The slowdown of the Chinese economy over the past two years has had adverse effects on commodity-based economies; especially oil-based economies like Nigeria and Angola. In both countries the lower oil prices led to lower foreign exchange earnings forcing authorities to devalue their currencies. In response, both the Central Bank of Nigeria and the National Bank of Angola abandoned their exchange rate anchors, allowing their currencies to float. The Angola Kwanza (AOA) has stabilised against the USD since April 2016 after a 79.6% depreciation in January 2016. Despite the stability of the AOA the scarcity of the USD has resulted in an imbalance in Angola’s domestic foreign exchange market. Relaxing capital controls to ease foreign exchange liquidity crunch would give more credibility to the formal foreign exchange market given that the reported black market exchange rate is AOA550.0/USD compared to the official average rate of AOA165.9/USD. Malawi, Zambia and Zimbabwe are experiencing similar currency liquidity crises.
Inflation in the Angola has been on an upward trajectory since the FY2016/17, and is likely to continue as such. This trend can only be halted by an increase in oil prices, which will boost inflows of foreign currency. The devaluation of the exchange rate led to the initial price level increase, with the National Bank of Angola setting the Kwanza at around AOA169.0/USD in 2016. The likelihood of the Kwanza depreciating against the US dollar in FY2017/18 is high, albeit at a slower pace than previously experienced thanks to larger export receipts from the oil sector; this will quell short-term pressure on the value of the Kwanza. If the National Bank of Angola seeks to protect the Kwanza through market interventions, it will have to be on the back of improved foreign exchange reserves.
The Chinese economy recorded 6.7% GDP growth in FY2016/17, the lowest in over a decade. As one of the epicentres of manufacturing, and being one of the biggest importers of raw materials, the slowing of such an economy has a direct effect on emerging markets, which have leveraged the demands of Beijing with their own economies growth prospects. Beijing has undertaken a policy shift in a ploy to rebalance its economy from manufacturing and construction toward a focus on the services sector and domestic consumption; this augurs badly for extractive-based, emerging economies such as Angola.
Angola experienced swift economic growth in the past decade, but it was superficial as it was based on oil revenues and not on the improvement of the lives of Angolans. The oil sector alone does not create a sufficient amount of jobs. Prior to the civil war, the Angolan economy was known as an agricultural centre within which ancillary rubber and coffee, sisal, sugar cane, banana and cotton production took place. However, there was a decrease of government investment in the modernization of the agricultural sector and as a result, productivity decreased. With vast oil revenues it was possible for the government of Angola to be a net food importer, allowing the economy to import 90% of its food. Even though Angola’s commodities attracted foreign direct investment which triggered steady economic growth in the past decade, the economy is undergoing structural shock due to subpar crude oil prices1. Even with efforts aimed at economic recovery, there has little emphasis on stimulating the agricultural and industrial sector. The International Monetary Fund expects zero economic growth in 2017, the worst growth rate in the peacetime era.
The Road to Diversification
The Angolan economy is currently experiencing the aftermath of what economists refer to as the ‘Dutch Disease’. This occurs when there is an increase of imports because of the strengthening of the national currency which is catalysed by an inflow of foreign currency, namely the dollar, emanating from oil revenues which moves the attention of the economy away from other sectors. Thus, the main issue of contention is the misallocation of resources. As a mitigating measure, the Angolan government created the National Agency for Promotion and Export of Angola (APIEX) which is housed under the Ministry of Commerce. This agency’s primary focus is to diversify the economy in an attempt to stimulate sustainable economic activity, thereby creating a sound platform for growth and avoiding the phenomena of jobless economic growth. APIEX facilitates measures to decrease the bureaucracy of opening or doing business and easing access to loans, along with mentoring and training of entrepreneurs.
The government has proceeded with the refurbishment of Angola’s main railway lines, running to three different ports: Lobito, Namibe and Luanda. Infrastructure development will allow more efficient transportation of agricultural materials to agrarian areas, boosting production. This will have a knock-on effect of ensuring sustainable livelihoods and alleviating unemployment. The potential of agriculture is exponential – the US Department of Agriculture’s Foreign Agriculture Service estimates that Angola is using only 8% of its arable land. Oil revenues should be utilized to spur economic activity in ailing sectors and not to sponsor property rents, generating an artificial expansion of the construction sector through government spending and in effect creating ‘white elephants’.
