OREANDA-NEWS. The Angolan government's decision to discontinue talks with the IMF on a potential loan increases risks to the sovereign's external financing position if no other sources of external funding are available, Fitch Ratings says. We identified deteriorating external dynamics as a rating sensitivity when we revised the Outlook on Angola's 'B+' sovereign rating to Negative from Stable in March.

The IMF said last week that Angola wanted to halt talks on an economic programme supported by financial assistance. The Angolan authorities had made a formal request for discussions on a programme and possible three-year Extended Fund Facility in early April. The IMF said that President Jose Eduardo dos Santos wants to maintain dialogue regarding the IMF's annual assessment of the country's economy.

Historically, Angola's external balance sheet has been a credit strength. But the fall in oil prices since 2014 has put strains on external buffers. We forecast a current account deficit of 13.9% in 2016, from an estimated 8.7% last year and in contrast with 2013's large surplus. (Our forecasts do not incorporate IMF assistance.)

Angola has a large external funding gap due to capital outflows as oil companies transfer deposits abroad. With FDI inflows falling, external borrowing is necessary to avoid a sharp fall in foreign exchange reserves. The government has not revealed an alternative to IMF support, so risks to reserves appear to have risen. Failure to attract sufficient financing sources, precipitating a more abrupt macroeconomic adjustment, could lead to a downgrade, as we highlighted in our rating sensitivities in March.

Weak governance is a significant constraint on Angola's sovereign rating and ending IMF talks highlights policy unpredictability - notwithstanding the strong policy response mounted so far to the fall in oil prices. This has included a series of kwanza devaluations, most recently in January 2016, to cushion the current account balance and maintain reserves, which have been stable at USD24.5bn this year, according to the National Bank of Angola.

But the widening gap between the official exchange rate and the parallel market rate shows that the currency remains under pressure. Further devaluation could ease this, but would raise Angola's debt/GDP ratio (which stood at 47.4% of GDP in 2015) since two-thirds of public debt is dollar-denominated. Devaluation could also weaken the banking sector, given that a third of deposits and credits are denominated in foreign currency. Devaluation may also fuel further inflation, leading to a rise in social discontent.

Using monetary and exchange rate policy to mitigate the oil price shock has also involved the central bank aggressively raising interest rates. On Friday, it increased the benchmark rate by another 200bp to 16%, which may add some support to reserves and the kwanza although rates remain well below the rate of inflation (29% in May).

Our next scheduled sovereign rating review is due on 23 September.