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Rating Action:

Moody's assigns B1/N-P rating to Republic of Angola

19 May 2010

First-time rating

London, 19 May 2010 -- Moody's Investors Service has today assigned first-time issuer ratings of B1/Not-Prime to the local and foreign-currency debt of the Republic of Angola. The rating outlook is positive. Specifically, an upgrade to the lower Ba range could potentially come within 12-24 months should institutional capacity, such as public financial management, continue to strengthen.

"The B1 rating reflects the economy's rapid growth potential, and expectations of further improved fiscal and external finances associated with increased oil output and prices," says Anthony Thomas, a Vice President-Senior Analyst in Moody's Sovereign Risk Group. "The main rating constraints relate to Angola's weak institutional capacity, a short track record of policy reform implementation and uncertainty regarding an eventual political transition."

Moody's says that Angola's fast growth has massively expanded the scale of the economy over the past decade, thanks to the development of its sizeable oil reserves. The rating agency expects that the country will soon become one of the top 10 oil producers in the world. Nominal GDP is likely to surpass the US$100 billion mark. Meanwhile, per capita GDP, now classified as lower middle income, could also leapfrog into middle income levels during the coming decade.

The dominant position of the oil sector in the Angolan economy means that the budget is more often than not in surplus, since oil receipts amply cover expenditures associated with the government's development efforts except when oil prices fall below roughly $60/barrel. "Prior to the global recession and the associated oil price collapse, the government had been able to build reserves and pay down debt that had built up after the long civil war ended in 2002," adds Mr. Thomas. "Moody's expects the government's debt metrics to improve again going forward based on likely oil price levels."

Thomas points out that the Angolan authorities have ambitious plans to diversify the economy beyond petroleum. The experience of other countries in this respect suggests this will prove difficult to achieve, at least in the short to medium term. However a substantial investment in necessary infrastructure has been made possible by the country's oil riches.

Given its relatively short post-war history, institutional capacity is still developing from a low level. "Accordingly, the government faces serious challenges to significantly improve fiscal transparency, accountability and economic policy implementation," notes Mr. Thomas. "Moreover, a continued reduction in macroeconomic imbalances and containing inflation will likely require further improvement in monetary and exchange rate policy management."

The main vulnerability posed by the political situation stems from a degree of uncertainty surrounding issues of succession and continuity in economic policy. However, recent constitutional reforms and government reorganisation should help policy making to be more streamlined and more efficient.

In particular, increased accountability for oil income and its disbursement are necessary in order to bolster budgetary resilience. "The main concerns about fiscal transparency have to do with the continuing large quasi-fiscal operations undertaken by Sonangol, the fully-owned state oil company," says Mr. Thomas. "The new IMF Stand-by Agreement (SBA) involves specific measures to deal with these operations, which, if successfully implemented, should positively answer questions regarding this aspect of public finance management."

Moody's positive outlook for the new rating foresees the establishment of a more robust policy framework. This includes such elements as the formulation of a strict fiscal rule that Angola is developing with assistance from the IMF as well as various upgrades in fiscal institutions and transparency, including the establishment of a Sovereign Wealth Fund (SWF). Such measures would be supportive of an eventual upgrade if and when successfully implemented. Indeed, in its recent approval of the first review of the SBA programme, the IMF says that the reforms undertaken in fiscal and especially monetary and exchange rate management are 'beginning to bear fruit.'

In conjunction with the first-time sovereign rating, Moody's has today also assigned a foreign currency bond ceiling of Ba3 and a foreign currency bank deposit ceiling of B2 to Angola. The foreign currency bond ceiling reflects the risk the government would impose a moratorium on foreign currency transfer payments by non-governmental entities; the foreign currency bank deposit ceiling reflects the risk the government would impose a freeze on foreign currency bank deposits to conserve scarce foreign currency resources during a crisis.

Additionally, Moody's has assigned a Baa3 rating to Angola's long-term local currency bond and deposit ceilings, reflecting the broader financial, political and legal country risks faced by locally funded or domiciled credit transactions. According to Moody's sovereign rating methodology, the government's own local currency rating is not a constraint on the local currency ratings of other entities domiciled in Angola. The long-term local currency bond ceilings caps the rating constellation for non-governmental entities domiciled in Angola; the long-term local currency deposit ceiling reflects the ability of the central bank to provide liquidity to the banking system and therefore is close to the long term local currency bond ceiling.

The principal methodology that Moody's uses in rating the Republic of Angola is "Moody's Sovereign Bond Ratings Methodology," published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

New York
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

London
Anthony Thomas
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B1/N-P rating to Republic of Angola
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