New York, October 20, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook to positive from stable and affirmed the B3 foreign and local currency long-term issuer ratings of the Government of Angola. The B3 foreign currency long-term senior unsecured ratings were also affirmed, along with the (P)B3 senior unsecured foreign and local currency MTN program ratings. The foreign and local currency short-term issuer ratings were affirmed at Not Prime (NP).
Moody's decision to change the outlook to positive from stable reflects its assessment that robust economic growth prospects and significant revenue growth supported by elevated oil prices affords the government the opportunity to continue implementing reforms that can solidify its fiscal strength, liquidity and external position further and point to stronger creditworthiness. From a longer-term perspective, the current environment also provides the opportunity for the government to continue its diversification agenda, ultimately assisting in navigating carbon transition risks.
The decision to affirm the ratings at B3 reflects Moody's view that, despite the continuing improvement in both fiscal and current account positions, Angola's credit profile remains constrained by its vulnerability to oil shocks due to its rigid economic structure and weak institutional capacity. Policy continuity and the reform agenda of the newly reelected government will invariably take time to reduce Angola's structural vulnerabilities.
Angola's local currency (LC) and foreign currency (FC) country ceilings remain unchanged at B1 and B3 respectively. The two-notch gap between the LC ceiling and the sovereign rating reflects a certain degree of unpredictability of government actions, the relatively large, albeit declining domestic footprint of the government in the economy, as well as the exposure of the economy to hydrocarbons. The two-notch gap between the FC ceiling the LC ceiling reflects limited policy effectiveness and transfer and convertibility risks given the track record of imposing capital controls and restrictions during the oil price shocks.
RATIONALE FOR THE POSITIVE OUTLOOK
ANGOLA'S DEBT BURDEN AND FISCAL METRICS ARE LIKELY TO CONTINUE IMPROVING
The first driver supporting Moody's decision to change the outlook to positive from stable is the improvement in Angola's fiscal and debt metrics supported by elevated oil prices and continuing fiscal consolidation. This rebuilding of buffers provides the opportunity for the government to take further measures to shield its finances from fluctuations in oil prices to a greater extent and further solidify its fiscal strength.
Moody's expects the country's debt to GDP ratio to reach 51% by the end of 2022, down from 78% in 2021 and 123% in 2020. All related fiscal metrics, including debt to revenue and interest payments to revenue, have similarly also improved (expected to reach 225% and 14.9% respectively, in 2022 against 586% and 32.6% in 2020).
Moody's expects Angola's fiscal surplus to average 2.5% of GDP between 2022-2025 and be resilient to moderate oil price volatility given the conservative budgeted oil price and the expectation that the authorities will abide by the Fiscal Responsibility Law. Moreover, the recent and orderly re-election of President Lourenço for a second mandate substantially dispels political uncertainty over the next five years, ensuring policy continuity and is likely to reinforce the resolve of reform-minded staff within the administration. The authorities' fiscal prudence and consolidation efforts are likely to see government debt decline below 40% of GDP by 2025.
Even if oil prices ease from their current levels, Angola's macroeconomic stability is likely to be supported by robust growth prospects and declining inflation. Moody's forecasts economic growth of 3% this year, accelerating to 4.2% on average during the period 2023-2026 driven by the higher oil proceeds and improved dollar liquidity. Non-oil GDP is also benefitting from better budget execution, including increasing capital spending and the prospect of gradually expanding oil production after years of structural decline. Moody's expects oil production to increase to 1.25 million barrels per day (mbpd) in 2023 from 1.18 mbpd forecast in 2022. Inflation is also expected to decline to 14% in 2023 and move towards single digits by 2025 from an estimated 17% in 2022 and 27% in 2020.
ANGOLA'S EXTERNAL POSITION AND LIQUIDITY RISKS ARE LIKELY TO CONTINUE TO IMPROVE IN THE COMING YEARS
The second driver for the change in outlook to positive is the continuing improvement in the country's external position as well as the reduction in liquidity risks. Prolonged elevated oil prices will provide the opportunity for the authorities to further strengthen the official foreign currency reserves and continue to implement their policy of reducing the stock of debt. The strengthening of Angola's external position is evidenced by the strong appreciation of the kwanza against the dollar over the past 12 months to around AOA 440/USD in October 2022 from AOA 628/USD in September 2021. This reversal after several years of sharp depreciation was made possible because of the liberalization of the exchange rate implemented with the help of the IMF program. The improvement in dollar liquidity is likely to be sustained if oil prices remain elevated. Moody's expects the current account to reach a surplus of 11.9% of GDP in 2022 (after 11.2% in 2021) and remain in surplus, averaging 6.8% of GDP between 2023-2025 reinforced by the government's import substitution initiative. Consequently, gross official foreign reserves are likely to continue to improve and potentially reach $22 billion in 2025 from $16 billion in 2021.
