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Rating Action:

Moody's affirms Angola's B1 ratings and maintains negative outlook

07 Apr 2017

New York, April 07, 2017 -- Moody's Investors Service has today affirmed the B1 long-term issuer and senior unsecured ratings of the Government of Angola and maintained the negative outlook. The short-term issuer ratings remain unchanged at Not Prime.

The key drivers supporting the affirmation of the B1 rating are:

1) The improvement in the macroeconomic situation, supported by the rebound in oil prices and slightly rising oil production.

2) The significant fiscal adjustment achieved by the authorities, with contained fiscal deficits, which helped to keep the government debt-to-GDP ratio on par with B1-rated sovereigns.

3) Progressively receding external vulnerabilities and financial buffers that have by and large been preserved.

The negative outlook recognizes that downside risks remain. In particular:

1) The government remains susceptible to debt roll-over risks and further currency devaluation as gross borrowing requirements remain elevated this year and next.

2) Government spending pressures persist due to the electoral cycle and high inflation.

3) Angola faces a difficult balancing act between preserving foreign exchange reserves and providing sufficient dollars into the economy to keep banks and businesses running smoothly.

All country ceilings remain unchanged. The long-term local-currency bond and deposit ceilings remain at Ba1 while the long-term foreign-currency bond and deposit ceilings remain unchanged at Ba3 and B2, respectively. Angola's short-term foreign-currency bond ceiling also remains unchanged at Not Prime.

RATINGS RATIONALE

RATIONALE FOR THE B1 AFFIRMATION

IMPROVING MACROECONOMIC ENVIRONMENT

Moody's expects Angola's economic growth and US dollar earnings to gradually improve in 2017, supported by both the recovery in oil prices and a modest increase in oil and gas production. After an estimated 0.1% real GDP growth in 2016, Moody's forecasts real GDP growth to rise to 2.6% in 2017 and accelerate further in 2018 to 3.5%. The non-oil economy is also likely to benefit from a small increase in government spending, including the clearance of arrears and progressively improving dollar liquidity.

Angola's oil and gas production in 2017 is trending towards 1.825 million barrels per day (mbpd) from 1.748 mbpd in 2016. Several off-shore projects launched before the oil shock (including the mega project Koambo) are coming on stream over the next 18 months, adding in excess of 400,000 barrel per day to the country's oil production. Those projects will allow for oil and gas production to remain at a minimum of 1.8mbpd in the medium-term. Oil and gas are the main sources of government revenues (53% in 2016 against 79% in 2013) and are also the main sources of foreign currency for the economy, as they consistently account for around 95% of Angola's exports.

With the rebound in oil prices, the Central Bank of Angola (BNA) has provided more dollars to the banking system, improving dollar liquidity that is essential for important sectors of the non-oil economy, such as manufacturing and construction. This has been evidenced by the narrowing gap between the official exchange rate (at AOA165 per dollar) and the parallel market, decreasing from AOA600 to AOA380 recently.

SIGNIFICANT FISCAL ADJUSTMENT CONTAINED FISCAL DEFICITS AND KEPT GOVERNMENT DEBT-TO-GDP ON PAR WITH B1-RATED SOVEREIGNS

The authorities have substantially adjusted their fiscal account in response to the drop in the oil revenue, mainly thanks to large cuts in expenditures. The latter halved between 2014 and 2016 from 40% of GDP to 20% in 2016. In particular, capital spending and subsidies decreased respectively to 3.7% and 0.8% of GDP in 2016 from 12.9% and 5.5% of GDP in 2014. Moody's estimates the fiscal deficit to have reached 4.1% of GDP in 2016, below the 5.9% initially budgeted in October 2015. At an estimated 53% of GDP in 2016, the Angola's government debt-to-GDP is on par with the median of B1-rated sovereigns at 56% .

In 2017, Moody's anticipates a similar fiscal deficit, at around 4% of GDP. Government revenues will likely exceed the budget target (set at 18.6% of GDP) and the 2016 level (at 17.5% of GDP) given a budgeted oil price at $46 that is below the current spot international oil price. However, government expenditures will likely rise to a similar extent.

RECEDING EXTERNAL VULNERABILITIES

The depreciation of the domestic currency kwanza and restrictions on imports, which halved between 2014 and 2016, drove the improvement of the current account deficit in 2016 to an estimated 4.8% of GDP from a high 11.3% in 2015. Moreover, soft capital controls reduced the downward pressures on Angola's balance of payments. Moody's expects further improvements of the current account in 2017 driven by increased exports given international oil prices of around $50/barrel. This will allow the authorities to gradually ease the existing soft capital controls.

