Fitch: Angola Improves Policy Response, But Faces Oil Challenge
The BNA has now raised rates by 150bp to 10.25% since August 2014 in response to steadily rising inflation (9.6% yoy in June from 6.9% a year earlier). Inflation concerns have been caused by the kwanza's 18% fall against the dollar this year as the BNA allows the currency to depreciate much more rapidly than in 2008.
This has limited reserve burn, although reserves have still fallen by USD3.5bn since 3Q14. In 3Q08-2Q09, the kwanza fell by 4% against the dollar, but maintaining the exchange rate cost USD7.1bn in foreign reserves, prompting the government to ask the IMF for balance-of-payments support.
Despite weak domestic monetary transmission mechanism, the BNA's willingness to raise rates could help contain inflation expectations and limit exchange-rate pass-through to inflation, which remains well below its October 2010 peak of 16%.
A continued shortfall of dollars due to the widening balance-of-payments deficit is likely to maintain pressure on the currency and international reserves. We expect international reserves as a percentage of current external payments to fall to 4.8 months in 2015 - still above the 'BB' category median of 4.1 months and the previous low of 3.3 months in 2009.
The authorities have also taken a more proactive approach to fiscal policy. February's revised 2015 budget uses a conservative oil price assumption of USD40/barrel. Spending on goods and services and capital projects was halved, and the petrol subsidy removed, although the authorities forecast the fiscal deficit to widen to 7% of GDP, from 3.2% in 2013. Our 4% forecast - in line with the 'BB' median - is based on our oil price assumption of USD65/barrel. Preliminary data for 1Q15 suggest expenditure fell much faster than revenue, resulting in a modest fiscal surplus of 1.2% of GDP, although possible arrears could significantly revise this figure.
Raising external financing to help finance the deficit on the balance of payments could prove challenging, particularly if oil prices stay low. Plans for a USD1.5bn Eurobond have been delayed. The government has signed a number of new loans and credit lines to improve access to external financing, including a USD200m loan from Japan and a USD500m credit line from Germany.
Persistently low oil prices would be negative for Angola's credit profile, but the extent will depend on the authorities' ability to continue to adjust. Widening fiscal and external deficits and falling reserves, combined with a weaker growth outlook (we forecast 3.3% real GDP growth this year, with downside risks) contributed to Fitch's decision to revise the Outlook on Angola's 'BB-' rating to Negative from Stable in March. The next scheduled rating review is on 25 September.
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