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Angola: Policy Continuity under Lourenço Bodes Poorly For Economic Reform

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Monday, November 13, 2017 3:55 PM / BMI Research

 

BMI View: The election of João Lourenço in the August general election will see the country's current economic status quo remain firmly in place over the coming quarters. This means the reforms needed to attract foreign investment will see little progress, weighing on prospects for real GDP growth beyond that afforded by an increase in oil production in 2018.

 

Prospects for much-needed economic reform in Angola remain slim following the election of João Lourenço in the August general election, weighing on the country's chances of securing a more sustainable recovery in economic growth. Despite campaigning on promises to diversify the economy away from its dependence on hydrocarbons, we see little scope for the newly elected president to move away from the country's status quo on economic policy.

 

This means we do not anticipate any significant uptick in investment that could spur more robust real GDP growth. While an increase in oil production will see growth accelerate to 4.0% in 2018 from a projected 2.0% in 2017, we believe this is ultimately unsustainable.

 

Kaombo Field Offers Boost To Growth In 2018…

After beginning a tentative recovery in 2017, we believe a 7.0% increase in oil production in 2018 will fuel an uptick in economic activity. Crude output has consistently posted weak or negative growth over the past five years, suffering from a lack of investment into the sector as the impact of collapsing oil prices has exacerbated the operational risks of working with Angola's opaque national oil company Sonangol.

 

However, our Oil & Gas team are confident that Total's 230,000 barrel per day Kaombo field will come online, offering a fleeting return to more robust levels of production growth in the country's biggest industry.

 

With oil having historically accounted for around 70.0% of government revenue and 95.0% of exports, the increase in crude output we anticipate in 2018 will provide the main tailwinds to economic growth in 2018. The collapse in crude oil prices since H214 has led to a dearth of hard currency, resulting in substantial weakness in both the official and parallel exchange rate.

 

In 2017, a slight recovery in oil prices has seen the parallel rate strengthen from around AOA550/USD in 2016, to AOA390/USD as of August 2017. Although we maintain a muted outlook on crude prices over the coming quarters, forecasting Brent to increase to just USD57.0/bbl in 2018 from USD54.0/ bbl, the increase in output will sustain flows of foreign revenue across 2018.

 

We maintain our core view that the central bank will look to gradually devalue the official exchange rate over 2018, these revenues will offer some support to the parallel exchange rate which most businesses and households rely on to access hard currency. We believe more stable import prices will support production in Angola's non-oil economy, which relies heavily on goods and services from abroad in supply chains.

 

…But Outlook Subdued Thereafter

Beyond 2018, our Oil & Gas team forecast Angola's oil production will return to contraction, as lower-for-longer crude prices and an uncooperative national oil company deter potential investment, weighing on prospects for economic growth, which we believe will decline to 2.4% in 2019. The election of João Lourenço in August only re-affirms this view.

 

Considered a close ally of Angola's longstanding former president, José Eduardo dos Santos, we do not expect Lourenço will look to mount any significant challenge to the petro-state model developed by his predecessor. Although officially stepping down from office, the former president will retain a large degree of influence by remaining leader of the ruling party, as well as through his children, who hold positions as head of the national oil company and chairman of Angola's USD5bn sovereign wealth fund.

 

Given the limited scope for any meaningful deviation from Angola's policy status quo, we do not expect the new administration will look to make the necessary reforms to encourage foreign investment. Perhaps most notably, this means Sonangol will remain an opaque and inefficient institution.

 

A number of international oil companies have reported delayed payments when working with Sonangol, adding another deterrent to investing in Angola's oil industry, alongside those already posed by high production costs and low crude prices. Moreover, ruling elites' stake in Angola's key assets will also continue unchallenged under a Lourenço administration.

 

In addition to her position in the state oil company, Dos Santos' daughter Isabel profits from large positions in a number of Angolan companies in the banking and telecoms sector, making her the richest woman in Sub-Saharan Africa. The family's influence and control over the Angolan economy likely played a large role in her success, which has often come at the expense of opening up investment to foreign companies.

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