Legacy of Oil Collapse Offers New Headwinds to Growth in Angola


Monday, October 24, 2016/ 3.07pm /BMI Research

BMI View: Angola will continue to struggle with slow economic growth over the next two years, as high inflation replaces low oil revenues as the economy's main headwind. While macroeconomic fundamentals will begin to improve from H216 as prices begin to stabilise and investment returns to the oil sector, we highlight the potentially destabilising effect of elevated political risk in the approach to 2017 presidential election and President José Eduardo Dos Santos' planned succession in 2018.

The Angolan economy will continue to suffer from slow growth over the next 12-18 months as high inflation and unattractive borrowing costs weigh on production incentives.

The highly oil-dependent economy is slowly moving away from crisis point, reached in Q116 when Brent crude plummeted to its lowest price since 2003 at less than USD30.0 per barrel (/bbl), prompting large devaluations to the local currency.

Even so, we believe any subsequent recovery will be slow, as high inflation and weak levels of investment see growth fail to reach its historic trend. We expect real GDP to grow by 2.1% in 2016, before climbing slightly to 2.4% in 2017.

First Oil, Now Inflation
Having begun their gentle recovery from Q1 lows, oil prices will come to pose less of a headwind to growth over the coming quarters than they have done over 2016. BMI's Oil & Gas team expects Brent crude to average USD57.0/bbl over 2017, and while a far cry from the days of fetching in excess of USD100/bbl prior to the collapse in prices, this recovery marks a notable improvement from the USD45.5/bbl projected over 2016.

As oil revenues gradually pick up, pressures on the country's duel deficits will gradually ease, offering relief for those businesses dependent on imports or government spending. However, we highlight that most of the economic benefit of higher oil prices will be lost to the effects of higher inflation.

The rate of y-o-y inflation rose to 35.3% in July, the highest since 2004, following the central bank's series of large devaluations of the kwanza against the US dollar. The Banco Nacional de Angola (BNA) has allowed the exchange rate to fall by 39.1% since the beginning of 2015 in response to slowing demand for the local currency after the collapse in oil prices.

Although this policy has offered some relief to the country's external accounts, it has naturally increased the cost of key imports, including refined fuels and manufactured goods.

We now believe the central bank has moved away from its policy of making large devaluations to the kwanza (see 'AOA: Beyond The Worst Of Central Bank Devaluations', September 5), but the lasting impact on prices will continue to affect consumption over the coming quarters regardless.

Price growth is expected to remain high over 2017, averaging 21.8% across the year according to our forecasts, and without a similar increase in wages, household demand will continue to decelerate. Given slow economic growth and the government's efforts to contain recurrent expenditure, we see little scope for real wage growth over the next 18 months, meaning businesses have little incentive to increase production over our short-term outlook.

The impact of this unattractive climate will be exacerbated by the high cost of borrowing that has followed from the BNA's hiking cycle. The central bank is expected to increase rates by a further 100 basis points (bps) before year end, having already implemented 500bps since January in a bid to temper rapid inflation.

We do not forecast the BNA to begin cutting until 2018, meaning borrowing costs for businesses and consumers will remain high over our short-term outlook and adding another headwind to a stronger recovery in real GDP growth.

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