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Angola – Increasing Oil Prices Allow For More Expansionary Fiscal Policy

Proshare

September 4, 2017 4:00 PM / BMI

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A recovery in the oil sector will facilitate a notable boost for Angola's state revenues over the coming months, allowing the government to pursue more expansionary fiscal policy. While this will offer tailwinds to economic growth, the effect will be tempered by the upcoming general election as demands on unproductive forms of recurrent expenditure remain high.

Angola's fiscal position will see a notable improvement through to 2018, as an improvement in the oil sector increases government revenues. Crude oil production has traditionally accounted for around 75.0% of total revenue, meaning the collapse in oil prices between 2014 and 2016 weighed heavily on state finances. Our Oil & Gas team expects the price of Brent to jump to an average of USD57.0 per barrel (/bbl) in 2017 and USD60.0/bbl in 2018 (from just USD45.1/bbl in 2016) and we believe revenues will increase accordingly.

The government's fiscal deficit will narrow to 3.2% of GDP in 2017, before narrowing further to 1.9% in 2018. Although higher spending and smaller deficits are show a notable recovery in the country's fiscal position, particularly as pressure on the public debt burden decelerates, the impact on growth with be limited due to a large portion of spending going towards current expenditure in the approach to the August 2017 general election.

Austerity Commitments Will Face Pressure

We believe the government's recent commitment to more austere fiscal policy will come under pressure. The collapse in oil prices forced the government to rein in recurrent and capital expenditures, cutting subsidies, freezing public sector pay and delaying project investment. With revenues now improving, the government will be eager to pursue a more expansionary fiscal policy.

This will be a boost in economic activity, particularly as projects partly financed by public investment return to schedule. Key developments, including an airport in Luanda and the Cabinda Deep Water Port, were delayed in 2016, but are expected to be completed in 2017 due to more robust government revenues.

However, not all of the increase in oil revenue will go towards productive ventures such as infrastructure investment. The government faces an election in August 2017 and while we believe the ruling People's Movement for the Liberation of Angola (MPLA) will win a large majority, administrative costs will weigh on the government's budget, particularly given the risks of an escalation in social instability around the vote.

Public frustrations, particularly within the younger population, with the country's lack of progress towards democratisation and management of the economy saw a number of anti-government protests become violent in 2015. While these have subsided, there is certainly scope for an outbreak of violence in the approach or immediate aftermath of the election.

Maintaining security amid a possible rise in social instability will be a key priority of the government over the coming months, particularly for João Lourenço, the chosen successor of long-standing President José Eduardo Dos Santos and most likely the next president of Angola. We forecast a 14.0% increase in recurrent expenditure over 2017, compared to just a 10.0% increase in capital spending, tempering the long-term impact of any fiscal stimulus on economic growth.




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