OREANDA-NEWS. March 28, 2016. Fitch Ratings has revised the Outlook on Angola's Long-term foreign and local currency Issuer Default Ratings (IDRs) to Negative from Stable and affirmed the IDRs at 'B+'. Fitch has affirmed Angola's Short-term foreign currency IDR at 'B' and the Country Ceiling at 'B+'. The issue rating on Angola's senior unsecured foreign currency bonds has also been affirmed at 'B+'.

KEY RATING DRIVERS
The revision of the Outlook on Angola's IDRs reflects the following key rating drivers and their relative weights:

MEDIUM
Angola's high dependence on oil revenues in combination with the further decline in oil prices since Fitch's previous rating review in September 2015 has worsened the country's macroeconomic, fiscal and external outlook and heightened downside risks. This is despite the authorities' generally strong policy response to the shock, which has helped to moderate the depletion of foreign exchange reserves and general government deposit buffers. Oil accounted for 95% of exports and 50% of government revenue in 2015. Fitch has revised down its baseline forecast for 2016 Brent oil prices to US35/b, from USD60/b in our last review.

Fitch forecasts the budget deficit to widen to 4.6% of GDP in 2016, from an estimated 1.6% in 2015, despite a significant fiscal adjustment. We project oil revenues at around 10% of GDP in 2016-17, down from 33% in 2004-14. Preliminary data show the government cut central government expenditure/GDP ratio by almost 15pp in 2015, to 26.4%, helped by cuts to capital spending and subsidies. Downside risks to the budget include uncertainty over oil prices and the government's capacity to cut spending further without driving up debt arrears, stifling growth or fuelling public dissatisfaction.

Fitch estimates gross general government debt increased to 47.4% of GDP at end-2015, an almost 17pp increase from end-2014, reflecting depreciation of the kwanza and some pre-financing activities. Although debt is still below the 'B' category median of 53% of GDP, Fitch forecasts it to rise further owing to the budget deficit and currency depreciation (around 45% of government debt is denominated in foreign currency) to a peak of close to 60% in 2017. Sonangol, the state oil company, also had debt equivalent to almost 15% of GDP at end-2015 according to the IMF, which Fitch views as a contingent liability to the sovereign. Our forecasts carry downside risks, in particular if the exchange rate continues to depreciate. However, Angola's large deposits (around 20% of GDP at end-2015), including its sovereign wealth fund, mean that its net debt position is set to remain below the 'B' median.

The collapse in oil prices has taken a toll on Angola's external finances, despite a sharp contraction in imports. Fitch forecasts the current account deficit to widen to 14% of GDP in 2016, from an estimated 8.7% in 2015 and a large surplus in 2013. With inflows of foreign direct investment also set to fall in 2016, Angola will move to a net external debt position and the authorities will be forced to draw on external borrowing to avoid a collapse in FX reserves. As well as some financing from international financial institutions, much of this financing is expected to continue to come from China. However, there is some uncertainty in regards to the amount of financing committed to the sovereign and Sonangol.

Angola's 'B+' IDRs also reflect the following key rating drivers:

Angola's growth outlook is clouded by weaker external demand, uncertain prospects in the oil industry and sluggish domestic consumption. GDP growth fell to 3% in 2015, the lowest level since 2009, but was helped by the scaling up of oil production in existing fields. Although oil output will continue to rise modestly in 2016, this will be offset by lower investment across most other sectors and a projected contraction in private consumption, the result of high inflation and rising credit costs. Fitch now expects the economy to grow only 2.5% in 2016, before picking up in 2017, on the assumption that oil prices recover.

The decision by the National Bank of Angola (BNA) to let the kwanza devalue by about 20% against the USD since January 2016 has helped stabilise foreign reserve levels in 1Q, at around USD24bn. It has also narrowed the spread to the parallel exchange rate market and could help lift the country's competitiveness in the medium term. However, in combination with the adjustment of subsidies, it has fuelled rapid inflation, which reached 20% in February, the highest level in over a decade. This will most likely force the BNA to continue tightening policy throughout 2016, increasing risks to growth and the financial sector.

Angola's banks have been traditionally well capitalised, with a system-wide capital ratio of over 20% at end-2015. However, the sharp depreciation of the kwanza (55% against the USD since end-2014) will likely lead to rising non-performing loans, which were already 18.2% at mid-2015. Exposure to real estate lending is also sizeable.

Structural fiscal reforms could help to strengthen the public finances if oil prices recover. Subsidies on gasoline, electricity and water, which mainly benefited higher income groups, were cut to an estimated 1.8% of GDP in 2015 from 6% in 2013. We expect them to fall further to around 1% of GDP in 2016-17.

Angola's ratings are constrained by some of the weakest governance and social indicators in the 'B' category. The country's business environment is also very weak, ranking near the bottom of the World Bank's Doing Business Indicators. Although GDP per capita is higher than the 'B' median, it is falling sharply as a result of currency depreciation.

RATING SENSITIVITIES
The main factors that could lead to a downgrade are:
- Further deterioration in the fiscal balance, depletion of government deposits or an increase in public debt/GDP.
-Failure to narrow the current account deficit, depletion of foreign currency reserves or rising external indebtedness.
-Failure to attract sufficient financing sources, precipitating a more abrupt macroeconomic adjustment.

The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to a positive rating action:

- Narrowing of the budget deficit consistent with stabilisation of public sector debt/GDP
-Narrowing of the current account deficit.
-Improvement in the business environment, income per capita and governance standards over the medium term.

KEY ASSUMPTIONS
Fitch assumes Brent oil prices to average USD35/bl in 2016 and USD45/bl by 2017.

Fitch assumes a continuing stable political environment, with no significant challenge to the current ruling establishment.