Angola: Third Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Augmentation And Rephasing of Access, Waivers of Nonobservance of Performance Criterion and Applicability of Performance Criterion, Modifications of Performance Criteria, and Completion of Financing Assurances Review— Supplementary Information, and Supplementary Letter of Intent

Third Review under the Extended Arrangement Under the Extended Fund Facility, Requests for Augmentation and Rephasing of Access, Waivers of Nonobservance of Performance Criterion and Applicability of Performance Criterion, Modifications of Performance Criteria, and Completion of Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Angola

Abstract

Third Review under the Extended Arrangement Under the Extended Fund Facility, Requests for Augmentation and Rephasing of Access, Waivers of Nonobservance of Performance Criterion and Applicability of Performance Criterion, Modifications of Performance Criteria, and Completion of Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Angola

Revisions to the Macroframework

A. Non-Oil Primary Fiscal Deficit

1. There is no clear evidence that the end-June 2020 performance criterion (PC) on the non-oil primary fiscal deficit (NOPFD) was not met and, therefore, the authorities request a waiver of applicability. Given serious administrative capacity limitations in the wake of the COVID-19 pandemic, staff continues to work with the authorities to verify the data related to the PC and to come to an assessment on this PC.

B. International Oil-Price Outlook

2. Oil-price projections for Angola were revised upward relative to the staff report to reflect recent developments in global oil markets.1 The annual revisions, covering 2020–30, are consistent with the IMF’s Brent price projections of August 17, 2020, and continue to incorporate a discount for Angola’s reference price as a matter of prudence (Text Table 1).

Text Table 1.

Projections for Oil Prices, 2019–30

(U.S. dollars per barrel)

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

For 2020–25, updated GAS assumptions as of August 17, 2020; for 2026–30, same percentage increases as in the staff report.

C. Debt Sustainability

3. The revised framework assumes a somewhat different debt relief package, but it preserves debt sustainability (Figure 1). Although the authorities reached agreements on substantial debt relief with two of Angola’s large creditors, debt relief negotiations with a third large official creditor have yielded a different result from the assumption made in the staff report. The new baseline scenario, presented in the revised framework (Tables 19), now projects that all debt service payments until-end December 2020 for loans from that creditor will be rescheduled under the G20 Debt Service Suspension Initiative (G20DSSI). With the authorities sending a formal letter of request to that creditor since the issuance of the staff report, as part of the G20DSSI, this agreement has been activated.

4. The higher oil prices lead to narrower overall fiscal deficits and improved debt dynamics relative to the staff report, despite a smaller debt relief. The NOPFDs in 2020–30 remain broadly unchanged compared to the staff report. However, the revised oil-price projections have a positive impact on revenue, improving the overall fiscal balances and debt dynamics (Text Table 2). Projected debt reduction, measured as a percentage of GDP, is now faster in the coming decade and in 2025 is quite close to the authorities’ medium-term debt objective of 65 percent of GDP.

Text Table 2.

Angola: Fiscal Balance and Public Debt, 2020–30

(Percent of GDP)

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

Using revised-oil price projections and debt relief assumptions.

5. Under the new baseline scenario, Angola’s fiscal gross financing needs (GFNs) are reduced notably. The combined effect of the revisions to the framework lead to GFNs, which, on average, are lower by 1½ percent and 1 percent of GDP in 2021– 25 and 2026–30, respectively (Text Table 3 and Figure 1).

Text Table 3.

Angola: Gross Financing Needs, 2021–30

(Percent of GDP)

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

Using revised oil-price projections and debt relief assumptions.

6. As a result, debt servicing capacity is stronger than in the staff report. Lower GFNs are offset by reduced issuance of both domestic and foreign debt and lesser reliance on drawdowns of Treasury deposits at the central bank and commercial banks. Specifically, there is lower issuance of T-bills and T-bonds across the board, with the exception of 2026, when the Eurobond issuance assumed in the staff report is eliminated; lower issuance of Eurobonds in 2025 and 2028–30; and smaller drawdowns of Treasury deposits at the central bank and commercial banks until 2025, and even some partial replenishment of deposits in 2022 and after 2025 (Text Table 4).

7. Under the revised framework, fiscal financing gaps remain closed, while keeping the outcomes in line with program parameters and preserving Angola’s debt sustainability. The lower debt ratios (Text Table 2) and gross financing needs (Text Table 4) relative to the staff report continue to allow staff to support the authorities’ request to complete the Third Review under the Extended Fund Facility.

