Fitch Ratings-London-27 March 2015: Fitch Ratings has revised the Outlook on Angola's Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at 'BB-'. The Country Ceiling has been affirmed at 'BB-' and the Short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
The revision of the Outlook on Angola's IDRs reflects the following key rating drivers and their relative weights:
MEDIUM
We expect Angola's economy to slow as a result of a sharp fall in government expenditure, a shortage of dollar liquidity and uncertainty about the future direction of oil prices constrains activity in the non-oil economy. Fitch expects growth to moderate to 3.3% in 2015, from 4.4% in in 2014 and 6.8% in 2013.
The 45% drop in oil prices since July 2014, which once again highlighted Angola's vulnerability to oil price shocks, is expected to result in a sharp drain on reserves, weaker economic growth and rising debt. This underpins today's revision of the Outlook to Negative. Nonetheless, the Angolan authorities have responded quickly to sharply lower oil prices by severely cutting expenditure and allowing the exchange rate to depreciate, in sharp contrast to the delayed policy response in 2008, the last time oil prices collapsed.
Government debt shot up between 2013 and 2014, rising to 33% of GDP from 23.1%, but still below the 'BB' median of 39%. Rising debt reflects a fall in nominal GDP as well as a USD7bn increase in borrowing over the year. The authorities forecast debt to rise to 45% of GDP in 2015. Fitch expects a more modest increase to 39%, although a sharp exchange rate depreciation or increased borrowing to support the balance of payments could see this figure rise above 40%. The authorities are planning to issue a eurobond (USD1.5bn) for the first time this year. Government deposits are high at 16.7% of GDP, and as a result net debt (17.9% of GDP) is well below the 'BB' median of 34% and supports the ratings at the current level.
We expect the current account to record a deficit for the first time since 2009, due to the fall in oil prices. The deterioration will be partly mitigated by a fall in imports, reflecting insufficient dollar liquidity and a sharp fall in capital imports as a result of the reduction in government spending on infrastructure. As a result, Fitch forecasts a current account deficit of 7% of GDP. Angola has relied on surpluses on the current account to offset the outflows on the capital account, as oil companies move savings abroad.
A sharp fall in reserves, as a result of a large balance of payments deficit, is a significant risk to the ratings. The National Bank of Angola (BNA) forecasts reserves to fall by USD8bn (to USD19bn). Fitch expects this figure to be lower, as reduced oil revenue limits the scope for oil companies to remit corporate savings abroad. A key priority of the BNA is to maintain six months of import cover (currently 6.2 months based on the BNA's calculations). The kwanza will be allowed to depreciate to maintain this objective.
Angola's 'BB-' IDRs also reflect the following key rating drivers:
A revised 2015 budget was passed in February, with a conservative oil price assumption of USD40/barrel. Spending on goods and services as well as capital projects was cut in half, while subsidies are expected to be eliminated by year-end. The authorities forecast a deficit of 7% of GDP, up from 3.2% in 2013. Fitch expects a deficit of 4% of GDP - still in line with the 'BB' median - based on an oil price assumption of USD65/bl in 2015 as well as higher-than-budgeted spending due to likely challenges containing expenditure at ministerial level.
Angola scores MPI3 - indicative of a high risk of systemic banking sector stress emerging - in Fitch's Macro Prudential Risk assessment due to high real private credit growth and real exchange rate appreciation. There is evidence of over-building in certain areas of the capital and exposures to the development and construction sectors feature prominently among Angolan banks' largest impaired or restructured loans. Credit growth to the private sector is likely to be minimal this year.
Bank capital adequacy stood at 20% in November 2014, above the 'BB' median. Resolving the failure of one of the country's largest banks, Banco Espirito Santo Angola (BESA), poses a contingent risk to the state. In August 2014 the BNA stated that BESA needed to raise around USD4.3bn (3.7% of GDP) to re-establish liquidity and solvency. State-owned oil producer Sonangol has injected new capital of USD200m. BESA's failure reflected weak credit controls and governance, but in our view it was not symptomatic of extreme problems throughout the banking system. Contagion risk appears to have been well contained.
Social indicators and human capital are weak compared with peers according to the UN Human Development Index (HDI). Angola was ranked 148th in the 2013 UN HDI, the bottom 20th percentile of countries Fitch rates and well below the 'BB' median of 46.7%.
Progress in addressing challenges facing the business environment has been slower than expected. The government is in the process of finalising a deal with the World Bank to address challenges facing the country's business environment. Angola dropped one place in the World Bank's Doing Business Survey for 2015, falling to 181 out of 189 countries. Governance indicators are poor even when compared with the 'B' median.
The government expects oil production to increase in 2015 to 1.83 million barrels/day, up from 1.65 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. The development of the pre-salt layer, where significant oil deposits are expected, remains uncertain given the high cost of exploration and development in the current environment of low oil prices.
RATING SENSITIVITIES
The main factors that could lead to a downgrade are:
- Deterioration in fiscal balances, renewed accumulation of arrears and a worsening of public and external debt dynamics, for example caused by sustained low oil prices or failure to adequately reduce spending to offset lost oil receipts
- Further delays in raising oil production in the short term, or deterioration in medium-term oil production potential
- Faster-than-forecast depletion of international reserves
The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to a positive rating action:
- A steady rise in oil revenue, which supports a return to fiscal surpluses and an improved sovereign balance sheet
- A continued track record of improved economic and public financial management and faster implementation of regulatory reforms leading to improvements in the business environment and per capita income, and improvements in governance.
- Strengthening the non-oil revenue base
KEY ASSUMPTIONS
Fitch assumes Brent oil prices to recover from current levels, averaging USD65/bl in 2015 and USD75/bl by 2016.
Fitch assumes a continuing stable political environment, with no significant challenge to the current ruling establishment.
