Angola: Staff Report for the 2018 Article IV Consultation—Debt Sustainability Analysis

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola

Public Debt Sustainability Analysis

1. The main assumptions underpinning the debt sustainability analysis (DSA) are based on the baseline scenario of the 2018 Article IV Staff Report (SR).1 Growth is expected to recover modestly to 2¼ percent in 2018 and pick up over the medium term to about 5 percent, supported by resumption of private sector credit, scaling up of public investment, and implementation of structural reforms to improve governance and the business climate. Inflation is expected to remain high at 24½ percent (y/y) in 2018, driven by a relatively high exchange rate devaluation pass-through, and adjustment of domestic fuel prices and public utilities’ tariffs, but it would gradually decline to single digits over the medium term as the exchange rate stabilizes and fiscal and monetary policies remain tight. The fiscal consolidation entails some frontloading in 2018 (2 percent of GDP improvement in the non-oil primary fiscal balance) and would continue over the medium term at a gradual pace (¾ of one percent of GDP improvement per year on average). The external current account deficit would remain modest at about 3 percent of GDP over the medium term, reflecting the outlook for international oil prices, scope for import substitution and non-oil export promotion, as well as fiscal discipline.

2. The financing strategy for 2018 envisages greater reliance on domestic sources. The financing mix assumed in the baseline scenario— which reflects the authorities’ borrowing strategy underpinning the 2018 budget—envisages continued reliance on domestic sources, financing from bilateral creditors like China, multilaterals, commercial banks, and issuance of a US$2 billion Eurobond. Market sentiment towards Angola has been positive lately, owing to more favorable oil prices and the willingness of the new government to implement difficult but much-needed reforms. Angola’s Eurobond that was placed at a 9½ percent annual yield in November 2015 is trading close to historically low yields (text chart).

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Angola Eurond Yield and Oil Price

(yield in percent, oil price in US$/barrel)

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A003

Sources: Bloomberg and Fund staff calculations.

3. Angola’s key macroeconomic variables forecast track record shows a relatively large median error compared with advanced and emerging market surveillance countries. This in part reflects oil production and oil price volatility, swings in agricultural production due to weather conditions, as well as the very low level of economic diversification. The baseline medium-term growth is predicated on the drivers of growth discussed above and absence of exogenous shocks or natural disasters. The envisaged medium-term fiscal consolidation is more gradual and moderate than that implemented in 2015–16— almost 18 percent of GDP improvement in the non-oil primary fiscal balance. As explained in the SR, risks to medium-term projections appear balanced, but Angola’s debt trajectory faces vulnerabilities.

4. Public debt increased by almost 25 percentage points of GDP between 2014 and 2017, reflecting the impact of exchange rate depreciation in 2015–16, primary fiscal deficit, and recapitalization of state-owned enterprises and banks. At end-2017, external debt accounted for over half of total debt; FX-denominated or linked debt amounted to about 80 percent of total debt; net public debt—gross debt minus government’s cash deposits—stood at 59 percent of GDP at end-2017;2 and the net present value (NPV) of debt was estimated at 55¾ percent of GDP, reflecting external financing on semi-concessional terms (text table).

Public Debt, 2014–17

(In percent of GDP)

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Sources: Angolan authorities and IMF staff calculations.

Discount rates: average Eurobond yield for external debt and projected non-oil GDP growth for domestic debt in local currency.

5. Under the baseline scenario, Angola’s public debt is projected to peak at about 73 percent of GDP in 2018 but would gradually converge to the authorities’ target over the medium term. The projected increase in 2018 is mostly driven by exchange rate adjustment and clearance of about 4½ percent of GDP in domestic payments arrears. The envisaged fiscal consolidation and stronger nominal GDP and fiscal revenues in local currency—boosted by higher oil prices and currency depreciation—would contain the increase in debt-to-GDP ratios (text table). The additional fiscal consolidation assumed for the medium term would gradually improve the non-oil primary fiscal balance and bring public debt to the authorities’ target of 60 percent of GDP at the end of the projection horizon.3

Public Debt Dynamics, 2018

(In percent of GDP)

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Sources: Angolan authorities and IMF staff calculations.

6. Angola’s elevated debt burden indicators and unfavorable debt profile expose debt dynamics to macroeconomic shocks and pose risks to debt sustainability. In 2018, Angola’s debt-to-GDP ratio and gross financing needs (GFN)-to-GDP ratio would exceed the Fund’s MAC-DSA high-risk benchmarks for emerging economies, making debt dynamics sensitive to macroeconomic shocks.4 Also, the debt profile—short-term domestic debt maturities and large share of FX-denominated or linked instruments—makes debt dynamics sensitive to changes in market perceptions and the exchange rate.

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

  • Growth shock. If projected real GDP growth rates are lowered by half standard deviation, the debt ratio would remain above the high-risk benchmark of 70 percent of GDP until 2020 and above 65 percent of GDP over the medium term.6

  • Real exchange rate shock. A one-time real depreciation of 30 percent would increase the debt ratio to over 80 percent of GDP on impact and debt would remain above the high-risk benchmark for emerging economies over the entire projection horizon. However, the shift to a more flexible exchange rate regime in early 2018 and the large upfront adjustment of the exchange rate may lessen the likelihood of such a shock in the future. A large exchange rate depreciation would boost fiscal revenue and nominal GDP—factors not considered in this standardized shock scenario—thus mitigating the impact on the debt ratio.