Text Table 4.

Angola: Financing Assumptions, 2020–30

(Percent of GDP)

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Source: IMF Staff estimates and projections.

Less than one-year maturity.

EBS/20/128, dated July 20, 2020.

For 2020–25, updated GAS assumptions as of August 17, 2020; for 2026–30, same percentage increases as in the staff report.

Changes relative to the staff report are concentrated in 2-year and 3-year T-bonds.

Includes Treasury deposits at the central bank (BNA) and commercial banks.

8. Although debt is sustainable, significant vulnerabilities remain. Debt dynamics are highly sensitive to further oil-price volatility. Other areas of vulnerability include exposure to currency risk, exposure to interest-rate risk, and a narrow creditor base, especially in the domestic market.

D. External Sector

9. The revised oil-price projections also have a positive impact on the projected current accounts (CAs) and net international reserves (NIRs). Relative to the staff report, the CA balance is projected to improve cumulatively by almost US$1.5 billion in 2020–21 on the back of higher oil exports. Even though the CA improvement is partially offset by lower projected net foreign direct investment (FDI) inflows—resulting from lower transfers from overseas parent oil companies, which are historically negatively correlated with oil prices—and by larger amortization payments due to the smaller debt relief, the expected reduction in NIRs is now smaller than in the staff report. However, and despite the recent increase in oil prices, NIRs remain substantially below those of the Second Review baseline scenario, and the cap to the relevant program adjustor is still binding.2 Accordingly, it is proposed to keep the December 2020 and June 2021 NIR quantitative PCs as specified in the MEFP (Text Table 5).

Text Table 5.

Angola: Cumulative Balance of Payments, 2020–21

(US$ millions)

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

Using revised oil-price projections and debt relief assumptions.

10. The updated oil-price projections require that Text Table 2 in the Technical Memorandum of Understanding be revised. The revision was agreed with the authorities, who signed-off on the revised table—see supplementary Letter of Intent.

E. Monetary Sector

11. The modifications to the outlook do not warrant a major change in the monetary policy stance in the near term. The temporary interruption of the gradual tightening initiated in 2019Q4 in favor of a more accommodative stance in 2020, followed by renewed tightening in 2021, remains appropriate. The net effect of the larger stocks of NIRs and greater expansion of credit to the Central Government on money aggregates is overall slightly expansionary in 2020–21 relative to the staff report. The expansion of credit to the Government induces a modest crowding out of credit to the private sector relative to the staff report (Text Table 6).

Text Table 6.

Angola: Monetary Sector, 2020–21

(Average percent change, unless stated otherwise)

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

Using revised oil-price projections and debt relief assumptions.

Proposed Access Augmentation

12. The widening of the external financing gaps since the Second Review continue to support the case for the proposed access augmentation (Text Table 5). The higher cumulative balance of payments (BOP) gap over the remainder of the program is mainly driven by a substantial worsening of the CA, reflecting the lower oil-price path, lower portfolio inflows (no Eurobond issuance in the wake of temporary loss of market access), and larger deposit outflows (in response to stronger Kwanza depreciation). These BOP shortfalls are only partially offset by higher net FDI inflows from overseas parent oil companies and lower medium- and long-term amortization (reflecting debt relief). The wider external gap since the Second Review is to be partly accommodated by a drawdown of international reserves, with the remainder filled by the proposed access augmentation. Further depletion of international reserves would not be prudent—at 106.5 percent of the ARA metric by end-2021, reserves already fall short of levels considered appropriate for commodity exporters (i.e., over 120 percent).

Text Table 7.

Angola: Gross Financing Needs, 2020–21

(Percent of GDP)

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

Using revised oil-price projections and debt relief assumptions.

13. Directing the access augmentation toward budget support remains justified by the GFNs during the program period, which are still substantially larger than at the time of the Second Review. Specifically, average public GFNs in 2020–21 are still estimated to be some 2¼ percent of GDP larger than the Second Review projections (Text Table 7).

14. The proposed augmentation would also help with containing liquidity pressures on the Treasury. In the staff report, the wider financing gaps were filled in large part by almost fully running down the Treasury’s deposits at the central bank and liquid assets of the Sovereign Wealth Fund, leaving the financing of the budget highly vulnerable to shocks. With higher oil prices, the augmentation would allow somewhat lower drawdowns of Treasury deposits, which would, however, continue to be low: by end-2021, they would amount to less than ½ month of annual spending (Text Table 8).

