New York, March 31, 2020 — Moody’s Investors Service (“Moody’s”) has today placed Angola Government’s B3 long-term issuer ratings and senior unsecured rating and its (P)B3 senior unsecured MTN rating under review for downgrade. The short-term issuer rating is affirmed at Not Prime (NP).
The decision to place Angola’s ratings on review for downgrade is prompted by the magnitude of the shock from the sharp drop in oil prices and an acute tightening in global financing conditions on Angola’s already weak public finances and external position, and elevated government gross borrowing requirements. Weak governance, notwithstanding a number of reforms implemented in recent years, undermines the government’s capacity to respond to this shock and is a driver of this rating action.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. For Angola, the shock mainly transmits through a further weakening in the currency that raises the debt burden and debt service; a significant drop in revenues that is likely to prevent the government from pursuing its debt management strategy of paying down short-term debt and reducing rollover risk; and pressure on an already fragile balance of payments.
The review period will allow Moody’s to assess the overall policy response to the shock and the capacity of the authorities to manage: 1) the additional stress on public finances and the government’s balance sheet driven by the significant loss of oil-related revenues and a potential further depreciation of the currency; 2) the severity of the increase in external vulnerability given the expected sharp drop in oil export receipts putting pressure on foreign currency reserves; 3) the rising risks associated to large domestic and external debt service payments in a currently dislocated credit market.
Concurrently, all Angola’s country risk ceilings remain unchanged: Foreign Currency bond ceiling at B2, Foreign Currency deposit ceiling at Caa1, and Local Currency bond and deposit ceilings at Ba3.
RATIONALE FOR INITIATING A REVIEW FOR DOWNGRADE ON ANGOLA’S B3 RATINGS
As a result of the oil price fall in the face of depressed oil demand and a slow supply response, Moody’s now assumes that oil prices will average US$40-45 per barrel in 2020, and US$50-55 by 2021, around $20 and $10 below previous expectations in each year.
As a large oil exporter, Angola heavily relies on the oil sector as a source of government revenue (62% of total revenue in 2019) and exports (96%). Such a fall in oil prices heightens the pressure on Angola’s already weak fiscal and external metrics.
ANGOLA’S WEAK CREDIT METRICS ARE LIKELY TO DETERIORATE FURTHER, TO AN EXTENT PARTLY DETERMINED BY THE GOVERNMENT’S CAPACITY TO RESPOND
Angola’s credit profile is weakened by the oil price shock which negatively affects the government’s balance sheet and the country’s external position, through a significant loss of government revenue and export proceeds respectively. Also, the Covid-19 related spending to prevent the spread of the virus throughout the country is expected to further aggravate the fiscal deficit.
Already, Angola’s fiscal and external metrics are very weak. General government debt increased to an estimated 100.5% of GDP in 2019, from 81% in 2018, and debt-to-revenue was around 500% from 371% respectively. Similarly interest payment-to-revenue exceeded 25% in 2019 against 20.7% a year before. On the external side, vulnerability relates to low net foreign exchange reserves at $11.8 billion at the end of 2019, covering around 6 months of imports of goods and services and external debt amounting to about twice the level of current account receipts this year, according to Moody’s estimates.
Angola is unlikely to be able to significantly increase its oil production that has been in a secular decline for the last 4 years to offset the price drop. Moody’s estimates that a $10/barrel decrease in oil price leads to a $2$2.5 billion loss in government revenue (around 3% of 2019 GDP) and a $5 billion fall in exports receipts.
The 2020 budget which was designed to post a small surplus (0.8% of GDP), was passed with a $55/barrel oil price assumption. It would have contributed to a slightly positive balance of payments after International Financial Institutions’ (IFIs) disbursements of concessional loans. As a result of the price fall, Angola’s fiscal and external accounts will be in deficit, raising pressure on the exchange rate and foreign exchange reserves and incentivizing economic transactions in the parallel exchange rate market.
