Moody’s Investors Service has today downgraded the long-term issuer and senior unsecured ratings of the Government of Angola to B2 from B1 and changed the outlook to stable from negative. It also affirmed Angola’s short-term issuer ratings at Not Prime.
The key drivers supporting the downgrade are:
1) Lower economic strength in light of the diminished medium-term growth outlook, constrained by foreign currency shortages, high inflation, lower public sector spending and a weak banking system. Angola still faces the difficult challenge of diversification away from its heavy reliance on oil
2) Fiscal strength has materially decreased with indebtedness nearly doubling in the past four years, while liquidity risk remains elevated due to significant gross borrowing requirements. The debt-to-GDP ratio remains vulnerable to further currency devaluation and potential crystallization of contingent liabilities from the public sector
3) Persisting external pressures in the form of low dollar liquidity and declining net international reserves, despite higher oil prices and a decreasing current account deficit
The stable outlook reflects the broadly balanced credit pressures at the B2 rating level, with a gradual recovery supported by the oil sector, albeit still well below the average growth rate recorded in the preceding decade. It also reflects the current account’s continued improvement, and the government’s large fiscal adjustment in the past two years aimed at reducing its fiscal imbalance.
Concurrently, Moody’s has lowered Angola’s foreign-currency bond ceiling to B1 from Ba3, the foreign currency deposit ceiling to B3 from B2, and the local currency bond and deposit ceilings to Ba2 from Ba1. The short-term foreign-currency bond ceiling remains unchanged at Not Prime.
RATIONALE FOR THE DOWNGRADE TO B2
LOWER GROWTH PROSPECTS UNDERMINING ECONOMIC STRENGTH
Moody’s anticipates a lower growth outlook for Angola, whose real growth forecasts at 2% on average for 2017 and 2018 are much weaker than the average growth of 4.5% between 2010-2015. As a result of the lower medium-term growth prospects, a weakening banking system, high inflation and rising competitiveness issues, Moody’s assesses Angola’s Economic Strength lower than under the previous baseline scenario, more in line with B2 rated peers.
Although Angola emerged from a recession in 2016 (when GDP contracted by 0.7%), the country’s economy continues to be negatively impacted by several factors, including foreign currency liquidity shortages and high inflation that erodes purchasing power. In particular, the improved liquidity is not yet sufficient to satisfy the backlog of demand for dollars in Angola, constraining imports and the real economy. In addition, high inflation (at 25% year-on-year in August 2017) continues to weaken private consumption. Despite its downward trend from 42% in December 2016, inflation levels remain vulnerable to further currency devaluations.
In addition, economic activity will be constrained by lower levels of government spending than before and a weak banking system. While the economy remains heavily reliant on the public sector as a whole, Moody’s expects government spending to remain at around 25% of GDP in the upcoming years, which is significantly lower than the 39% of GDP average during 2010-2015. This is mostly due to much lower oil prices after the oil shock (expected to remain around $53 per barrel in the next two years), as oil proceeds still account for more than 50% of government revenues. Moreover, the banking system is weaker and less able to support economic growth, due to the loss of correspondent USD bank relationships and a surge of the gross non-performing loan ratio to 27% at the end of June 2017.
Finally, important structural challenges remain over the long-term. These include the economy’s lack of diversification away from the non-oil sector and high operating costs as a result of bureaucracy and a lack of competition, as well as low productivity due to relatively weak infrastructure and poor human capital development.
LIQUIDITY RISK REMAINS ELEVATED AND HIGHER GOVERNMENT DEBT REMAINS VULNERABLE TO FURTHER CURRENCY DEVALUATIONS AND POTENTIAL CRYSTALLIZATION OF CONTINGENT LIABILITIES
The government’s elevated gross borrowing requirements estimated at around 17% of GDP per year between 2017 and 2019 are mainly driven by sizeable maturing government bonds — in particular, local currency USD-indexed bonds — on top of fiscal deficits averaging around 3.8% of GDP. The government’s strategy continues to be to lengthen the debt maturity and increase the share of pure local currency-denominated debt. In order to prevent an increase in interest payments over the medium-term, it plans to issue future local currency debt below par if needed. While such a strategy lowers gross borrowing requirements in the medium-term, it will fuel already high inflationary pressures and increase the government’s debt stock. In addition, the government intends to issue a Eurobond worth up to $2 billion (around 2% of GDP) to replace maturing short-term local currency instruments and contribute to fund infrastructure projects.
