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Angola: Staff Report for the 2016 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
February 2017
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Public Debt Sustainability Analysis

1. Angola’s gross public debt is estimated at 65½ percent of GDP at end-2015. Public debt statistics comprise the central government and (the external debt of) the state-owned oil and airline companies (Sonangol and TAAG, respectively).1 There was a 24¾ percentage point of GDP increase in gross public debt in 2015 relative to 2014, due to a fiscal deficit of about 3⅓ percent of GDP, the effect of the exchange rate depreciation on foreign currency denominated and indexed debt stocks—which accounted for 9½ percentage point of GDP increase in public debt. Net public debt (gross debt excluding deposits of the central government at the BNA) stood at 54¼ percent of GDP at end-2015.2

2. In 2016, Angola’s gross public debt is projected to have continued to increase, by 6¼ percentage points, to 71½ percent of GDP. This is driven by the projected fiscal deficit of 4 percent of GDP for the year and the effect of a more depreciated exchange rate on foreign currency denominated and indexed debt stocks.

3. The main assumptions underlying the debt sustainability analysis (DSA) are fully in line with the baseline macroeconomic scenario outlined in the Article IV Staff Report. After negative growth in 2016, staff projects a very gradual increase in non-oil GDP growth until 2019 and stable but subdued growth thereafter, reflecting improved terms-of-trade, a moderately improved business climate, and the completion of several projects in agriculture and infrastructure. Inflation is projected to remain high in 2016 and then decline gradually. The non-oil primary fiscal balance is projected to improve only starting in 2018—due to projected higher public spending in 2017—to preserve debt sustainability given that international oil prices are expected to improve but remain significantly lower than in 2011–13. The external current account deficit would be reduced over the medium term due to fiscal retrenchment and higher oil prices.

4. Staff estimates public debt as a share of GDP to decline in 2017 due to the projected appreciation of the real exchange rate,3and to stabilize thereafter reflecting improvements in fiscal balances, and despite projected subdued real GDP growth. As the government continues its fiscal consolidation efforts, the debt ratio would stabilize at about 64 percent.4 This fiscal consolidation would be achieved mainly through additional nonoil taxation and expenditure savings.

5. Angola’s moderate debt burden and gross financing needs can pose risks to debt sustainability and leave debt dynamics highly vulnerable to macroeconomic shocks. Angola’s debt ratio is projected to exceed in 2016 (but not in subsequent years) the debt burden benchmark for emerging economies of 70 percent of GDP. Angola’s public gross financing needs are expected to be slightly above the relevant benchmark of 15 percent of GDP in 2017 and 2019–20.

6. Angola’s key macroeconomic variables forecast track record shows a relatively large median error compared with advanced and emerging market surveillance countries in some years. This is partly due to unforeseen developments, including volatility in either oil production or oil prices and swings in agricultural production due to weather conditions. This also reflects the low level of diversification of the economy and still weak fiscal institutions.

7. The baseline debt path is vulnerable to various shocks, including on real GDP growth, exchange rate, financial contingent liability, and oil price.5

  • Growth shock: If projected real GDP rates are lowered by half standard deviation (implying lower real growth by about 4 percentage points in 2017 and 2018), the debt ratio would reach 72¾ percent of GDP in 2018 and stabilize thereafter at around 73 percent:6

  • Real exchange rate shock: A one-off real depreciation of 30 percent (45 percent nominal depreciation) would alter the debt-to-GDP path significantly, with this ratio reaching 74¾ percent of GDP in 2017 before declining slightly to 74½ percent in 2021.

  • Combined shock: A combination of various (standard and non-standard) macro-fiscal shocks would increase debt to 101½ percent of GDP by 2021.

  • Financial sector contingent liability shock: A one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets would increase the debt-to-GDP ratio to 73½ percent by 2018 and stabilize thereafter around 74 percent.

  • Oil price shock: Given Angola’s high dependence on oil, an oil price shock representing a 30 percent drop in the projected price of the Angolan oil basket in 2017 was also considered. Under this scenario, the debt-to-GDP ratio would increase in 2017 compared to the baseline and stabilize at 66½ percent.7

Angola. Figure 1:Public Sector Debt Sustainability Analysis, Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 01-Sep-16 through 30-Nov-16.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Angola. Figure 2:Public Debt Sustainability Analysis, Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Angola, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual observations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Angola. Figure 3:Public Debt Sustainability Analysis, Baseline Scenario

(In percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as the Central government plus public companies.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r − π(1+g) − g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r − π (1+g) and the real growth contribution as −g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Angola. Figure 4:Public Debt Sustainability Analysis, Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Angola. Figure 5:Public Debt Sustainability Analysis, Stress Tests

Source: IMF staff.

External Debt Sustainability Analysis

8. Angola’s external debt is sustainable.8 External debt is expected to continue increasing in 2016 to about 43 percent of GDP from 40½ percent in 2015. The external debt trajectory is projected to decline to 39½ percent by 2021 mainly due to declining current account deficits, and a slower pace of exchange rate depreciation.

9. Stress tests in the external DSA suggest that Angola’s external debt ratio is also sensitive to shocks. Of the various standard shocks, the most significant is a real depreciation shock. The second most significant shock is the non-interest current account shock, followed by the combined shock and growth shock:

  • Real depreciation shock: A one-time real depreciation of 30 percent in 2017 would raise external debt to 89 percent by 2021.

