Impact of External Factors on Angola

PESA Editorial - Angola - 1Q2017/18

Inflation is expected to ease towards Angola’s target of 15.8% after closing FY2016/17 at over 40%1. Angola’s government expects economic growth to expand in FY2017/18 due to the slowing of inflationary pressure, the economy is expected to grow at a rate of 3.5%2. The devaluation of the kwanza will not happen anytime soon, as it would put a strain on household incomes because it would result in the increase of the cost of imports. The Ministry of Finance will have to charter these rough waters until the economy does not have such a large import bill, the areas of focus should be diversification of the economy; sources of state financing; controlling inflation and stimulating exports. Per capita income has grown from USD 350 in FY2000/01 to USD 4 100 in FY2016/173, but the economy remains cripplingly reliant on oil exports.

 

With OPEC’s pronouncement to decrease production amidst increasing demand, to support the projected modest upsurge in oil prices, is envisioned to shore up consumption levels, which in turn will help reduce macroeconomic imbalances. Though Angola has abided by OPEC’s decree, reservations arose in March regarding to the deal’s efficacy, due to accounts of rising global oil inventories. This has instigated the price drop in Angola’s Cabinda oil. For the Angolan economy to stay afloat, it needs an oil price of USD 85 per barrel to balance its budget. Prices have been sub-par for the past three years, even with OPEC’s intervention, Brent crude is expected to average USD 50 per barrel in FY2017/18.

 

Angola’s is countering this economic downturn by diversifying the economy and creating a comprehensive reform program, including the incremental riddance of most fuel subsidies. The government is expected to further ratify policy reforms promulgated to ensure doing business is easier, with less bottlenecks. Included in these reforms is the improvement of infrastructure, restructuring the administrative method of listing and operating businesses, and strengthening the judicial system and financial sector. The government further dropped corporate income tax rates from 35% to 30%4.

 

With the downturn in global oil prices it became difficult for Angola to service its debt from China. China has positioned itself as a key investor in Angola’s development, on the basis of the bilateral China-Angola relationship, dubbed the “Angola model” of economic development. In this model China extended an oil backed credit line, in order for Angola to stimulate the economic growth. Since the loans were oil backed, a sizable portion of Angola’s oil production now goes toward servicing the debt. China’s presence in Angola is multi-pronged, in the form of loans, investment ventures and trade agreements, all backed by oil concessions. Plagued by a downturn in crude prices, Africa’s second largest oil exporter has been exhausting its foreign exchange reserves to ensure to fund imports and government debt. Oil output represents 40% of Angolan GDP and more than 95% of its foreign exchange revenue.

 

Angola needs to maximise proceeds from the oil industry. The production of Angolan oil is in a healthy state, with the government investing in new oil projects. The government is principally interested in tapping into the estimated 4 billion barrels of marginal reserves, and in consequence, has passed legislation to stimulate exploration and development. So far, there has been no interest shown from international oil prospectors. New prospection will only take pace after the oil price recovers.

 

Oil is sufficient to boost the Angolan economy in the interim, even though for the longer-term, there must be a continued, concerted effort toward diversification of the economy and specifically in value added agriculture.


1 Banco Nacional De Angola
2 African Development Bank
3 Namibia Economist
4-5 Southern African Development Community


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