Country risk: Angolan investors ignore risks

By:
Jeremy Weltman
Published on:

Investors snapped up Angola’s $1.5 billion Eurobond debut this month, and yet the sovereign borrower’s country-risk score has plunged, putting it among the world’s worst default risks.

José Eduardo dos Santos-R-600

The government, under José Eduardo dos Santos's leadership, is using repressive means to clamp down on dissent


Angola’s score has sunk to 35 points out of 100, having racked up external debt it might have difficulty servicing thanks to the demise of the oil boom and the country’s worsening macro-economic fundamentals.

That has seen the borrower slide a remarkable nine places in the global rankings since June, below Côte d’Ivoire and Tanzania, to 107th out of 186 countries.

 

Now in tier five, the lowest of Euromoney’s risk categories, Angola’s risk score is equivalent to a B- credit rating at best, contrasting with the B+ assigned by Fitch and Standard & Poor’s, and quite a distance from the Ba2 Moody’s deems to be adequately assessed.

Oil shock shatters economy

GDP growth is slowing to 3.5% this year from 4.8% in 2014, says the IMF’s latest World Economic Outlook, and the current-account deficit is widening from 1.5% of GDP to 7.6%.

All five of Euromoney’s economic risk indicators have been downgraded recently, notably the economic/GNP outlook highlighting the urgency of diversifying from oil extraction as the main source of exports earnings (95%) and budget revenue (75%).

The government has managed to bring the budget deficit down from 6.5% of GDP last year to 3.5%, although finance minister Armando Manuel has factored in a rise to 5.5% in 2016.

That could turn out to be larger if the revenue stream fails to close the gap to public spending targets, bearing in mind the direct effect on revenue from Sonangol, the state-owned petroleum company, and the indirect effect as the share of revenue from private oil companies contracted to Sonangol is reduced when oil prices fall.

That calls for drastic action, not just making minor fiscal efficiencies but tackling the civil service wage bill, for instance.

Devaluing the currency, the kwanza, twice this year to avoid depleting FX reserves has sent prices soaring, worsening the sovereign’s medium-term debt sustainability metrics.

However, the official exchange rate of around AOA135 per dollar still deviates from the unofficial rate of AOA200 per dollar, and the financial system is failing.

One survey expert, speaking in confidence to Euromoney, mentioned there are no US dollar reserves to speak of within the banking system, that savings accounts are being transferred to the eurozone – principally Portugal – via indirect channels, and there is little access to credit.

The same source went on to say that most oil and gas projects are on hold and the lack of dollar reserves is constraining financing for other projects, thwarting attempts to diversify the economy, amid ongoing problems approving Angola’s liquefied natural gas plant.

Accentuating political risks

With less oil money available to spend, and inflation and unemployment aggravating social tensions, the government is using repressive means to clamp down on dissent.

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This comes at a time when there are question marks over the health of president José Eduardo dos Santos and the lack of a succession plan for a leader who has retained a firm grip on power for 36 years.

Most of the political risk-indicator scores have been lowered by Euromoney’s experts, especially the risk of government non-payment/non-repatriation that is linked to the drop in oil revenue.

Structural risk-indicator scores are similarly lower, indicating infrastructure will suffer from a lack of funding. Transport and electricity infrastructure are already poorly maintained, and access to the port of Luanda is difficult.

For now, investors in Angola will be hoping for oil prices to improve.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.