Angola: Staff Report for the 2015 Article IV Consultation—Debt Sustainability Analysis

This 2015 Article IV Consultation highlights that the oil price shock is adversely impacting the economy of Angola. While oil production has recovered following the completion of maintenance work, non-oil GDP growth is expected to decelerate to 2.1 percent in 2015. The economic situation in 2016 is likely to remain challenging as international oil prices are not expected to recover and risks are on the downside. Growth is projected to remain stable at 3.5 percent in 2016, with the oil sector growing by about 4 percent. The non-oil sector is expected to show a small improvement.

Abstract

This 2015 Article IV Consultation highlights that the oil price shock is adversely impacting the economy of Angola. While oil production has recovered following the completion of maintenance work, non-oil GDP growth is expected to decelerate to 2.1 percent in 2015. The economic situation in 2016 is likely to remain challenging as international oil prices are not expected to recover and risks are on the downside. Growth is projected to remain stable at 3.5 percent in 2016, with the oil sector growing by about 4 percent. The non-oil sector is expected to show a small improvement.

Angola’s public and external debts are rising but remain sustainable. The gross public debt-to-GDP ratio rose by 6 percentage points over the past year, to 42 percent at end-2014. This ratio is expected to increase to 57½ percent in 2015 given the projected fiscal deficit of 3½ percent of GDP for the year and the effect of a more depreciated exchange rate on foreign currency denominated and indexed debt stocks. Starting in 2016, however, the gross public debt-to-GDP ratio would gradually decline, reaching 38½ percent by 2020, mainly due to projected improvements in fiscal balances and an acceleration of real GDP growth. While the projected path of Angola’s public debt is sustainable, stress tests show that it remains sensitive to shocks, including on real GDP growth, the exchange rate, and the international price of oil. Angola’s gross external debt is projected to reach 28½ percent of GDP in 2020, from 25½ percent of GDP at end-2014.

Public Debt Sustainability Analysis

Angola’s gross public debt is estimated at 42 percent of GDP at end-2014. Public debt statistics comprise the central government, public entities, and (the external debt of) the state-owned oil and airline companies (Sonangol and TAAG, respectively).1 There was a 6 percentage point of GDP increase in gross public debt in 2014 relative to 2013, due to an increase in both domestic and external debt. Net public debt (gross debt excluding deposits of the central government at the BNA) stood at 32¾ percent of GDP at end-2014.2

In 2015, Angola’s gross public debt is projected to increase significantly, by 15 percentage points, to 57½ percent of GDP. This is driven by the projected fiscal deficit of 3½ percent of GDP for the year and the effect of a more depreciated exchange rate on foreign currency denominated and indexed debt stocks. In February 2015, S&P downgraded Angola’s sovereign credit ratings to ‘B+/B’ from ‘BB-/B’ following the sharp decline in oil prices and, in August 2015, they revised the outlook to negative. Moody’s revised Angola’s outlook to negative in March 2015. In September 2015, Fitch Ratings downgraded Angola’s long-term foreign and local currency issuer default ratings (IDRs) to ‘B+’ from ‘BB-’. They affirmed Angola’s short-term IDR at ‘B’ and also lowered the country ceiling to ‘B+’. However, they changed the outlook to stable from negative.

Interest costs are expected to rise in 2015 and beyond. With softening oil revenues and projected fiscal deficits for the next few years, Angola would have to increasingly rely on market financing, increasing its financing costs. In addition, if international financial markets become tighter due to the “normalization” of U.S. monetary policy, the cost of external borrowing could also rise.

The main assumptions underlying the debt sustainability analysis (DSA) are consistent with the macro-framework spelled out in the 2015 Article IV staff report. After sharply decelerating in 2015, staff projects a gradual increase in non-oil GDP growth over the medium term, reflecting an improved business climate and the completion of several projects, including in agriculture and infrastructure. Inflation is projected to peak in the first half of 2016 and then decline gradually, despite greater exchange rate flexibility, as a new monetary policy framework is introduced. The medium-term GDP deflator in local currency, however, is projected to be significantly higher than in the DSA carried out last year due to higher inflation and the exchange rate depreciation. The non-oil primary fiscal balance is projected to continue to improve gradually over the medium term to preserve debt sustainability given that international oil prices are expected to remain much lower than in 2011-13. The current account deficit is projected to improve over time due to oil exports recovery and through import substitution, particularly of agricultural and light industry products.

