Angola: Staff Report for the 2014 Article IV Consultation—Debt Sustainability Analysis

KEY ISSUESContext and outlook: Angola’s recent economic developments have been positive, but softening oil revenue and limited proven oil reserves highlight the need to contain emerging fiscal deficits, preserve policy buffers, and continue diversifying the economy.Focus of consultation: Discussions focused on mitigating the main risks to the macroeconomic framework and, inter alia, policies to return to structural fiscal surpluses over the medium term, and to support economic diversification and inclusive growth, the modernization of the monetary policy framework, and financial stability.Key policy recommendations:• Return to structural fiscal surpluses in line with the objective set forth in Angola’s Sovereign Wealth Fund, by mobilizing additional nonoil tax revenue, improving the efficiency of public investment, and reducing current spending, including by phasing out the costly and regressive fuel subsidies—while mitigating the impact on the poor through well-targeted social assistance.• Adopt an improved medium-term fiscal framework, focusing on the structural fiscal balance to limit the impact of the oil sector on the nonoil economy.• Develop a coherent asset-liability management framework, including awell-designed stabilization fund to shield the budget from oil revenue fluctuations.• Further improve public financial management systems to avoid, inter alia, a recurrence in the future of domestic payments arrears.• Continue improving the business climate to boost economic development, diversification, and competitiveness.• In transitioning over the medium-term toward an inflation targeting regime, enhance the central bank’s capacity to collect and analyze high-frequency economic data, and continue de-dollarizing the economy.• Further strengthen the financial system, by continuing to improve the transparency and accountability of banks, and enhancing bank supervision.• Manage public guarantees transparently and with a view to minimize fiscal costs, as envisaged in the recently-approved law on public guarantees.

Abstract

KEY ISSUESContext and outlook: Angola’s recent economic developments have been positive, but softening oil revenue and limited proven oil reserves highlight the need to contain emerging fiscal deficits, preserve policy buffers, and continue diversifying the economy.Focus of consultation: Discussions focused on mitigating the main risks to the macroeconomic framework and, inter alia, policies to return to structural fiscal surpluses over the medium term, and to support economic diversification and inclusive growth, the modernization of the monetary policy framework, and financial stability.Key policy recommendations:• Return to structural fiscal surpluses in line with the objective set forth in Angola’s Sovereign Wealth Fund, by mobilizing additional nonoil tax revenue, improving the efficiency of public investment, and reducing current spending, including by phasing out the costly and regressive fuel subsidies—while mitigating the impact on the poor through well-targeted social assistance.• Adopt an improved medium-term fiscal framework, focusing on the structural fiscal balance to limit the impact of the oil sector on the nonoil economy.• Develop a coherent asset-liability management framework, including awell-designed stabilization fund to shield the budget from oil revenue fluctuations.• Further improve public financial management systems to avoid, inter alia, a recurrence in the future of domestic payments arrears.• Continue improving the business climate to boost economic development, diversification, and competitiveness.• In transitioning over the medium-term toward an inflation targeting regime, enhance the central bank’s capacity to collect and analyze high-frequency economic data, and continue de-dollarizing the economy.• Further strengthen the financial system, by continuing to improve the transparency and accountability of banks, and enhancing bank supervision.• Manage public guarantees transparently and with a view to minimize fiscal costs, as envisaged in the recently-approved law on public guarantees.

Public Debt Sustainability Analysis

Angola’s public debt is estimated at 35 percent of GDP at end-2013. Public debt statistics comprise the central government, public entities, and (external debt of) the state-owned oil and airline companies (Sonangol and TAAG, respectively).1 There was a 5 percentage point of GDP increase in public debt in 2013 relative to 2012, which is explained mainly by an increase of about 1 percentage point in short-term domestic debt and 3 percentage points in Sonangol’s external debt.

Staff estimates that net public debt stood at 21 percent of GDP at end-2013. Angola accumulated sizable public assets in the recent past. Net debt excludes from gross debt the value of available financial assets. These are in two funds: the Petroleum Fund / Sovereign Wealth Fund (FSDEA),2 and the treasury reserve at the BNA.