Against the background of the significant fiscal and exchange rate adjustments, the authorities preserved most of their existing financial buffers despite the oil shock. Official foreign exchange (FX) reserves stabilized during 2016 at $22 billion. The government's fiscal reserves accumulated at the central bank, denominated in US dollar and accounted for as FX reserves, amounted to $9.2 billion at the end of 2016, representing 9% of GDP or 42% of Angola's FX reserves, against $11 billion in 2014. The Angolan Sovereign Wealth Fund - seeded with $5 billion (5% of GDP) not included in the FX reserves -- holds 40% in liquid assets (or 2% of GDP).

RATIONALE FOR THE NEGATIVE OUTLOOK

GOVERNMENT SUSCEPTIBILITY TO DEBT ROLL-OVER RISKS AND CURRENCY DEVALUATION

Over 2017 and 2018, the government will have to cover elevated gross borrowing requirements of around 20% of GDP per year, which are mainly driven by sizeable (14% of GDP) government bonds that will be maturing (in particular, local currency USD-indexed bonds).

In response, the government's strategy is to lengthen the debt maturity and increase the share of local currency-denominated debt, but prevent an increase in interest payments by issuing future local currency debt below par. Everything else being equal, such a strategy would lower gross borrowing requirements in the medium-term, but it would create inflationary pressures and increase the government's debt stock.

Moreover, the government debt stock and service remain susceptible to further devaluations. The impact of a kwanza's devaluation against the dollar is significant because 78% of the government debt was denominated in or linked to foreign currencies (primarily the US dollar) at the end of 2016. The currency depreciated 38% between end of 2014 and end of 2016 and Moody's expects a further devaluation of the kwanza against the US dollar around the end of 2017.

PRESSURES ON GOVERNMENT SPENDING DUE TO ELECTORAL CYCLE AND HIGH INFLATION

Pressures on government spending risk widening the fiscal deficit in 2017. Given the high level of inflation, at 42% at the end of 2016 and 39% as of February 2017, low economic activity in the non-oil sector that employs the bulk of the workforce, and the Presidential election of August 2017, the government will face increased social demands.

After 37 years as President, Eduardo dos Santos announced that he would not run for the 2017 Presidential elections. The party already announced a potential successor, namely the current Defence minister, Mr. Lourenço, thereby limiting succession risk. However, given that the population and the non-oil economy have borne most of the policy adjustment through the oil price shock, there are risks that pressures on spending will increase in the election year.

A wider-than-currently forecast fiscal deficit in 2017 would increase the government's borrowing requirements and weigh on its balance sheet, as would accelerated clearance of accumulated arrears vis-à-vis goods and services providers of the government -- another means to alleviate economic and social pressures.

A DIFFICULT BALANCING ACT BETWEEN PRESERVING FOREIGN EXCHANGE RESERVES AND PROVIDING SUFFICIENT DOLLARS TO THE ECONOMY

The Angolan authorities continue to face a policy trade-off between preserving FX reserves in 2017 and providing sufficient US dollar for the smooth functioning of the real, non-oil economy.

While Moody's expects external pressures to ease in 2017 due to the increase in oil prices and production, the BNA is unlikely to remove all the soft capital controls and other restrictions that have been put in place. As such, the demand for US dollar, which is currently constrained, will only be gradually satisfied, which means that foreign exchange liquidity shortages will likely persist during 2017. The backlog of accumulated demand for dollars is still estimated between $2 billion and $3 billion. Moreover, should net outflows accelerate, for instance as a result of a drop in oil prices or production -- not our central scenario -- the authorities will likely reverse the trend and limit even more the supply of foreign currency to the economy.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure would be exerted on the rating if (1) the government's balance sheet were to deteriorate; (2) official financial buffers were to erode, as this would likely undermine confidence in the country's external stability and increase downward pressure on the kwanza; (3) the manifestation of the longstanding risk of significant political and/or social tensions that could hinder the country's medium-term growth prospects and fiscal outlook.

WHAT COULD STABILIZE THE OUTLOOK/CHANGE THE RATING UP

A stabilization in the outlook could follow: 1) a stabilization or even increase in FX reserves concomitant to increased FX supply into the domestic economy that would support an acceleration in non-oil growth, and 2) a stabilization in government debt metrics at levels on par with B1-rated peers.

Upward pressure on the rating, while unlikely at present, could follow 1) a successful diversification of the economy and government revenues away from oil; and 2) continued improvements in governance and institutional strength which act as long --term constraints on Angola's rating.

GDP per capita (PPP basis, US$): 6,958 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.1% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 42% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -4.1% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.8% (2016 Actual) (also known as External Balance)

External debt/GDP: 50.7% (2015 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 4 April 2017, a rating committee was called to discuss the ratings of the Government of Angola. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed. Other views raised included: the issuer's institutional strength/framework, have not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The Local Market analyst for this rating is Aurelien Mali, +971 (423) 795-37.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lucie Villa
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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