Angola: Update of political risk assessment

Angola’s political risk classifications

Given the country’s important risks and challenges, the medium- to long-term political risk classification – which represents the solvency of a country – is in the second highest risk category 6/7. Angola’s short-term political risk classification – which represents the liquidity of a country –   has been in category 5/7 since an upgrade in 2021 when higher global oil prices drove the economic recovery after five years of recession, resulting in substantial current account surpluses (3% of GDP in 2023). However, the 2021-2022 economic recovery came under pressure in 2023 due to unexpected underperforming oil revenues and a tight monetary policy pulling real GDP growth down to merely 0.5%. The near-term economic outlook for Angola is supported by large foreign investments in infrastructure, oil and gas, and mining, raising real GDP growth prospects to around 3% for the coming years. The country’s extreme reliance on the oil sector (96% total export revenues in 2023) continues to be a major trial, especially in an environment of global decarbonisation and challenged production.

Struggling with liquidity pressure and high levels of inflation

Following the oil price drop in 2015-2016 and the continuous fall in crude oil production levels (2015-2021), foreign exchange reserves have been trended down for years (see graph below). Higher oil-related USD inflows in 2021 supported foreign exchange reserves, before declining somewhat in 2022. In 2023, reserves stabilised around USD 13 billion, good for approximately five months of import cover, which represents a healthy liquidity level. Due to volatile investment inflows and capital flight, large financing gaps on the external balance of payments regularly emerge, squeezing hard currency availability in the market. So, despite current account surpluses, certain foreign exchange controls are held in place by the BNA (Banco Nacional de Angola) to protect its liquidity position. Other elements explaining persistent pressure on reserves are related to the fact that Angola is an import-dependent economy due to lacking diversification and an underperforming non-oil economy.

Angola has been struggling with persistently high levels of inflation for a decade (20% in 2023). Over the past four years, tighter monetary policy have been implemented to reduce inflation, yet a real drop is only expected as of 2025. Under the coordination of an IMF financial support programme (December 2018-2021), the government committed to the implementation of some critical reforms, such as VAT implementation, a floating exchange rate, the partial privatisation of the national oil company Sonangol (ongoing process) and the cutting of fuel subsidies (first phase initiated in June 2023).

High reliance on volatile oil market causes great exchange rate instability

Angola’s local currency value is very volatile and tends to follow oil market evolutions, causing great exchange rate instability. In 2018, periods of heavy Kwanza depreciation resulted from the withdrawal of the peg to the USD and led to soaring external debt services in local currency terms, high inflation and sharp fluctuations of the external debt sustainability indicators. In 2021, higher oil revenues temporarily turned the trend around, supported by the successful issue of a USD 1.75 billion ten-year Eurobond in 2022. Nevertheless, volatility returned, and the Kwanza depreciated by 40% again in June 2023, reflecting a drop in foreign exchange supply from the Treasury and from oil companies experiencing unexpected weakness due to maintenance operations. Thereafter, the Kwanza has been maintained broadly stable by BNA interventions.

Public finances improve but also show periods of high fluctuations

The public debt stock to GDP ratio dropped from its peak of 139% of GDP in 2020 to approximately 65% in 2022 (see graph below). The sharp tumble in Angola’s public debt ratio was driven by the jump in GDP and temporary strong performance of the Kwanza, while the nominal external debt stock level in US dollar terms has remained relatively stable since 2018. Moreover, domestic debt maturity was lengthened, and the government was cautious in taking on new loans as some debt management reforms were introduced. However, in 2023, the public debt stock jumped back up to 85% of GDP following the significantly weaker exchange rate but is expected to moderate again to around 62% by 2025. This demonstrates the high volatility of Angola’s (public) debt position.

Yearly debt servicing costs have reduced substantially since 2020, thanks to a bilateral debt reprofiling deal with China. Angola has been by far China’s largest African debtor over recent years. In 2021, Angola secured a debt rescheduling deal with China in the form of three years of payment relief, deferring almost USD 6 billion in repayments and opening another USD 700 million tranche of IMF financing at the time. Since the moratorium ended in 2023, debt is being repaid again, pushing up the debt servicing burden to higher levels.

Risks stemming from the political system and the business environment

On the political and security fronts, progress has been made since power shifted hands to President Lourenço in 2017, yet the MPLA’s rule (Popular Movement for the Liberation of Angola) is still contentious, leading to sustained risk for social unrest and political destabilisation. The limited employment opportunities and very high cost of living emanating from elevated inflation and fuel subsidy removal are likely to persistently drive public protests in the near term.

Angola’s weak spots remain substantial (high perceived corruption, weak legal protection, volatile exchange rate, capital controls, climate change vulnerability, etc.) and have an important impact on the country’s business environment, growth potential and monetary stability. Therefore, Credendo’s business environment risk classification is in the second highest category F/G.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com