Fitch Ratings has upgraded Angola's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B-' from 'CCC'. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
The upgrade of Angola's IDRs reflects the following key rating drivers and their relative weights.
There has been a significant improvement in the country's fiscal and external metrics underpinned by a return to positive economic growth, sound fiscal management and higher oil prices. Oil prices have recovered sharply since the onset of the Covid-19 pandemic and the probability of downside scenarios related to oil markets has declined relative to September 2020, when we downgraded Angola to 'CCC', or to September 2021 when we affirmed the 'CCC' rating. Angola's heavy dependence on oil, accounting for on average 34% of GDP, 56% of fiscal revenue and grants and 96% external receipts during the five years to 2020, has led to substantial improvements on key credit metrics.
Based on data up to November, Fitch estimates Angola's central government (CG) debt to GDP ratio fell to 78.5% in 2021, a marked improvement from our forecast of 126.9% at the September 2020 review and well below 123.8% of GDP in 2020. We forecast CG debt to decline further to 74.8% of GDP in 2022 and 73% in 2023. The lower debt ratios are the result of substantially higher nominal GDP (up 32.4% in 2021, partly reflecting oil prices), a stabilisation of the kwanza (with the earlier depreciation an important driver for rising debt in previous years, given foreign-currency denominated debt makes up 70% of total debt) and continued commitment to fiscal consolidation.
Despite the sharp reduction, Angola's debt remains above the current 'B' median (68% of GDP). In addition to the CG's debt obligations, state-owned enterprises' debt was AOA2.6 trillion (5.5% of GDP) at end-June 2021. Most of this is at Sonangol, the state-owned oil company.
We estimate the CG cash surplus at 2.5% of GDP in 2021, and forecast a surplus of 1.1% of GDP in 2022, amid stronger GDP growth and broadly stable oil prices. We expect expenditure to remain broadly stable relative to GDP. Covid-19 will continue to exert some spending pressure and we expect the government will avoid further fiscal consolidation ahead of 2022 elections.
The authorities have built a significant record of stability-oriented economic reform and fiscal consolidation under the IMF Extended Fund Programme that concluded in 2021. They have restructured the oil sector, moved to a more flexible exchange rate regime, introduced value-added tax in October 2019 and lowered the non-oil fiscal deficit from above 50% of non-oil GDP before 2014 to 6.7% in 2021. Maintaining adherence to fiscal prudence could become more challenging as social pressures could rise after five years of economic contraction and the election could lead to a change in economic management but we do not expect sharp reversals of previous policies.
Liquidity pressures have also eased considerably with the increase in oil export receipts accompanying the rise in global oil prices. We estimate a current account surplus of 8.1% of GDP in 2021, after 1.5% in 2020. The surplus will narrow to 7.4% in 2022 and 2.8% in 2023 on the back of slightly lower oil prices, leaving external balances in a comfortable position. Gross international reserves increased to USD15.4 billion in 2021 and we expect a further increase to USD15.9 billion in 2022, equivalent to 7.2 and 7.3 months of current external payments, respectively, up from USD14.9 billion in 2020. This includes the approximately USD1 billion increase in Angola's IMF Special Drawing Rights allocation last August.
Pressure on external finances could intensify again if there is a sharp fall in oil prices, given rising external public debt service of USD5.6billion in 2022, USD6.9 billion in 2023 and USD6.5 billion in 2024. However, fiscal and external adjustment have lowered the fiscal and external breakeven oil prices to around USD50 per barrel, leaving some buffers before new fiscal and external liquidity pressures tensions would build up again. Under our baseline we do not expect the government will request another IMF programme. However, should external pressures arise, we believe a new arrangement with the IMF would be possible, given the successful completion of the recent programme and the good relationship built in recent years.
Angola's 'B-' IDRs also reflect the following key rating drivers:
After five consecutive years of economic contraction, we forecast GDP growth of 0.1% in 2021, accelerating to 2.1% and 3.1% in 2022 and 2023, respectively, mainly driven by the non-oil sector. We expect oil production to fall to 1.13 million barrels per day in 2021 and 2022 from 1.27 million barrels per day in 2020. Weak investment in the oil sector pose downside risks to this forecast, and the return to annual oil licensing rounds will only start to affect production several years later, with take-up uncertain. The low vaccination rate (12.7% of the population are fully vaccinated) also poses a downside risk to our GDP growth forecast.
Angola's ratings are constrained by structural weaknesses, most notably poor performance on governance and human development indicators and one of the highest levels of commodity dependence among Fitch-rated sovereigns. GDP per capita is well below the current 'B' median. Although high oil dependence is a credit weakness, our Brent oil price assumptions (USD70/bbl in 2022, USD60/bbl in 2023) imply a supportive oil price environment over the next two years.
Angola has a record of high inflation and the earlier sharp depreciation of the kwanza drove inflation to 28.7% in 2021, the highest since 2016. The National Bank of Angola raised its interest rates by 4.5pp to 20% in June and kept other parameters of its policy tight, leading M3 growth to turn negative and overall bank credit to the economy is also contracting. Combined with the stabilisation, and recent appreciation of the kwanza, this should lead to a moderation of inflation to 16% in 2022 and 10% in 2023.
Political uncertainty is unusually high ahead of the parliamentary election in August, which will also determine the future president as the president is elected by parliament. The election result is uncertain and the main opposition coalition appears more united than in the past. The ruling party, MPLA, has been in power since independence in 1975 so there is no precedent for a peaceful transfer of power and the country has had a long civil war. However, we judge tensions have subsided substantially over the last two decades and independent of the election outcome, we assume only moderate disruption from the election.
ESG - Governance: Angola has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Angola has a low WBGI ranking at 19.1, reflecting the absence of a recent track record of peaceful political transitions, weak institutional capacity, uneven application of the rule of law and a high level of corruption.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Public Finances: Signs of a change in fiscal policy that reduces confidence in our forecast of continued debt reduction, for example as a consequence of increased social pressure.
-External Finances: A resurgence of liquidity pressures for example as the result of a renewed sharp fall in oil prices.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Public Finances: Continued substantial reduction in debt levels combined with a reduced dependence of public finances on oil revenue.
-Structural: A significant improvement in governance as reflected in the WBGI.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Angola a score equivalent to a rating of 'CCC+' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:
- Structural: +1 notch, to for the negative impact on the SRM of Angola's take-up of the DSSI, which prompted a reset of the 'years since default or restructuring event' variable (which can pertain both to official and commercial debt). In this case we judged that the effect on the model output exaggerated the signal of a reduced capacity and willingness to service debt to private-sector creditor.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.