  • Combined shock. A combination of various macro-fiscal shocks would persistently keep the debt ratio close to 100 percent of GDP and GFN well above the high-risk benchmark for emerging economies.

  • Financial sector contingent liability shock. A one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets would also keep both debt and GFN ratios elevated over the next few years.

  • Oil price shock. To reflect the risk from Angola’s high dependence on oil, a customized scenario featuring a one-time 30 percent drop in the projected price of the Angolan oil basket in 2019 was also considered. Under this scenario, debt burden-to-revenue and GFN-to-GDP ratios would jump in 2019 and debt-to-GDP ratio would remain persistently elevated.7

8. The heat map and fan charts also show that Angola’s public debt is subject to significant vulnerabilities. The heat map shows that debt and GFN breach their corresponding high-risk benchmarks in both baseline and stress test scenarios, and flags risks stemming from short maturities of domestic debt and external debt. The fan charts depict the evolution of the debt-to-GDP ratio over the medium term, based on symmetric and asymmetric distribution of risks. In the former, upside and downside risks to the main macroeconomic variables are treated as equally likely, while in the latter some shocks are restricted to be negative to reflect downside risks to the debt trajectory. The asymmetric distribution illustrates that debt would exceed the high-risk benchmark for emerging economies with high likelihood.

9. Angola’s public debt is assessed as sustainable under the baseline scenario but subject to significant vulnerabilities. The key assumptions underpinning this scenario—including gradual fiscal consolidation, gradual pickup in growth, and relatively favorable oil prices as indicated by WEO projections, would keep debt burden indicators manageable and at sustainable levels. However, Angola’s debt sustainability under the baseline is subject to significant vulnerabilities per stress test scenarios.

10. Risks to debt sustainability are mitigated by several factors, including the availability of buffers (liquid government deposits and international reserves), ability to tap financing on semi-concessional terms, and the government’s willingness to implement structural reforms. With support of Fund-Bank TA, the government is committed to pursue a prudent debt management strategy and develop the domestic debt market. This strategy would allow replacing gradually government domestic securities denominated in/linked to foreign currency with local currency government bonds with increasingly longer maturities. In turn, this would help improve the debt profile and contain GFN, thus mitigating risks to debt sustainability.

External Debt Sustainability Analysis

11. The debt coverage in the external DSA only includes external debt of the general government and debt of SOEs Sonangol and TAAG. No information is yet available on private sector external debt. The authorities are making efforts to collect private sector debt data.

12. Angola’s external debt is projected to remain stable over time. Under the baseline scenario, it is expected to remain at around 40 percent of GDP over the projection years. But its share on total debt would remain elevated over the medium term, as the government would continue financing the bulk of public investment with external credit lines. On the other hand, this strategy would reduce domestic debt rollover risks. The baseline scenario also assumes that Sonangol and TAAG would not accumulate new external debt, in line with the authorities’ intentions. External financing requirements are projected to remain manageable at about 6–7 percent of GDP over the medium term.

13. Angola’s external debt remains vulnerable to shocks, especially to unfavorable current account developments (e.g., unforeseen export losses or spikes in imports) and large exchange rate depreciations. These risks would be mitigated by the government’s efforts to implement structural reforms to diversify the economy, boost FDI, and strengthen external buffers.

Figure 1.
Figure 1.

Angola: Public Sector Debt Sustainability Analysis (DSA)—Risk Assessment

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.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, 27-Dec-17 through 27-Mar-18.5/ 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.
Figure 2.
Figure 2.

Angola: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.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 obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure 3.
Figure 3.

Angola: Public DSA—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.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.
Figure 4.
Figure 4.

Angola: Public DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A003

Source: IMF staff.
Figure 5.
Figure 5.

Angola: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.A003

Source: IMF staff.
Figure 6.
Figure 6.

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

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2018, 156; 10.5089/9781484360194.002.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 2010.
Table 1.

Angola: External Debt Sustainability Framework, 2013–2023

(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 deflat

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. Includes Sonangol’s estimated debt service on existing debt.

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.

1

The debt coverage considered in the public debt DSA includes: domestic and external debt of the general government and external debt of the state-owned oil company Sonangol and airline company TAAG.

2

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

3

The residuals from the contribution to changes in public debt mainly reflect exchange rate depreciation.

4

Debt sustainability analysis for market-access countries, http://www.imf.org/external/np/pp/eng/2013/050913.pdf.

5

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.

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 2019. The price under this scenario is US$42 per barrel.

Angola: 2018 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 Eurond Yield and Oil Price

    (yield in percent, oil price in US$/barrel)

  • View in gallery

    Angola: Public Sector Debt Sustainability Analysis (DSA)—Risk Assessment

  • View in gallery

    Angola: Public DSA—Realism of Baseline Assumptions

  • View in gallery

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

    (External debt in percent of GDP)