New York, April 27, 2018 -- Moody's Investors Service has today downgraded the foreign and local currency
long-term issuer ratings and the foreign currency senior unsecured
rating of the Government of Angola to B3 from B2 and changed the outlook
to stable. This concludes the review for downgrade initiated in
February. It also affirmed Angola's short-term issuer ratings
at Not Prime.
The key drivers supporting the downgrade are:
1) Domestic and external refinancing risk will remain high for at least
the next two years.
2) Angola's fiscal metrics and debt burden are no longer in line
with B2 peers.
The stable outlook reflects the broadly balanced credit pressures,
with a potential gradual recovery supported by increasing oil production.
Higher oil prices will support the government's external position
and provide some relief to liquidity pressures and debt affordability.
Meanwhile, the scope and depth of reforms initiated by the new administration
and the potential for a two-year IMF policy coordination instrument
(PCI) program should support a return to macroeconomic stability over
the medium term.
Concurrently, Moody's has lowered Angola's foreign-currency
bond ceiling to B2 from B1, the foreign currency deposit ceiling
to Caa1 from B3, and the local currency bond and deposit ceilings
to Ba3 from Ba2. The short-term foreign-currency
bond ceiling were unchanged at Not Prime.
RATIONALE FOR THE DOWNGRADE TO B3
DOMESTIC AND EXTERNAL LIQUIDITY RISK REMAINS HIGH, DRIVEN BY HIGH
GROSS BORROWING REQUIREMENTS
Liquidity risks remain high, driven by government borrowing requirements
that will remain around 20% of GDP on average in 2018-19,
although planned measures will, if executed successfully,
cause this to decline thereafter. Domestic rollover risk is evidenced
by the need to issue high yielding debt to the domestic banking system
to extend maturity and increase the share of instruments denominated in
local currency. External debt service will amount to 5.9%
of GDP in 2018, up from 3.1% in 2017. The government
remains reliant on external bilateral and commercial investors continuing
to be willing to refinance material amounts of foreign currency debt.
Its strategy is, over time, to shift the burden to domestic,
local currency investors, and to reduce overall refinancing needs
through fiscal consolidation. If successful, this will improve
Angola's credit profile. But that will take time, and
in the meantime Angola remains vulnerable to a change in sentiment,
particularly over the next two years, in an environment in which
rises in yields and spreads are expected and shocks to confidence are
plausible.
More broadly, external vulnerability has also increased despite
higher oil prices, as reflected in the continuous decline in foreign
exchange reserves and dollar liquidity shortages that continue to constrain
economic activity. The ongoing depreciation of the kwanza currency
(AOA) will relieve some of the pressure on foreign exchange reserves (though
at the same time exacerbating refinancing pressures on the government).
However, while the gap between the official and the parallel market
exchange rate has fallen, it remains close to 100%.
Moody's expects the exchange rate to depreciate further to AOA225=$1
by end 2018, and to continue to depreciate gradually through to
end 2021. In turn, the marked depreciation since the beginning
of the year has raised inflation to around 23% year-on-year
and Moody's expects inflation to remain elevated.
GENERAL GOVERNMENT DEBT REMAINS HIGH RELATIVE TO PEERS
Angola's government debt burden has increased to $74billion
as at end-2017 (equivalent to 66% of GDP), significantly
higher than the median B2-rated sovereign debt to GDP ratio in
2017 of 43%. The increase in the last 12 months was mainly
due to the bailout of Sonangol (equivalent to 9.2% of GDP)
and fiscal loosening in the lead-up to the election late last year.
The debt burden is likely to increase to over 70% of GDP by the
end of the 2018, in part because of the ongoing depreciation of
the kwanza. Thereafter, a combination of average nominal
GDP growth between 2018 and 2021 of around 19% and relatively small
fiscal deficits should see the debt burden decline, albeit gradually.
However, given the high share of the government's debt stock
denominated in or linked to foreign currency (76.4% at the
end of 2017), the balance sheet of the government remains vulnerable
to any larger devaluation than anticipated by Moody's.
This large debt burden has caused Angola's fiscal metrics such as
debt to revenue (374% in 2017) and interest payments to revenue
(20.6% in 2017) to deteriorate to levels no longer compatible
with a B2 rating. Both ratios have increased significantly in the
past two years, up from 187.5% and 7.4%
respectively at the end of 2015.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects the broadly balanced credit pressures at the
B3 rating level. The downgrade reflects refinancing pressures which,
if they were to crystalize, would very likely cause the rating to
move lower. However, the government has a strategy in place
to alleviate those pressures over time. That strategy faces execution
risks, but if successful would place upward pressure on the rating.
Coming years may also see a gradual recovery in real GDP growth supported
by the oil sector, although growth is likely to remain subdued.
Inflation will remain high compared to before the oil shock. Higher-than-budgeted
oil prices and successful execution of external borrowings will,
if sustained/implemented, bolster the external position, providing
some relief to liquidity pressures and debt affordability challenges faced
by the government.
Over the longer-term the reforms initiated by the new administration
will, if successfully implemented, support a return to macroeconomic
stability over time. The mooted two-year IMF policy coordination
instrument (PCI) program will, if it happens, support the
implementation of the government's economic plan and, in particular,
the pursuit of fiscal consolidation efforts.
However, while the government is committed to pursue structural
reforms, execution risk may delay their implementation which would
be detrimental to Angola's credit profile. In particular,
the efforts to increase non-oil taxes as well as improving the
business environment are important to promote economic diversification
over the medium term.
WHAT COULD CHANGE THE RATING -- UP
Positive pressure on the rating would follow if the Angolan government
was successful in taking the measures needed to set its debt trajectory
on a clear downward path towards levels consistent with a higher rating.
Similarly positive would be outcomes which reduce the near-term
refinancing pressures facing the government, such as a rebound in
official foreign exchange reserves, in particular, resulting
from government revenue accumulation; and a more rapid increase in
non-oil revenue, which would further shelter government revenue
from oil price volatility. Measures to enhance the quality of Angola's
institutional framework and governance, which are long-term
constraints of the rating, would also support a higher rating.
WHAT COULD CHANGE THE RATING -- DOWN
Negative pressure would be exerted on Angola's credit rating if:
1) the balance sheet of the government were to deteriorate, in particular
due to a loosening of the current fiscal consolidation stance or an unforeseen
shock to public finances; 2) foreign exchange reserves were to decline
materially; 3) liquidity pressure were to increase above current
levels. While not Moody's current expectation, any
indication that the government was contemplating restructuring its debt
in a way that Moody's would consider to be a default would very
likely result in a downgrade.
GDP per capita (PPP basis, US$): 6,783 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.8% (2016
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 41.9%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -4.8%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.3% (2016 Actual)
(also known as External Balance)
External debt/GDP: 45.5% (2016 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 25 April 2018, a rating committee was called to discuss the rating
of the Government of Angola. The main points raised during the
discussion were: The issuer's fiscal or financial strength,
including its debt profile, has materially decreased.
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
VP - Sr Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
