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.
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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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.
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JOURNALISTS: 1 212 553 0376
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