  • Non-interest current account shock: An increase in the current account excluding interest payments by half a standard deviation in each year from 2017 onwards would raise external debt to 70 percent of GDP by 2021.

  • Combined shock: A one quarter standard deviation shock to the real interest rate, the growth rate and the current account would raise the external debt ratio to 60 percent by the end of the projection period.

  • Growth shock: A permanent half standard deviation shock applied to growth would raise external debt to 46 percent of GDP by 2021.

Angola. Table 1:External Debt Sustainability Framework, 2011–2021(In percent of GDP, unless otherwise indicated)
ActualProjections
20112012201320142015201620172018201920202021
1Baseline: External debt19.718.923.828.640.543.137.638.639.139.439.6
2Change in external debt−1.1−0.95.04.811.82.6−5.51.10.50.30.2
3Identified external debt-creating flows (4+8+9)−22.0−22.5−18.71.629.80.86.25.04.54.03.6
4Current account deficit, excluding interest payments−13.1−12.4−7.12.510.42.64.53.42.72.11.6
5Deficit in balance of goods and services−23.5−22.7−16.5−6.03.9−2.20.5−0.7−1.3−1.7−2.1
6Exports66.362.556.350.237.830.227.028.127.927.627.2
7Imports42.839.939.844.241.728.027.527.426.725.925.1
8Net non-debt creating capital inflows (negative)−5.0−8.4−10.7−1.99.0−3.50.50.60.60.60.6
9Automatic debt dynamics 1/−3.8−1.8−1.01.110.41.81.11.01.21.41.5
10Contribution from nominal interest rate0.40.30.30.60.91.81.61.61.71.92.0
11Contribution from real GDP growth−0.6−0.9−1.2−1.2−1.10.0−0.4−0.6−0.5−0.6−0.5
12Contribution from price and exchange rate changes 2/−3.6−1.2−0.11.610.6
13Residual, incl. change in gross foreign assets (2-3) 3/20.921.723.73.1−17.91.8−11.8−3.9−4.0−3.7−3.5
External debt-to-exports ratio (in percent)29.830.142.457.0107.0142.7138.9137.4139.9142.9145.4
Gross external financing need (in billions of US dollars) 4/−11.5−12.0−6.26.812.98.711.710.19.49.79.9
in percent of GDP−11.2−10.5−5.05.614.110-Year10-Year9.29.68.07.17.06.8
Scenario with key variables at their historical averages 5/43.126.411.5−1.5−13.4−24.0
HistoricalStandard
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)3.95.26.84.83.08.77.60.01.31.51.41.51.4
GDP deflator in US dollars (change in percent)20.76.50.7−6.5−27.04.417.84.125.92.64.43.12.7
Nominal external interest rate (in percent)2.41.91.92.52.43.82.24.54.74.34.85.15.4
Growth of exports (US dollar terms, in percent)32.25.6−3.2−12.5−43.48.231.2−16.914.38.35.23.32.8
Growth of imports (US dollar terms, in percent)23.94.47.38.8−29.113.029.9−30.025.23.73.21.50.9
Current account balance, excluding interest payments13.112.47.1−2.5−10.47.412.2−2.6−4.5−3.4−2.7−2.1−1.6
Net non-debt creating capital inflows5.08.410.71.9−9.02.45.73.5−0.5−0.6−0.6−0.6−0.6

Derived as [r − g − r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [−r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r − g − r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [−r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Angola. Figure 6:External Debt Sustainability, Bound Tests 1,2

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2017.

Sonangol’s external debt (14¼ percent of GDP at end-2015) is included in public debt given that Sonangol is fully state-owned. Most of its debt does not carry an explicit government guarantee, but disbursements in 2016 amounting to US$6.9 billion from the China Development Bank (CDB), which were on-lent by the central government to Sonangol, are explicitly guaranteed. In net terms, this was equivalent to about US$3.8 billion given that part of this loan was used to refinance existing debt.

Part of central government deposits at the BNA, which include the oil funds, could be used to reduce financing needs but under very strict conditions and with the approval of the President of the Republic.

The projected decline in the public debt ratio in 2017 is due to the still high expected inflation and the authorities’ commitment to maintain a stable nominal exchange rate.

The residuals from the contribution to changes in both public and external debt are mainly due to further projected exchange rate depreciation of the kwanza in 2018-21 but at a slower pace than in 2015-16.

The interest rate shock applied for Angola increases by 200 basis points rather than by the maximum real interest rate over the last 10 years to exclude the outlier resulting from the 2008-09 global crisis, which distorts the impact of the shock on public debt.

The real GDP growth is reduced by one-half standard deviation (rather than 1 standard deviation) for 2 consecutive years to tailor this shock better to the new reality of the Angolan economy, which has been growing for more than a decade and has seen the share of the less volatile non-oil (services dominated) sector increase.

The oil price shock shows only the direct impact of a decline in oil price on revenues in 2017. The price under this scenario is US$32¼ per barrel.

The external DSA is based solely on public sector debt, including two state-owned enterprises (Sonangol and TAAG), due to lack of data on private sector external debt. The authorities are making efforts to collect private sector debt data with the help of TA from STA.

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