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Rating Action:

Moody's downgrades Angola's ratings to Caa1, outlook changed to stable

08 Sep 2020

New York, September 08, 2020 -- Moody's Investors Service ("Moody's") has today downgraded the government of Angola's foreign and local currency long-term issuer ratings to Caa1 from B3 and changed the outlook to stable. The foreign currency long-term senior unsecured rating, and the senior unsecured MTN rating have also been downgraded to Caa1/(P)Caa1 from B3/(P)B3 respectively. The foreign and local currency short-term issuer ratings have been affirmed at Not Prime (NP). This concludes the review for downgrade initiated on 31 March 2020.

The decision to downgrade the government ratings to Caa1 reflects Moody's assessment that the shocks resulting from the sharp drop in oil prices and the coronavirus outbreak, and the related further depreciation of the currency, contribute to a significant weakening in Angola's already weak public finances and fragile external position, despite tangible and continuing reform efforts.

The stable outlook reflects Moody's view that Angola's credit risks are adequately reflected in the current Caa1 rating. While the oil price environment and financing conditions could impose a yet more severe and long-lasting shock than currently assumed by Moody's, the government has managed to maintain its consolidation efforts so far this year, which gives confidence that the debt burden is likely to fall once the exchange rate stabilises. The administration remains committed to structural reforms supported by an IMF programme, while the ongoing discussion on reprofiling a significant portion of Angola's external debt due to bilateral partners offers the prospect of reducing external vulnerability and liquidity risks over the next years.

Concurrently, Moody's has lowered Angola's country risk ceilings as follow: the foreign currency bond ceiling to B3 from B2, the foreign currency deposit ceiling to Caa2 from Caa1, and the local currency bond and deposit ceilings to B1 from Ba3.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADE TO Caa1 FROM B3

GOVERNMENT BALANCE SHEET CONTINUES TO DETERIORATE MARKEDLY

From an already-weak position, Angola's fiscal and debt metrics are set to weaken significantly further as a result of the sharp fall in oil prices and related currency depreciation, that more than offset the impact of the government's continued fiscal consolidation efforts.

With more than 90% of government debt in foreign currency or USD-linked, Angola's debt metrics are highly sensitive to currency fluctuations. The kwanza has depreciated by 29% against the US dollar since the beginning of the year, after 56% in 2019. Moody's assumes that with pressure on oil prices remaining on the downside as the global economy and global oil demand only recover at a modest pace, the kwanza will depreciate further contributing to a further rise in the government's debt-to-GDP ratio to around 120% of GDP in 2020 and still above 110% next year, from a peak expected below 100% before the shock. With a higher debt burden, the government's borrowing requirements are rising, to around 20% of GDP in 2020 compared to an estimated 15% pre-shocks.

Beside pressure on the debt burden from a weaker currency, three consecutive years of economic contraction have weakened Angola's economic strength, which contributes to increased credit risks. Moody's expects real GDP to contract by 3.3% in 2020 compared to an anticipated 1.2% expansion before the shocks. This makes the government's challenge to increase non-oil tax meaningfully more difficult in the foreseeable future. As a result, Moody's expects debt-to-revenue and interest payments-to-revenue ratios to peak close to 600% and 31% respectively over the next two years, well above the median of B3-rated sovereigns estimated at 225.8% and 8.3% respectively.

ANGOLA'S EXTERNAL POSITION REMAINS FRAGILE AND LIQUIDITY RISK ELEVATED DESPITE MULTILATERAL AND BILATERAL SUPPORT

Durably lower oil prices also have a significant negative impact on Angola's external position. Moody's estimates that the current account balance will fall deteriorate to a 4.8% of GDP deficit in 2020 compared to a pre-shocks forecast of a 3.5% surplus. The shock on the country's external position is evidenced by a continued fall in net international reserves and the significant depreciation of the exchange rate.

The drop in foreign currency earnings from lower oil prices is compounded by a structural decline in oil production that the authorities expect to reach 1.3 million barrels per day (mbpd) in 2020 against close to 1.8 mbpd five years ago. Moody's does not expect oil production trends to reverse in the near to medium term, despite a government strategy to enhance production capacity.