The rise of short-term debt as well as foreign currency denominated debt (as a percent of total debt) needs to be followed closely. The heat map toolkit pins down that these indicators are above adequacy levels (slightly in the case of debt in foreign currency). The authorities need to moderate their use of T-bills (short-term debt) and rely more on medium and long-term debt. Risks stemming from a high share of debt in foreign currency, however, are low because the authorities’ main fiscal revenue (oil) is also denominated in foreign currency.

Staff estimates a persistent increase in public debt over the medium term due to projected fiscal deficits for the foreseeable future. In 2014, the overall fiscal deficit is projected to reach 4 percent of GDP. Over the next years, staff estimates that the central government will continue in a similar deficit position mainly due to softening oil revenue but also because of the implementation of the ambitious investment agenda envisaged in the National Development Plan. With persistent fiscal deficits and despite solid economic growth, the public debt-to-GDP ratio is estimated to increase to about 45 percent by 2019.

Interest costs are expected to rise. In the past, Angola faced low interest costs because it relied on financing through expenditure arrears (at zero interest rate) and bilateral credit lines (with low interest rates). With softening oil revenues and high financing needs, the country would increasingly rely on market financing, therefore, increasing its financing costs gradually over the next years.

The baseline debt path is highly vulnerable to real GDP and interest rate shocks. Stress tests show that the debt path is highly sensitive to shocks from the real GDP and interest rate shocks. As discussed in this staff report for the 2014 Article IV consultation, the Angolan business cycle has historically a high correlation with oil prices. Therefore (as happened before) a sharp decline in oil prices can easily trigger a sharp economic slowdown or recession. Under this stress scenario, the debt path would increase sharply. Additionally, due to high financing needs an increase in interest rate would also increase the expected debt path.

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Angola Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2014, 274; 10.5089/9781484327395.002.A002

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 trie 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 S 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.
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Angola Public DSA - Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2014, 274; 10.5089/9781484327395.002.A002

Source: IMF staff.
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Angola Public DSA - Stress Tests

Citation: IMF Staff Country Reports 2014, 274; 10.5089/9781484327395.002.A002

Source: IMF staff.
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Angola Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2014, 274; 10.5089/9781484327395.002.A002

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 aver the last 3 months, 01-Mar-14 through 30-May-145/ 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.

External Debt Sustainability Analysis

Angola’s external debt position appears sustainable. Under the baseline, external debt increases from 22 percent of GDP in 2013 to 37 percent of GDP in 2019. Of the various standard shocks, the most significant is a current account shock (proxy for a decline in oil exports). Under this shock scenario, the current account balance is assumed to be one-half standard deviation below the baseline, which could be a major shock, given recent volatility. Under that scenario, the external debt-to-GDP ratio would increase to 61 percent in 2019. The second most significant shock is the real depreciation shock, which assumes a one-time real depreciation of the local currency of 30 percent in 2015. Under that scenario, the external debt-to-GDP ratio would increase to 54 percent in 2019. The interest rate and output shocks have less pronounced effects.

While the authorities have taken steps to collect private sector debt statistics, there is still no available data on private sector debt for Angola. Thus, the external debt sustainability analysis is currently solely based on public sector external debt, including two state-owned enterprises (Sonangol and TAAG).

Angola: External Debt Sustainability Framework, 2009-2019

(In percent of GDP, unless otherwise indicated)

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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.

Sources. IMF Staff and Authorities
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Angola: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2014, 274; 10.5089/9781484327395.002.A002

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 2015.
1

As reported as public debt in the authorities’ official debt bulletin (Boletim da Dívida Pública).

2

The Petroleum Fund was created by Presidential Decree 48/11 in March 2011. In June 2013, its denomination was changed to Angola’s Sovereign Wealth Fund (FSDEA). Assets from FSDEA at end-2013 comprised bank deposits.

Angola: Staff Report for the 2014 Article IV Consultation
Author: International Monetary Fund. African Dept.
  • View in gallery

    Angola Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

    (in percent of GDP unless otherwise indicated)

  • View in gallery

    Angola Public DSA - Composition of Public Debt and Alternative Scenarios

  • View in gallery

    Angola Public DSA - Stress Tests

  • View in gallery

    Angola Public DSA Risk Assessment

  • View in gallery

    Angola: External Debt Sustainability: Bound Tests 1/2/

    (External debt in percent of GDP)