After an almost twofold increase in the debt burden since 2014 at 28% of GDP, Moody’s expects the government debt-to-GDP ratio to peak at around 54% of GDP by 2018, two years later than previously expected. In addition, the government debt stock and service remain vulnerable to stronger devaluations than Moody’s baseline scenario. Moody’s expects a devaluation of the kwanza against the US dollar from AOA165 per USD to around AOA200 USD by end 2018. The impact of the kwanza’s further devaluation against the dollar would be significant because 78% of the government debt was denominated in or linked to foreign currencies (primarily the US dollar) at the end of 2016. In addition, general government interest payment-to-revenues will likely remain at around 12% over the upcoming years, substantially higher than the 2% average during 2010-2014.
Furthermore, the higher debt stock is also vulnerable to potential crystallization of contingent liabilities arising from the public sector, which includes the recapitalization of weak public sector banks or state-owned enterprises. For instance, the magnitude of government financial support for the public sector bank currently being restructured Banco de Poupança e Crédito (BPC) is estimated at around 1.5% of GDP. Despite the risks to the debt burden, Moody’s baseline scenario is that the debt-to-GDP will remain below 60%, mitigated by the strong nominal GDP growth due to high inflation and the existence of government financial buffers (around 14% of GDP). Nevertheless, at that starting point, Angola’s B2 rating better captures the above mentioned risks to the evolution of debt metrics.
PERSISTING EXTERNAL PRESSURES IN THE FORM OF LOW DOLLAR LIQUIDITY AND DECLINING NET INTERNATIONAL RESERVES, DESPITE HIGHER OIL PRICES
Despite higher oil prices and improved liquidity relative to the 2016 trough, foreign currency liquidity shortages remain, as evidenced by the still significant gap at around 100% between the parallel market exchange rate and the official dollar exchange rate. Banco Nacional de Angola (BNA) is unlikely to remove all the soft capital controls in place and imports will continue to be constrained for a considerable period of time. Consequently, Moody’s expects the current account to continue to improve to -1.8% of GDP in 2017 from -3.1% of GDP in 2016 and -11.3% in 2015. This trend means that the authorities will likely be able to preserve most of their fiscal accumulated surpluses included in the official FX reserves ($9.2 billion at the end of 2016).
Nevertheless, while the soft capital controls reduce the downward pressures on Angola’s balance of payments, the government has not been able to bolster its international reserves as a result of the rebound in oil prices in 2017 to $50/barrel, contrary to the rating agency’s expectations at the time of the rating affirmation and extended negative outlook earlier this year. In particular, official foreign exchange reserves (FX) have slightly fallen to around $20.8 billion in August 2017 from $23.2 billion at end 2016 ($32.4 billion in 2013). However, the decline in net international reserves (excluding essentially short-term repo operations with Chinese banks) is more significant to $15.6 billion from $20.8 billion at the end of 2016. Moody’s expects official FX reserves to remain flat at $22 billion by the end of the year, if the government goes ahead with the planned $2 billion Eurobond issuance.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook indicates that the downside risks posed by large domestic and external imbalances have receded, with credit pressures broadly balanced at the B2 rating level. In particular, growth is likely to remain positive as the oil sector is likely to grow moderately till 2022 supporting a gradual recovery, albeit still well below the average growth rate recorded in the preceding decade. In addition, Moody’s expects the current account deficit to further continue its improvement. In addition, the risk of fiscal slippage has also diminished given the government’s large fiscal adjustment over 2015-2016, suggesting a transition to the B3 rating level in coming years is unlikely at this point. Finally, political risk has decreased with a successful presidential succession in August 2017.
WHAT COULD CHANGE THE RATING UP
Upward pressure on the rating could develop if the country’s credit fundamentals significantly strengthen. For example, from: 1) the replenishment of foreign exchange buffers large enough to protect the economy against a protracted shock; 2) a significant reduction in government debt metrics; 3) a successful diversification of the economy and government revenues that will become less dependent on oil receipts; 4) continued improvements in governance and institutional strength which act as long –term constraints on Angola’s rating.
WHAT COULD CHANGE THE RATING DOWN
Downward pressure would be exerted on the rating if (1) there is a significant deterioration in the government’s balance sheet (2) a substantial erosion of official financial buffers that undermines confidence in the country’s external stability; (3) the manifestation of significant political and/or social tensions that could hinder the country’s medium-term growth prospects beyond Moody’s current expectations.
GDP per capita (PPP basis, US$): 6,797 (2016 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.7% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 41.9% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -4.7% (2016 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2016 Actual) (also known as External Balance)
External debt/GDP: 42.2% (2016 Estimate)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 18 October 2017, a rating committee was called to discuss the rating of the Government of Angola. 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.