Staff estimates a gradual decline in public debt as a share of GDP, starting in 2016, due to projected improvements in the primary balance and nominal GDP growth. Over the next years, in light of softening oil revenues, staff estimates that the government will need to continue its fiscal consolidation efforts. Although challenging, this fiscal consolidation is needed to bring down the debt ratio to levels close to the ones seen in 2011-13. This fiscal consolidation could be achieved through additional efforts to raise non-oil taxation and expenditure savings. These savings could be achieved by further reducing fuel subsidies, improving the quality of capital investment (which would allow for a reduction in public spending), and containing the growth of the wage bill. With improved primary balances and solid economic growth, the gross public debt-to-GDP ratio is expected to decline to 38½ percent by 2020.3

Angola’s key macro 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.

The baseline debt path is vulnerable to various shocks, including on real GDP growth, exchange rate, and oil price. 4 5 6 7 For example, a sharp decline in international oil prices can trigger an economic slowdown in Angola as the government would cut public spending to offset lower oil related fiscal revenue. Under a real GDP growth shock scenario, the debt path would thus increase. Given Angola’s high dependence on oil, an oil price shock representing a 50 percent drop in the projected price of the Angolan oil basket in 2016 was also considered. Under this scenario, debt ratios would jump in 2016 and gradually come down over time although remaining above the baseline path.

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Angola: Public Sector Debt Sustainability Analysis, Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2015, 301; 10.5089/9781513542218.002.A003

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.
A03ufig2

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

Citation: IMF Staff Country Reports 2015, 301; 10.5089/9781513542218.002.A003

Source: IMF staff.
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Angola: Public Debt Sustainability Analysis, Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2015, 301; 10.5089/9781513542218.002.A003

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 obervationsfrom 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
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Angola: Public Debt Sustainability Analysis, Stress Tests

Citation: IMF Staff Country Reports 2015, 301; 10.5089/9781513542218.002.A003

Source: IMF staff.
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Angola: Public Debt Sustainability Analysis, Risk Assessment

Citation: IMF Staff Country Reports 2015, 301; 10.5089/9781513542218.002.A003

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, 18-Jun-15 through 16-Sep-15.5/ 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.

External Debt Sustainability Analysis

Angola’s external debt is sustainable. Under the baseline, external debt increases slightly from about 25½ percent of GDP in 2014 to 28½ percent of GDP in 2020. Of the various standard shocks, the most significant is a current account shock. The second most significant shock is the combined shock, followed by the real depreciation shock. The interest rate and real GDP growth 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, as mentioned above, two state-owned enterprises (Sonangol and TAAG).

Angola: External Debt Sustainability Framework, 2010–20

(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.

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Angola: External Debt Sustainability, Bound Tests 1,2

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2015, 301; 10.5089/9781513542218.002.A003

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 2016.
1

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

2

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.

3

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.

4

The real exchange rate shock assumed for Angola is 30 percent.

5

The interest rate increases by 200 basis points under the interest rate shock 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.

6

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.

7

The oil price shock shows only the direct impact of a decline in oil price on revenues in 2016. The price under this scenario is US$26.5 per barrel.

Angola: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola
Author: International Monetary Fund. African Dept.
  • View in gallery

    Angola: Public Sector Debt Sustainability Analysis, Baseline Scenario

    (In percent of GDP unless otherwise indicated)

  • View in gallery

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

  • View in gallery

    Angola: Public Debt Sustainability Analysis, Realism of Baseline Assumptions

  • View in gallery

    Angola: Public Debt Sustainability Analysis, Stress Tests

  • View in gallery

    Angola: Public Debt Sustainability Analysis, Risk Assessment

  • View in gallery

    Angola: External Debt Sustainability, Bound Tests 1,2

    (External debt in percent of GDP)