Fitch Ratings has upgraded Angola’s long-term foreign currency issuer (IDR) default rating to “B-” from “CCC”. The outlook is stable.
A full list of rating actions can be found at the end of this rating action commentary.
Main rating factors
Angola’s IDR upgrade reflects the following key rating factors and their relative weights.
There has been a significant improvement in the country’s fiscal and external measures, underpinned by a return to positive economic growth, sound fiscal management and higher oil prices. Oil prices have recovered strongly since the onset of the Covid-19 pandemic and the likelihood of downside oil market scenarios has diminished compared to September 2020, when we downgraded Angola to “CCC”, or September 2021 when we affirmed the “CCC”. ‘ Evaluation. Angola’s heavy dependence on oil, which accounts for an average of 34% of GDP, 56% of tax revenue and grants, and 96% of external revenue over the five years to 2020, has led substantial improvements in key credit metrics.
Based on data through November, Fitch estimates that Angola’s central government (CG) public debt-to-GDP ratio fell to 78.5% in 2021, a marked improvement from our forecast for 126.9% at the September 2020 review and well below 123.8% of GDP in 2020. We expect CG debt to decline further to 74.8% of GDP in 2022 and 73% in 2023. The decline in debt ratios is the result of significantly higher nominal GDP (up 32.4% in 2021, partly reflecting oil prices), a stabilization of the kwanza (the previous depreciation having been a major driver of the increase in debt in previous years, given that foreign currency-denominated debt accounts for 70% of total debt) and a continued commitment to fiscal consolidation.
Despite the sharp reduction, Angola’s debt remains above the current “B” median (68% of GDP). In addition to CG bonds, public enterprise debt stood at AOA 2.6 trillion (5.5% of GDP) at end-June 2021. Most of this debt is with Sonangol, the state-owned oil company .
We estimate the GC cash surplus at 2.5% of GDP in 2021 and project a surplus of 1.1% of GDP in 2022, amid stronger GDP growth and broadly stable oil prices. We expect spending to remain broadly stable relative to GDP. Covid-19 will continue to put some pressure on spending and we expect the government to avoid further fiscal consolidation before the 2022 elections.
The authorities have established a significant track record of stability-oriented economic reforms and fiscal consolidation under the IMF’s expanded fund program that ended in 2021. They have restructured the oil sector, moved to a more flexible exchange rate, introduced value added tax in October 2019 and reduced the non-oil fiscal deficit from over 50% of non-oil GDP before 2014 to 6.7% in 2021. Maintain adherence to fiscal prudence could become more difficult as social pressures could increase after five years of economic contraction and elections could lead to a change in economic management, but we do not expect abrupt reversals of previous policies.
Liquidity pressures have also eased considerably with the increase in oil export earnings that accompanies rising 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 due to the slight decline oil prices, leaving external balances in a comfortable position. . Gross international reserves increased to USD 15.4 billion in 2021 and we expect a further increase to USD 15.9 billion in 2022, equivalent to 7.2 and 7.3 months of current external payments, respectively. compared to USD 14.9 billion in 2020. increase of around USD 1 billion in the allocation of special drawing rights from the IMF to Angola last August.
The pressure on external finances could intensify again in the event of a sharp drop in oil prices, given the increase in the service of the external public debt of 5.6 billion dollars in 2022, 6.9 billion in 2023 and $6.5 billion in 2024. However, fiscal and external adjustment have lowered the fiscal and external oil price breakeven point to around $50 per barrel, leaving reserves before further fiscal pressures and external liquidity does not accumulate again. Under our baseline scenario, we do not expect the government to request another IMF program. However, should external pressures arise, we believe that a new arrangement with the IMF would be possible, given the successful completion of the recent program and the good relations established in recent years.
Angola’s “B-” IDRs also reflect the following major rating factors:
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 poses downside risks to these forecast, and the return to annual oil licensing cycles will only begin to affect production several years later, with recovery uncertain. The low vaccination rate (12.7% of the population is fully vaccinated) also poses a downside risk to our GDP growth forecast.
Angola’s ratings are constrained by structural weaknesses, including 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. While the heavy reliance on oil is a credit weakness, our Brent oil price assumptions ($70/bbl in 2022, $60/bbl in 2023) imply a favorable oil price environment over the next couple of years.
Angola has a record of high inflation and the previous sharp depreciation of the kwanza pushed inflation up to 28.7% in 2021, the highest since 2016. The National Bank of Angola has raised interest rates from 4.5 pp to 20% in June and maintained other parameters of its restrictive policy, leading M3 growth to turn negative and overall bank credit to the economy also contracting. Combined with the stabilization and recent appreciation of the kwanza, this should lead to a moderation in inflation to 16% in 2022 and 10% in 2023.
Political uncertainty is unusually high ahead of the August legislative elections, which will also determine the future president as the president is elected by parliament. The outcome of the elections is uncertain and the main opposition coalition appears more united than in the past. The ruling MPLA party has been in power since independence in 1975, so there is no precedent for a peaceful transfer of power and the country has experienced a long civil war. However, we estimate that tensions have eased considerably over the past two decades and, regardless of the election outcome, we only assume moderate disruption to the election.
ESG – Governance: Angola has an ESG Relevance Score (RS) of ‘5’ for Political Stability and Rights and for Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These 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 lack of a recent record of peaceful political transitions, weak institutional capacity, uneven enforcement of the rule of law, and high levels of corruption.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
-Public finances: Signs of a change in fiscal policy that is reducing confidence in our forecasts for further debt reduction, for example due to increased social pressure.
-External finance: A resurgence of liquidity pressures, for example following a new sharp drop in oil prices.
Factors that could, individually or collectively, lead to positive rating action/improvement:
– Public finances: Continuation of a substantial reduction in debt levels combined with less dependence of public finances on oil revenues.
– 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 IDR Long-Term Foreign Currency Scale (LT FC).
Fitch’s Sovereign Rating Committee adjusted the SRM output to arrive at the final IDR LT FC by applying its QO, against the SRM data and output, as follows:
– Structural: +1 notch, due to the negative impact on the SRM of Angola’s membership in the DSSI, which led to a reset of the variable “years since default or restructuring event” (which can concern both public debt and commercial debt) . In this case, we judged the effect on model output to exaggerate the signal of reduced ability and willingness to repay debt to the private sector creditor.
Fitch’s SRM is the agency’s proprietary multiple regression scoring model that uses 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to an LT FC IDR. The Fitch OQ is a forward-looking qualitative framework designed to allow adjustment of the output of the SRM to assign the final score, reflecting factors in our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Best/Worst Case Evaluation Scenario
Global credit ratings of sovereign, public finance and infrastructure issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of one. three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of three notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from “AAA” to “D”. Worst case and worst case credit ratings are based on historical performance. For more information on the methodology used to determine industry-specific best-case and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.