With the strong improvement in the government balance sheet, Angola's liquidity risk is likely to continue to decline. Moody's expects relatively modest gross borrowing requirements of around 6% of GDP in 2022 reflecting the higher fiscal surplus. Given that the government is likely to continue to repay some maturing debt using fiscal surpluses, the government gross borrowing requirement is likely to remain around 8% of GDP until 2025. External funding will also benefit from the partial accumulation of fiscal surpluses over the next few years, which offers the possibility for the government to rebuild some financial buffers given that there is no maturing eurobond before 2025.
Domestic funding is likely to continue to benefit from declining yields offered by the banking system. This trend is supported by the reduction in government issuances on the domestic market and the steady decline in inflation levels in Angola. Domestic liquidity risk also benefits from the ability of the government to opportunistically issue more domestic debt instruments with longer maturities purely denominated in kwanza.
RATIONALE FOR THE RATING AFFIRMATION AT B3
CREDIT PROFILE REMAINS VULNERABLE TO OIL PRICE VOLATILITY AND GLOBAL CARBON TRANSITION
Angola remains highly vulnerable to oil price volatility as illustrated in the past oil shocks of 2015 and 2020, which have almost totally depleted its financial buffers. In 2021, Angola's hydrocarbon sector still accounted for 30% of total GDP, 60% of total government revenue, and more than 90% of total exports of goods and services. Fluctuations in oil prices tend to be reflected in sharp changes in the exchange rate which has a very large impact on the debt burden given Angola's reliance on foreign-currency debt. More generally, this very high dependence on the hydrocarbon sector explains Angola's very highly negative exposure to global carbon transition. The country's credit profile could come under pressure in the case of an accelerated global carbon transition, especially if the government fails to further diversify export earnings and its revenue base away from the oil & gas sector and rebuild material financial buffers able to withstand a prolonged period of financing pressures. Angola's capacity to implement these changes is constrained by the country's weak, although improving, institutional framework.
These credit weaknesses are balanced by robust growth prospects and relatively elevated global oil prices that will support Angola's fiscal and current account positions for the coming years. This provides some time for the authorities to implement ambitious diversification plans and rebuild significant financial buffers. Moody's also expects the authorities to continue to implement structural reforms and accelerate the privatization strategy in order to ultimately grow the size of the private sector in the economy. While the recent reelection of President João Lourenço will support policy continuity and continuing implementation of the reform agenda, realizing a tangible reduction in Angola's structural vulnerabilities will invariably take time.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Angola's ESG Credit Impact Score is very highly negative (CIS-5), reflecting very high exposure to environmental risk and social risk and very weak governance that, with low wealth levels, leads to low resilience to E and S risks.
For Angola, exposure to environmental risks carries very high negative exposures to environmental risks, reflected in its E-5 issuer profile score. Exposure to carbon transition risk is very high, given the country's very significant reliance on oil which generally accounts for more than 90% of exports earnings and around 50% of fiscal revenues. Angola's credit profile would face downward pressure in a scenario of rapid global transition to lower reliance on hydrocarbons that would depress global hydrocarbon demand and prices. Water risk is also high, reflected in a high share of the population exposed to unsafe drinking water. Finally, physical climate risk is also highly negative, Angola being exposed to heat stress and wildfires.
Angola's exposure to social risks is very highly negative (S-5 issuer profile score), related to a wide range of risks including prevalent poverty, low education outcomes, poor health and safety outcomes and access to basic services. Social indicators have improved from a very low level since the end of the civil war in 2002, but income inequalities remain very high. The risk of social unrest remains, especially in the context of high unemployment amongst the young.
Angola's governance is weak (G-4 issuer profile), reflecting in particular weak control of corruption and rule of law. Data transparency and availability, albeit improving, remain limited. For example, Angolan banks lost their dollar-correspondent banking relationships in 2016 because of their failure to meet international standards relating to shareholder structures and money laundering, resulting in increased transaction costs and delays. However, structural improvements related to the management of public finances, including the implementation of a clear and achievable fiscal rule into the law, support the country's institutional framework.
GDP per capita (PPP basis, US$): 6,970 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 0.8% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 27% (2021)
Gen. Gov. Financial Balance/GDP: 3.8% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 11.2% (2021) (also known as External Balance)
External debt/GDP: 66.7% (2021)
Economic resiliency: b2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 17 October 2022, a rating committee was called to discuss the rating of the Angola, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would consider upgrading Angola's ratings if its fiscal metrics continue to improve, reducing liquidity and funding risks, to a greater extent than Moody's currently expects. Similarly, a more sustained rebound in official foreign exchange reserves, and stronger non-oil GDP growth than currently expected would further shelter government revenues from oil price and production volatility. Measures that are likely to enhance the quality of Angola's institutional framework and governance, a long-standing constraint on creditworthiness, would also support its credit profile.
The positive outlook indicates a downgrade in the near term is unlikely. Moody's would likely downgrade the ratings if it were to conclude that the decline in the debt burden looked increasingly less likely, either because of external shocks that the government cannot effectively mitigate or because of a change in policy stance that slows or reverses the pace of fiscal consolidation. Such developments would also likely reintroduce liquidity and external risks.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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