Monday, April 04, 2018 9:10 AM /BMI Research
BMI View: Angola's balance of payments dynamics look poised to improve notably in 2018 and 2019, as rising oil prices and production narrow the current account deficit and promises of reform boost foreign investment. That said, with the successful implementation of President João Lourenço's ambitious reform agenda still uncertain, the long-term risks to the country's external position remain significant.
Pressure on Angola's external position will ease in the coming quarters, as exports and inward investment increase. Rising oil prices and production will narrow Angola's current account deficit. At the same time, we anticipate at least a modest uptick in financial account inflows as President João Lourenço's reform agenda moves forward, with a devaluation of the kwanza alongside promises to tackle corruption and cut red tape for businesses. However, while we see some of the most immediate pressure on Angola's external position easing, the risks to the country's longer-term balance of payments dynamics remain in place. In particular, systemic challenges to the oil sector stemming from prevailing debt and management issues for the state oil company Sonangol could offer headwinds to investment and exports. Meanwhile, the final form of the country's exchange rate policy remains uncertain – with some government statements suggesting an eventual move toward a free float while others indicate that there will be limited further adjustment. Should the Lourenço government fail to adopt a more flexible exchange rate regime; the highly oil-dependent economy will remain more vulnerable to allowing for a build-up of macroeconomic imbalances.
Oil Exports Will Narrow the Current Account Deficit
We expect the current account deficit to narrow, albeit slowly, from an estimated 2.6% of GDP in 2017 to 2.0% in 2018 and 1.5% in 2019, largely on the back of improving goods trade dynamics. Oil production and prices will boost export growth, offering crucial tailwinds to Angola's goods trade position. Oil makes up around 96.0% of Angola's exports, and the fall in prices seen in recent years shifted the country's current account from a surplus – averaging 5.4% of GDP from 2000 to 2013 – into a deficit. However, in the coming quarters, export growth will benefit from higher oil prices. Our Oil & Gas team recently revised its average Brent crude price forecast for 2018 to USD65.0/bbl, up from USD57.0/bbl previously (see 'Brent: Q1 Weakness, H2 Strength', January 10). We also expect an increase in output as Total's Kaombo oilfield comes online in 2018. This will see growth from 1,654,500 barrels per day (b/d) in 2017 to 1,786,000b/d in 2018 and 1,808,700b/d in 2019.
This short-term improvement in goods trade dynamics will be somewhat tempered by the effects of increased access to hard currency inflows, boosting imports. Generally, currency devaluation would raise import costs, thereby strengthening a country's trade balance.
However, in Angola's case, many imports are already bought at the much weaker parallel exchange rate, at AOA430.0/USD at the time of writing, suggesting that the devaluation of the kwanza will not undermine import demand to the same extent that it ordinarily would. Indeed, with an increasing availability of hard currency inflows likely to see the reopening of some temporarily shuttered businesses – which saw their operations halted due to a lack of hard currency essential for purchasing supplies and inputs – the country could actually see a boost in import growth in the near term. That said, even with import growth likely to be fairly buoyant, it will still be outpaced by export growth.
Renewed Investment Inflows Will Bolster the Financial Account
Alongside the gradual current account deficit narrowing, we also anticipate modestly increased financial account surpluses in 2018 and 2019 as the promise of economic reforms stimulates greater foreign investment. In recent years, the crash in oil prices weighed on investor sentiment, ensuring that the financial account was unable to fund Angola's rising current account deficits. However, since Lourenço became president in September 2017, his administration has taken a number of steps toward more significant reforms. These include abandoning the hard dollar peg, commitments to economic diversification and tackling political graft.
While success in fully implementing these policies remains uncertain, we expect the promises and even gradual progress will be seen as positive by investors, offering a boost to capital inflows. Indeed, recent progress has seen Brazil agreeing to grant new loans and credit lines to fund infrastructure projects, and a consortium of Chinese firms planning to fund water and agro-industrial investments in Angola's Huíla province over coming months.
Sustainable Progress Predicated on Reforms
Our one-to-two year outlook is bright, but longer-term improvements in Angola's external position are heavily dependent on successful reform implementation to address long-standing changes to the business environment. Indeed, at present, Angola's score in our Operational Risk Index is 30.5, below the Sub-Saharan Africa average of 34.8.
Operational challenges have undercut investment in the key oil sector and could weigh on long-term export growth if not addressed. For example, our Oil & Gas team expects a sharp decline in crude production after 2019, with Total's Kaombo oilfield currently the final project scheduled in the industry. This stems from Sonangol being heavily indebted, and the company's lack of transparency in its interactions with international oil companies, which have deterred investment.
We increasingly see upside risk to this forecast, with government promises to crack down on corruption in the sector, resolve payment issues and make it easier to invest through the creation of a single private investment agency. However, for now we maintain our forecast for oil production to fall off, presenting long-term risks to the country's balance of payments dynamics (see 'Quick View: Addressing Debt To Rekindle IOC Interest', January 18).
Similarly, there remains an ongoing question over what Angola's exchange rate policy will look like. While the government has allowed for a sharp devaluation since the start of the year, there have been mixed messages as to the longer-term trajectory. Should the government once again adopt a hard peg or allow for a crawling peg but with too tight a trading band, this could allow the imbalances to begin to build in the economy, and potentially act as a deterrent to investors.