The Angolan government has now put measures in place to support and protect local business. The government also distinguishes between foreign and local investors and stipulates that foreign investors should partner with locals when investing in key sectors of the economy. Foreign investors were incentivised by a decrease in corporate tax from 35% to 30%. FSDEA which is the country’s sovereign wealth fund, invested USD 250 million into agriculture, US 1.1 billion into infrastructure and USD 400 million into healthcare2.
The recent interest rate hike from 0.75% to 1.0% (the highest level since November 2008) by the US Federal Reserve signals a paradigm shift in its monetary policy stance in the short to medium term. Sentiment among US economists remains strong that the recent increase in interest rates may be the first of several in the next 12-18 months. As the largest economy in the world, the US economy drives global aggregate demand and numerous countries around the world have a strong propensity to demand US goods, or to export their goods to the US. Put simply, the influence of the US on the global output and related dynamics is undisputable.
As per the US Department of Trade, Angola has enjoyed a favourable trade balance with the US in recent year. In fact, bilateral trade in 2015 between the two nations totalled USD 4.0 billion. From this figure, goods exported by the US amounted to USD 1.2 billion and goods imported from Angola totalled USD 2.8 billion. Despite a sharp decline in US imports by 51% (USD 2.9 billion) from 2014 figures and as much as 67% from FY20053, Angola’s trade balance with US remains positive, for now. As Angola’s third largest trading partner, the US contributed an estimated 7.2% to the country’s total exports in FY2015 according to the IMF and this could be expanded with a focus on diversifying the economy4. Nonetheless, the scope of goods exported to the US remains quite narrow and limits Angola’s growth potential. Crude oil makes up 95% of total exports to the US at USD 2.7 billion, precious metals and stones accounting for USD 66 million, wood and related products, USD 4 million, as well as other ancillary goods. Trade dynamics between the US and Angola further highlight a deep-seated dependence of Angola on its oil exports, a situation that significantly curbs the country’s economic growth potential in the future and should promptly be addressed.
The question as to how the election of populist US President, Donald Trump, and his strong stance on protectionist policies will affect emerging economies globally and Africa, remains to be answered. Based on Trump’s initial economic policies, the assumption is that the US will gradually reduce its imports in certain industries from the rest of the world. For instance, Trump’s flawed proposal earlier this year of granting automotive makers tax incentives to move their manufacturing operations from regions such as Mexico (where the labour and other input costs are substantially lower) to the US. The key focus is creating jobs within the US, however this will have a tremendously adverse effect on the economy. The obvious effect of moving operations from regions such as Mexico to the US will be increased labour and other input costs that automotive firms will have to carry, which will ultimately be passed down to consumers, around the world – vehicles manufactured In the US are exported across various geographical jurisdictions.
The implication of similar protectionist measures in other industries and sectors for emerging economies, Africa and the SADC will be declining exports to the US. This will impact current account balances – placing a greater burden on foreign exchange reserve purchases in a bid to maintain exchange rates within acceptable bands (if necessary).
The 2017 draft budget presented at the end of 2016 by the Angolan government forecast growth for FY2016/17 at an optimistic 2.1%. This was based on an estimated oil price of USD 46 per barrel. OPEC’s decision to cut production amid growing demand should support the projected modest upsurge in oil prices and shore up consumption levels, which in turn will help reduce macroeconomic imbalances. When compared to IMF’s end-of-mission Article IV consultation team report on Angolan growth, it forecast growth to be at a rate of 1.25% for FY2017/185. The Angolan government’s forecast is optimistic but not implausible. For this rate of growth to be achievable it should be off the back of the oil and non-oil sectors. With the oil price predicted to improve, it would be favourable if the agriculture and manufacturing sectors had an upsurge in production. The status of the fiscal accounts will be influenced by the upsurge of oil prices and supported by oil revenue growth in FY2017/18; the anticipated oil prices should assist in offsetting lower contribution from income taxes and non-tax revenues, but government should seek to expand their tax base and continue with the scheduled introduction of VAT, scheduled to take place in FY2019/20. Social spending will not be cut due to the impending elections. The elections themselves could be a socio-economic destabiliser, should a peaceful democratic transition not occur. There is already a climate of discontentment due to heightening social inequality, which is exacerbated by a stagnating economy. Unfortunately it appears as though the political situation in the country will remain tense in 2017 and there may be instances of social upheaval leading up to the general elections.
1 The African Development Bank
2 Fundo Soberano de Angola (FSDEA)
3 United States Trade Representative
4-5 International Monetary Fund