low. Angola’s obligations are overwhelmingly longer term; its first Eurobond repayments are due in 2025. Most of the country’s debt is multilateral and bilateral (its biggest creditor is China), which is likely to be rolled over. Even so, the IMF will probably demand that the government tightens fiscal policy as part of the country’s financing arrangement.
  • We now think that the economy will contract for a fifth consecutive year in 2020 due to elevated inflation, policy tightening and continued weakness in the oil sector. We expect that GDP will shrink by 1.5% in 2020. This is a below-consensus view.

Chart 1: Exchange Rate (AOA per USD)

Chart 2: Public Debt (% of GDP)

Sources: Refinitiv, Capital Economics

Sources: IMF, WB, Bloomberg, Refinitiv, Capital Economics


Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, virag.forizs@capitaleconomics.com