Net international reserves have declined to $10.4 billion as of June 2020 from $11.7 billion at the end of 2019. To support reserves, the government has taken a number of steps including its repatriation of $1.5 billion from its $3.5 billion Sovereign Wealth Fund and accelerated debt reprofiling negotiations with bilateral partners. The latter are ongoing and the government expects to conclude them in the fourth quarter, allowing it to postpone $7 billion of external debt payments due between June 2020 and the end of 2022. Moreover, Angola has opted to participate in the G20 Debt Service Suspension Initiative (DSSI) that grants a deferment of debt service owed to bilateral and official lenders. Debt reprofiling will not include debt owed to the private sector, as specified in the official announcement issued on 31 August 2020. Moody's estimates that the savings from DSSI amount to around $30 million until the end of 2020. Additionally, Angola's reserves will be supported by a package worth $2.3 billion from International Financing Institutions (IFIs) under the IMF program, designed to help cover Angola's external funding needs.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's assessment that the credit risks for the government of Angola are balanced over the next 12-18 months.

Downside risks remain. Generally, risks related to oil prices and the currency are on the downside, if the global economic recovery proves slower than currently expected. More specific to Angola, failure to reach a definitive agreement on the profiling of Angola's external debt would add around $2.5 billion to Angola external payments both in 2020 and 2021. This would further aggravate the deficit of Angola's balance of payments, the decline of its official foreign exchange reserves, and more generally weaken further its external position. Simultaneously, Angola's gross borrowing requirements would significantly increase by around 4.5-5% of GDP each year, significantly increasing liquidity risks from high levels.

However, these risks are balanced by the credit supportive implications of the measures taken by the government before the shocks and maintained since. Based on the fiscal consolidation steps taken so far, the debt burden will start to fall once the exchange rate stabilises. For instance, the new budget law passed in July is based on a conservative $33/barrel average oil price for 2020 which offers some budget flexibility considering the current international price. The authorities also continued to clear arrears amounting to 0.5% of GDP (close to 5% of GDP since 2018) despite the challenging environment. These measures illustrate the commitment to the government to repair its balance sheet.

Additionally, gross borrowing requirements are likely to fall back to around 15% of GDP in 2021, which will strengthen resilience to potential future shocks. And assuming that the ongoing reprofiling discussion conclude as the government expects, net international reserves should remain above $10 billion covering 5-6 months of prospective imports and contributing to macroeconomic stability.

In general, the reforms implemented since 2018 include the liberalisation of the exchange rate, the introduction of VAT, the introduction of a fiscal rule aimed at maintaining fiscal prudence through economic and oil prices volatility, a fight against corruption and the promotion of the private sector. The administration has remained committed to structural reforms included in the IMF programme, although delivering on more reforms is likely to continue to be challenging especially if the economy continues to contract in 2021 as the gradual global recovery still remains uncertain.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Angola's environmental risks derive from carbon transition. Its 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, although in light of the measures against climate change taken so far, this is not Moody's baseline.

Social considerations influence Angola's credit profile, given very low wealth levels and high levels of poverty. GDP per capita, at $6,8431 on a PPP basis as of 2019, remains low. Additionally, the UN's Human Development Index for 2019 ranked Angola 149 out of 189 countries. Social indicators have improved from a very low level since the end of the civil war in 2002, but income inequalities remain very high. Since the oil shock and the election of President Lourenco, the authorities have been implementing an ambitious reform agenda. Risk of social unrest remains, especially stemming from jobless young people.

Governance considerations are material to Angola's credit profile. Data transparency and availability are areas of improvements, as well as institutional capacities that 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. There are also significant weaknesses related to the management of public finance, illustrated by the level of arrears accumulated over the last few years.

GDP per capita (PPP basis, US$): 6,843 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -1% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 17% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 0.6% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 6.1% (2019 Actual) (also known as External Balance)

External debt/GDP: 59.2% (2019 Actual)

Economic resiliency: b3

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

On 02 September 2020, 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 economic fundamentals, including its economic strength, have materially decreased. The issuer's institutions and governance 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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's would likely consider upgrading Angola's rating if the debt trajectory were set on a clear and rapid downward path, reducing the risks associated with an elevated debt burden and constrained debt affordability in an adverse external environment. Similarly, an increasing likelihood that refinancing pressures will ease would exert positive pressure on the government rating. This could be the result of a sustained rebound in official foreign-exchange reserves, and stronger non-oil GDP growth than Moody's currently expects, which would further shelter government revenues from oil price volatility. Measures that are likely to enhance the quality of Angola's institutional framework and governance, which are long-term constraints on the rating, would also support its credit rating.

Moody's would likely downgrade the rating if it were to conclude that foreign-exchange reserves were to decline materially; and/or liquidity pressure were to increase significantly, potentially because the ongoing debt renegotiation with bilateral partners failed. This scenario would likely occur in the context of a more rapid and sustained deterioration of public finances than Moody's currently expects.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 79537.

REGULATORY DISCLOSURES

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Samar Maziad
Vice President - Senior Analyst
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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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