Fitch Ratings forecasts Angola’s government debt to exceed 80% of GDP by 2023 due to the kwanza depreciation and high foreign-currency debt. Despite current account surpluses, economic growth is expected to slow, primarily driven by lower oil production and FX scarcity, posing challenges to debt sustainability.

Amidst an expectation that growth will slow, Fitch Ratings has forecasted that Angola’s government debt would rise above 80% of gross domestic product (GDP) in 2023.

The surge is from 60.5% reported in 2022, driven by the impact of the depreciation of kwanza on the government’s high stock of foreign-currency debt. In its latest rating note, Fitch affirmed Angola’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook.

According to the global rating agency, Angola’s IDRs balance weak governance indicators, high inflation, high levels of foreign-currency denominated government debt and one of the highest levels of commodity dependence among Fitch-rated sovereigns.

The rating note indicated that Angola has higher international reserves relative to peers, with current account surpluses and manageable debt repayment risks due to a still supportive oil price environment over the next two years.

“We expect Angola to continue to run substantial current account surpluses, albeit narrowing to 5.1% of GDP in 2023, from 9.5% in 2022, primarily reflecting the decline in Brent prices to an average USD82/bbl from USD98/bbl in 2022”.

Fitch analysts forecast the current account surplus will then remain broadly unchanged at 5.2% of GDP in 2024 based on an average Brent price of USD80/bbl, before narrowing to 2.3% in 2025 -based on an average Brent price of USD70/bbl.

The ratings firm forecast international reserves of USD14.5 billion at end-2023 from USD14.7 billion in 2022, increasing to USD15.2 billion in 2025.

It said the moderate increase in international reserves reflects the current account surplus largely offset by significant outflows through the financial account, associated with the operations of oil companies (trade credits and profit repatriation), sizeable government debt repayments and accumulation of balances in escrow accounts.

Reserve coverage of current external payments will average 5.7 months over 2024-2025, well above the ‘B’ median of 3.3 months, though fx supply remained tight.

Fitch considers that FX liquidity in the Angolan economy remained constrained in the second half of 2023, following the sharp 35% depreciation of the kwanza in June 2023.

“…We understand the Angolan treasury remained absent from the domestic FX market through November, due to significant external debt repayments”.

While Kwanza’s official exchange rate has stabilised since July, analysts said they understand that a parallel exchange rate has developed with a differential of about 16.0% at the end of November 2023. Fitch also estimates that the FX backlog in the banking sector has increased since June.

The central bank (BNA) did not take additional measures to ease the FX scarcity beyond the immediate actions in June, when it sold USD400 million to the market and made USD320 million in FX-denominated bonds available, preferring instead to protect the country’s level of international reserves.

“We assume the kwanza’s 2024 end-of-period official exchange rate will be USD/AOA960, from an expected USD/AOA848 in 2023”, Fitch analysts said amidst expectation that inflation will worsen.

Fitch forecasts inflation to average 24.5% in 2024 and 16.6% in 2025, from an estimated 13.8% in 2023, owing to the depreciation of the kwanza and further implementation of gasoil subsidies’ reform.

In October, inflation rose to 16.6% from a multi-year low of 10.6% in April, driven by higher imported inflation and an 87.5% reduction in gasoline subsidies in June.

BNA hiked its key policy rate by 100bp to 18% and increased the local-currency mandatory reserves requirement to the same level in October, to address excess liquidity in the banking system. Fitch expects Angola’s real GDP growth to decline to 0.2% in 2023 and to average 1.2% over 2024-2025, from 3.0% in 2022.

“Weaker growth will reflect lower oil production, which we forecast to fall to an average 1.09 million barrels per day (mbpd) in 2023 and 1.05mbpd over 2024-2025, from 1.14mbpd in 2022”.

The higher inflation and FX scarcity will dampen consumption and the import of goods, weighing on non-oil economic activity. Analysts said their forecasts imply that Angolan economic growth will remain below the 3.3% we expect for the ‘B’ median over 2024-2025.

Angola’s budget is expected to remain broadly balanced over the forecast horizon, with cash balances of 0.1% and -0.2% of GDP in 2024 and 2025 respectively, from a forecast deficit of 1.4% in 2023.

“Under our baseline scenario, the improvement will be driven by 50% reduction in gasoil subsidies in 2024 and a further 25% reduction in 2025, translating into 2pp of GDP in additional fiscal space through 2025.

“Our forecast is subject to risks from Angola’s weak macroeconomic environment and the potential delay in implementation of the reform”, Fitch Ratings said.

Analysts estimate the government’s external amortisations will amount to USD5.6 billion in 2023, USD5.0 billion in 2024 and USD6.0 billion in 2025, compared with USD4.8 billion in 2022. Higher amortisations reflect the end of the moratorium from Chinese creditors in June 2023.

Amortisations will be met through a combination of disbursements from bilateral and multilateral sources, use of government deposits and liquidity in escrow accounts related to oil-backed loans to China.

Fitch forecasts Angola’s general government debt to increase to 80.5% of GDP at end-2023, from 60.5% in 2022, driven by the impact of the depreciation of kwanza on the government’s high stock of foreign-currency debt.

“We expect the debt ratio to then decline to 70.0% and 66.7% of GDP in 2024 and 2025, respectively, reflecting nominal GDP growth and primary budget surpluses. Nigeria Eurobond Slumps after CBN Resumes OMO Auction

Our forecasts imply that Angola’s debt/GDP ratio will remain above the ‘B’ median of 54.4% we expect over 2024-2025. We estimate the interest/revenue ratio at a relatively high 23.9% in 20242, the rating note stated. #Angola Debt to Hit 80.5% of GDP in 2023 –Fitch

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