Increasing Oil Output in Angola to Drive Modest Recovery


Friday, July 07, 2017 9:55 PM/BMI Research

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Angola will see a modest recovery in economic growth over the next two years due to an improving outlook in the oil sector. Very high inflation and a poor business environment will weigh on output in other sectors of the economy, denying the economy a more broad-based recovery.

Angola will see a modest acceleration in economic growth over 2017 and 2018 as improvements in the dominant oil sector fuel a short-term recovery.

We forecast real GDP growth to increase from just 0.3% in 2016 to 2.0% in 2017 and 4.1% in 2018, although this remains well below the annual average of 6.8% recorded between 2006 and 2016.

Even after the collapse in oil prices, crude production dominates the economy, comprising 95.2% of total exports and 70.2% of government revenue in 2016, meaning that movements in the international oil market will continue to dictate Angola's economic outlook.

Despite the tailwinds offered by the oil sector, high inflation, a poor business environment and uncertainty about the future of the central bank's exchange rate regime will ensure that investment remains subdued and that any economic recovery is ultimately short-lived.

Government Spending To Bolster Output In 2017

A recovery in global oil prices will offer a substantial boost to government revenues in 2017, which we believe will contribute to an increase in economic growth.

As we expect the value of Brent crude to average USD57.0 per barrel (/bbl) in 2017 and USD60.0/bbl in 2018 – having averaged only USD45.1/bbl in 2016 – we anticipate that government revenue will grow by 29.7% and 21.8% respectively, after posting several years of negative or minimal growth.

Government spending accounts for around a quarter of GDP in Angola, and public sector investment is essential for a large number of development and construction projects.

A number of these projects are set for completion in 2017, having been delayed in 2016 due to the government's constrained fiscal position.

With increasing revenues, we believe construction on the new Luanda Airport and the Cabinda Deep Water Port will return to schedule.

Crucially, increasing oil prices will strengthen the kwanza against the US dollar on the parallel exchange rate, which most of the economy relies on to access foreign currency.

The parallel rate has strengthened to around AOA380.0/USD, up from AOA600.0/USD at the worst of the oil crisis in 2016, and we expect it to strengthen further on the back of increasing oil prices (see 'Kwanza Stability To Continue Through 2017', April 25).

The majority of goods and services in Angola are purchased with dollars bought on the parallel market, meaning that the appreciation of the kwanza in 2017 and 2018 will ensure that imports become cheaper.

This will enable greater inputs to the non-oil economy and support an uptick in output, albeit a limited one.

Growing Oil Output To Carry Stronger Recovery in 2018

As the ultra-deep water Kaombo project comes online in 2018, oil production will see a significant increase, providing a strong tailwind to growth.

After a 3.9% contraction in oil production over 2016, we forecast a minor expansion of 0.2% in 2017, followed by a much more robust 6.6% in 2018 due to the maturity of the Kaombo project.

Alongside increasing production – and despite falling market share in the US – demand for Angolan oil is picking up in China (see 'Continued OPEC Compliance Positive For WAF Crudes', March 2), further encouraging a boost in exports.

The improving outlook for the oil sector will not be enough to return economic growth to levels recorded prior to the collapse in oil prices. Furthermore, maturing fields and a lack of investment ultimately render it unsustainable.

Unhealthy Business Environment Will Weigh On Investment

Despite an improvement in headline figures, a poor business environment will yield few opportunities for growth in the non-oil sector, undermining prospects for a more sustainable recovery.

Our Operational Risk team gives Angola a very low score of 31.1 out of 100, meaning that it is in the bottom 18 out of 53 Sub-Saharan African countries.

Compounding the difficulties presented by an unattractive operating environment is the potential for runaway inflation following another downturn in oil prices or devaluation of the kwanza peg.

In this uncertain environment, businesses have little incentive to invest in increasing production, and it is unlikely that the 4.0% real growth of 2018 will be sustained over a longer time-horizon.

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