Table 8.

Angola: Treasury Deposits at the Central Bank, End-2021

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Source: IMF Staff estimates and projections.

EBS/20/128, dated July 20, 2020.

Using revised oil-price projections and debt relief assumptions.

Other Developments

15. The National Assembly adopted a supplementary budget for 2020. Approved on July 28, 2020, the supplementary budget is consistent with the program’s PC for the NOPFD for end-2020 and incorporates additional non-oil revenue measures to those discussed in the staff report. Specifically, it includes measures to reduce tax arrears, remove selected value-added tax exemptions, increase import duties,3 and raise export tariffs on selected national products. To accommodate higher essential spending and support households and businesses within a tight spending envelope, the supplementary budget rebalances resources from low-priority expenditure to health, education, and agriculture.

16. Adoption of the draft Central Bank (Banco Nacional de Angola, BNA) and Financial Institutions Laws (FIL) has been progressing.

  • BNA management has agreed to incorporate the latest drafting suggestions from IMF staff in the draft Central Bank Law to reflect international good practices regarding the BNA’s mandate, governance structure, and autonomy. These suggestions include a clear price stability objective; an improved procedure for the appointment and dismissal of Board members; an appropriate framework for lending to financial institutions; limited lending to Government; prohibition to conduct quasi-fiscal activities; and revised provisions regarding BNA’s capital, profits and losses, reserves, and profit distribution. The draft BNA Law is expected to be sent to the Council of Ministers soon.

  • The draft FIL, with a new bank resolution framework, was approved by the Council of Ministers on August 14, 2020 and IMF staff recommendations have been inserted into it, including provisions to (i) safeguard the use of public funds, including a loss imposition requirement to the holders of capital instruments and the holders of other subordinated claims; (ii) mitigate risks involved in the asset-management tool; and (iii) strengthen the powers of the BNA to prevent contagion from troubled banks or to maximize value for all creditors as a whole when transferring assets and liabilities.

Figure 1.
Figure 1.

Angola: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(Percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 281; 10.5089/9781513557076.002.A002

Source: IMF staff.1/ Public sector is defined as the Central government plus public companies and includes public guarantees, defined as CG garantees to SOEs and private firms.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 changes in the stock of guarantees, 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.
Table 1.

Angola: Main Economic Indicators, 2019–23

(Units as indicated)

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Sources: Angolan authorities; and IMF staff estimates and projections.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Includes debt guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes debt guaranteed and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Table 2a.

Angola: Statement of Central Government Operations, 2019–23

(Billions of Kwanzas, unless otherwise indicated)

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Sources: Angolan authorities; and IMF staff estimates and projections.

Historical figures may include valuation effects related to foreign-currency denominated deposits. Projections for 2020–23 include deposit withdrawals from FSDEA.

Includes repayment of debt owed to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Spending on education, health, social protection, and housing and community services. For 2020 onwards are projected floors.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Includes debt guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes debt guaranteed and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Table 2b.

Angola: Statement of Central Government Operations, 2019–23

(Percent of GDP, unless otherwise indicated)

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Sources: Angolan authorities; and IMF staff estimates and projections.

Historical figures may include valuation effects related to foreign-currency denominated deposits. Projections for 2020–23 include deposit withdrawals from FSDEA.

Includes repayment of debt owed to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Spending on education, health, social protection, and housing and community services. For 2020 onwards are projected floors.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Includes debt guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes debt guaranteed and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Table 2c.

Angola: Statement of Central Government Operations, 2019–23

(Percent of non-oil GDP, unless otherwise indicated)

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Sources: Angolan authorities; and IMF staff estimates and projections.

Historical figures may include valuation effects related to foreign-currency denominated deposits. Projections for 2020–23 include deposit withdrawals from FSDEA.

Includes repayment of debt owed to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Spending on education, health, social protection, and housing and community services. For 2020 onwards are projected floors.

Includes debt of the Central Government, external debt of state oil company Sonangol and state airline company TAAG, and guaranteed debt.

Includes debt guaranteed and excludes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).

Excludes debt guaranteed and includes debt owed by the Central Government to Sonangol related to the National Urbanization and Housing Plan (PNUH).