A budget no longer likely to be in surplus and further pressure on the currency are likely to raise the already very high debt burden. In turn, the government’s borrowing requirements are likely to increase again in 2020 having fallen to 15% of GDP in 2019 (including clearance of arrears to goods and services suppliers), at a time when international and possibly domestic financing comes at very high costs. Given the current dislocation in credit markets, it will be increasingly challenging for the government to secure financing at affordable costs. Previous objectives, including an ongoing debt management strategy aimed at repaying short-term debt and lengthening its debt maturity and the maintenance of net international reserves above $10 billion have also become far less achievable.
The impact of the oil price shock will be attenuated by the fact that the government posted a small deficit on the budget estimated at 0.3% of GDP and a current account surplus estimated at 4% of GDP in 2019. This is due to the implementation of a vast array of reforms, and strong consolidation efforts under the $3.7 billion and 3-year IMF program, approved in December 2018. But during this transition period, where the authorities, with the support of the IFIs, are trying to spur the private sector, restore macroeconomic stability with a more flexible exchange rate and sounder public finances, having cleared large amount of arrears and improved the debt structure, Angola’s credit metrics remain highly vulnerable to shocks.
The review period, which may extend beyond the usual three-month horizon, will allow Moody’s to assess the credibility and sustainability of the government’s plans and its ability to mitigate the impact of significantly lower oil prices on Angola’s credit standing.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material for Angola’s rating.
As an oil producer and exporter, Angola’s environmental risks derive from carbon transition. Angola’s credit profile would face downward pressure in a scenario of rapid global transition to lower reliance on hydrocarbons that would depress global hydrocarbon demand and prices. However, in light of the measures against climate change taken so far, this is not Moody’s baseline.
Social considerations influence Angola’s credit profile, given very low wealth levels and high levels of poverty. GDP per capita, at $6,851 on a PPP basis as of 2018, remains low. Additionally, the UN’s Human Development Index for 2018 ranked Angola 147 out of 189 countries. Social indicators have improved from a very low level since the end of the civil war in 2002, but income inequalities remain very high despite the oil wealth of the country. Since the oil shock and the election of President Lourenco, the authorities have been implementing an ambitious reform agenda despite the political cost and inherent execution risks. Risk of social unrest remains, especially stemming from jobless young people.
Governance considerations are material to Angola’s credit profile and are a driver of this action. Data transparency and availability are areas of improvements, as well as institutional capacities that remain limited. For example, Angolan banks lost their dollar-correspondent banking relationships in 2016 because of their failure to meet international standards relating to shareholder structures and money laundering, resulting in increased transaction costs and delays. There are also significant weaknesses related to the management of public finance, illustrated by the level of arrears accumulated over the last few years.
FACTORS THAT WOULD LEAD TO A DOWNGRADE OF THE RATING
Moody’s would downgrade the rating if the review were to conclude that Angola’s government was unlikely to be able to alleviate the damage to its balance sheet and the subsequent rise in liquidity risk resulting in a credit profile no longer consistent with a B3 rating. Increasing risks of a balance-of-payment crisis would also likely lead to a downgrade.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
Moody’s would confirm the rating if the review were to conclude that a credible fiscal and economic policy response from the government will efficiently manage the risks arising from the upward trend in government debt, government liquidity risks, and increased pressure on the exchange rate, leaving Angola’s credit profile consistent with a B3 rating.
GDP per capita (PPP basis, US$): 6,851 (2018 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -1.2% (2018 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 18.6% (2018 Actual)
Gen. Gov. Financial Balance/GDP: 2.2% (2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 7% (2018 Actual) (also known as External Balance)
External debt/GDP: 44.4% (2018 Actual)
Economic resiliency: b2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 26 March 2020, a rating committee was called to discuss the rating of Angola, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer’s susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The local market analyst for this rating is Aurelien Mali, +971 (423) 795-37.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx? docid=PBC_79004.
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