Angola FX Move Signals Policy Shift, but Lacks Clarity


Friday, January 12, 2018 /04:51PM / Fitch Ratings 

Recent decisions by the Angolan authorities, including the shift to a more flexible exchange rate mechanism, signal an accelerated and potentially more effective economic policy adjustment, Fitch Ratings says. However, the lack of clarity over how some of the measures will be implemented may limit their effectiveness, and the adjustment carries execution risk.

At the start of January, Banco Nacional de Angola (BNA) announced that it would move from a de facto currency peg against the US dollar to a managed exchange rate band system. On 9 January, the new system went into effect following a foreign currency auction, resulting in an 11% depreciation of the kwanza against the US dollar, to AOA185 per USD, from AOA165.

Moving away from the currency peg is the latest measure aimed at ameliorating the fiscal and external imbalances caused by lower oil prices since President Joao Lourenco took office in September last year, and follows cabinet approval of a Macroeconomic Stabilization Programme (PEM) in December. The wide spread between the parallel and official market rates highlighted how the peg, along with the numerous administrative measures and exchange controls, constrained foreign currency liquidity. Foreign currency shortages have dampened Angola's growth prospects.

However, it is not yet clear how the authorities will follow up this week's initial exchange rate adjustment and how new policy will be implemented over time. The BNA has not specified how wide the kwanza's trading band will be, whether it will be adjusted, and whether dollar sales will be targeted to specific parts of the economy. The depreciation is likely to further increase inflationary pressures in the short term, but ultimately bringing inflation within the BNA's target of 7%-9% will depend on establishing the credibility of the new mechanism.

Together with recent higher oil prices, the depreciation is likely to reduce FX supply shortages and improve growth prospects, but further depreciation would be needed to meet the economy's need for foreign currency, close the gap with the parallel market, and help anchor inflation expectations.

As we noted when we affirmed Angola's 'B'/Negative sovereign rating last September, persistent inflation pressure and currency shortages meant that the exchange rate was unlikely to be sustainable. Our baseline scenario envisaged that the BNA would take action sometime in 1H18 and that the exchange rate would fall to AOA200 per USD, compared with a black market rate of around AOA430. We now believe that the rate is likely to depreciate beyond AOA200 by the end of the first quarter but is unlikely to eliminate the gap with the parallel market.

Kwanza depreciation beyond our earlier expectation will also worsen Angola's government debt ratios, as foreign currency-denominated debt accounts for 40% of total public debt (51% of GDP). The government said earlier this month that in order to reduce its debt service burden it is considering buying back short-term debt and refinancing it with debt with a longer maturity.

The Negative Outlook on Angola's sovereign rating reflects subdued growth prospects stemming from tight foreign currency liquidity and high inflation. An effective policy adjustment, resulting in reduced external and macroeconomic vulnerabilities, could lead to a stabilisation of the rating.

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