Fitch Ratings has downgraded Angola's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-'. The Outlook is Stable. Fitch has affirmed Angola's Short-term IDR at 'B'. Fitch has also lowered the Country Ceiling to 'B+'.
KEY RATING DRIVERS
The downgrade of Angola's Long-term IDRs reflects the following key rating drivers and their relative weights:
HIGH
Angola's dependence on hydrocarbons leaves it exposed to the sharp drop in oil prices, which has resulted in rising public debt, falling reserves and weakened growth. Nonetheless, Fitch acknowledges the authorities' timely response to the oil price shock, including tightening monetary and fiscal policy and allowing the exchange rate to devalue significantly. This policy response has contributed towards the Stable Outlooks.
Government debt is expected to jump above 40% of GDP in 2015 from 23.1% in 2013, but remain below the 'B' median of 51.3%. Rising debt reflects a fall in nominal GDP as well as borrowing estimated at USD15bn over the past two years. Due to large government deposits, net debt remains less than half the 'B' median at 22.1% of GDP) and provides a significant fiscal buffer and support to the 'B+' rating. The authorities are planning to issue a Eurobond (USD1.5bn) for the first time this year and continue to sign new loan facilities as well as credit lines to ensure sufficient external financing.
The current account is expected to shift into deficit in 2015, the first time since 2009. Angola's oil exports are also exposed to weaker Chinese demand, with 50% of exports destined for China. The sharp fall in exports will be partly mitigated by lower imports, due to compression, insufficient dollar liquidity as well as a sharp fall in capital imports. As a result, Fitch forecasts a current account deficit of 7.7% of GDP. Due to large dis-investment, as oil companies remit cash balances abroad, the current account deficit plus net FDI is large at -9.8% - against the 'B' median of -2.9% of GDP - and is a significant source of vulnerability to the rating. If oil prices remain lower for longer, closing the gap on the balance of payments could prove costly, particularly if the authorities chose to limit the drawdown of reserves.
Angola's 'B+' IDRs also reflect the following key rating drivers:
The National Bank of Angola's (BNA) decision to allow the kwanza to devalue by 25% since January 2015, has limited reserve burn, although reserves have still fallen to USD24.5bn in July, down USD3.5bn since 3Q14 - when oil prices started to fall. In 3Q08-2Q09, the kwanza fell by 4% against the dollar, but maintaining the exchange rate cost USD7.1bn in foreign reserves, prompting the government to ask the IMF for balance of payments support. A continued shortfall of dollars due to the widening balance of payments deficit is likely to maintain pressure on the currency and international reserves. We expect international reserves as a percentage of current external payments to fall to 5.4 months in 2015, which is still above the 'B' category median of 3.6 months and the previous low of 3.3 months in 2009.
The authorities have taken a proactive stance to fiscal consolidation, including a conservative oil price assumption (USD40/b), cutting capital and current expenditure, and removing fuel subsidies. Despite the downward revision in our oil price assumption to USD55/b from USD65/b since the last review in March 2015, Fitch has maintained the budget deficit forecast of 4% of GDP, due to larger than anticipated cuts in capital expenditure.
Angola's growth prospects have continued to worsen. Growth in the non-oil sector is expected to slow further this year. The authorities forecast growth of 4.4% (previously 6.6%) in 2015, as a rebound in oil production offsets weaker non-oil growth. Fitch expects growth of 3%, below the 'B' median of 4.4%, as the sharp fall in government expenditure, a shortage of dollar liquidity and uncertainty about the future direction of the oil price, constrains activity in the non-oil economy. Per capita income has declined steadily, falling to USD4,279 in 2015 from USD6,187 in 2013, as a result of lower oil prices and a weaker exchange rate.
Oil production has increased in 12015, averaging 1.83 million barrels/day, up from 1.7 million barrels/day in 2014. The recovery reflects the scaling up of production at the CLOV Field (160,000 barrels/day) as well as the resolution of persistent technical challenges. Over the medium term, the development of fields in the Kwanza Basin as well as the new LNG production unit will support production, but may not be sufficient to significantly raise production due to a high decline rate of 12% for maturing fields.
Weak governance and social indicators are a constraint on Angola's rating. Angola's rank in the World Bank's Doing Business Indicators remains extremely weak. Angola dropped one place in the World Bank's Doing Business Survey, falling to 181 out of 189 countries in 2015. Governance indicators are weak relative to the 'B' median. Angola was ranked 149th in the 2014 UN HDI, the bottom 20th percentile of countries Fitch rates.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently well balanced. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.
The main factors that, individually or collectively, could lead to negative rating action are:
- A deterioration in fiscal balances and a worsening of public and external debt dynamics.
- A sharp depletion of international reserves.
- A deterioration in medium-term oil production potential.
The main factors that could lead to positive rating action are:
- A steady rise in oil revenue supporting an improved sovereign balance sheet, and strengthening the non-oil revenue base.
- An improvement in the business environment as well as income per capita, and rising governance standards.
KEY ASSUMPTIONS
Fitch assumes Brent oil prices to recover from current levels, averaging USD60/bl in 2016 and USD70/bl by 2017.
Fitch assumes a continuing stable political environment, with no significant challenge to the current ruling establishment.
