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Rating Action:

Moody's upgrades Angola's issuer ratings to Ba2; outlook stable.

08 Aug 2014

London, 08 August 2014 -- Moody's Investors Service has today upgraded Angola's government bond rating to Ba2 from Ba3 and changed the outlook to stable from positive. The short term ratings remain Not Prime.

The key drivers for Angola's Ba2 rating are:

1. The strong medium-term economic outlook

2. Moody's expectation that government credit metrics will continue to improve

3. The government has demonstrated progress in implementing some structural reforms, despite very weak institutional framework

4. Key credit constraints (low economic diversification as well as very weak institutional strength) remain

RATINGS RATIONALE

-- FAST-GROWING ECONOMY, UNDERPINNED BY RISING OIL PRODUCTION

The first driver underlying Moody's decision to upgrade Angola's Ba2 government bond rating is the strong medium-term economic outlook, given the robust growth prospects of the oil and non-oil economy. Angola's non-oil economy has grown rapidly (10% in real terms) over the past five years. The non-oil sector accounted for about 60% of GDP in 2013, up from 42% of GDP in 2008. It is projected to grow in the upper single digits in the coming years, led by construction, manufacturing and agriculture. Having stagnated since 2008, oil production is poised for a rebound. French oil firm Total S.A.'s recent investment of $16 billion in the Kaombo's project, as well as the discovery of significant offshore deposits in the Kwanza Basin, will boost oil production in the coming years and bolster Angola's production potential in the long run. Total S.A. estimates that Kaombo has reserves of 650 million barrels of oil and a projected daily output of around 230,000 barrels by 2017. Kaombo's production will add to an additional 300,000 barrels per day (bpd) that is slated to come on stream over the next 18 months. 160,000 bpd of the latter will come from Total's CLOV project that began in May 2014 and 140,000 bpd from projects with ENI and ESSO in Block 15 slated to come on stream in 2015. All of this underscores the high likelihood that Angola's daily oil production, which averaged 1.73 million bpd in 2013, will rise to 2 million bpd or above from the end of 2015 until 2020. This gradual expansion of oil output, despite current difficulties at some fields, will continue to support economic diversification and infrastructure development.

-- FURTHER STRENGTHENING OF THE GOVERNMENT'S BALANCE SHEET LIKELY

The second driver for the upgrade to Ba2 is the expectation that the government balance sheet will strengthen further with rising oil production. Compared with Ba rated peers, Angola has one of the lowest debt-to-GDP ratios, one of the lowest debt affordability ratios (interest payments accounted for 2.1% of revenue in 2013), and the lowest debt-to-revenue ratios (60% in 2013). Indeed, due to oil revenues, the country has been able to generate substantial fiscal surpluses in recent years (averaging 7.0% of GDP since 2010) that have enabled it to bring its debt-to-GDP down to 23% in 2013 from 27% in 2010. It has also started to capitalise the newly created Sovereign Wealth Fund (SWF) - the Fundo Soberano de Angola (FSDEA) - with $3.6 billion (of $5 billion) as of April 2014. As of the end of April 2014, foreign currency reserves stood at $32.4 billion or roughly 7.8 months of import cover. The accumulation of foreign-currency reserves slowed in 2012-13 mainly due to larger-than-expected outlays for subsidies and arrears, and in 2013 as a result of government transfers to the FSDEA from its accumulated surpluses deposited at the Central Bank--the latter are estimated in the vicinity of $15 billion. Moody's forecast foreign currency reserves reaching $36-38 billion by the end of 2014. Angola's government is already a small net external creditor country, with more external financial assets than external liabilities. In addition, the accumulation of foreign currency reserves in the newly created sovereign wealth fund constitutes a formal mechanism to increasingly shield the Angolan economy from adverse shocks such as lower oil prices. The SWF is separate from the Central Bank's foreign currency reserves, but is part of the government's assets.

-- DESPITE A VERY WEAK INSTITUTIONAL ENVIRONMENT SOME STRUCTURAL REFORMS ARE UNDERWAY

The third driver explaining Moody's decision to upgrade Angola's sovereign rating to Ba2 is the fact that the authorities have managed to successfully implement some complex structural reforms. The National Bank of Angola has gradually implemented reforms and created new instruments to reduce the dollarization of the economy (which decreased to 42% in 2013 from 59% in 2009) and to make monetary policy more effective. Inflation has been on a steady downward trend since 2010 and in the single digits since 2012. In order to increase transparency, the quasi-fiscal operations (QFOs) of Sonangol, the state oil company, were for the first time incorporated onto the government's 2013 budget. To reduce the risk of arrears that have been problematic for the past 5 years, the government now requires the Minister of Finance to co-sign all public investment contracts above $1 million for local governments and $1.5 million for the central government; in fact, arrears are now punishable by law. Moody's thus expects lower arrears over the next few years as the pipeline of existing projects in arrears from the 2009-2011 period has almost dried up and public finance management has been steadily improving.

In addition, the country's Capital Market Commission is laying the groundwork for a secondary bond market to increase liquidity in the sovereign bond market and facilitate debt-management. Nonetheless, the institutional environment remains weak. This is illustrated by the revocation "in the initial phase" of the $5.7 billion guarantee provided by the government to Banco Espirito Santo de Angola in order to restore confidence in the bank and prevent contagion to the wider banking sector. Although this episode raises questions about the country's institutional capacity, the authorites did indicate that some form of support would be provided and the government balance sheet remains strong enough to support any potential liabilities.

-- KEY CREDIT CHALLENGES REMAIN

Angola's key credit challenges are a lack of economic diversification (which is also related to the dominance of state-owned enterprises in the economy), and very weak institutional strength. Significant improvements in this regard would be credit positive. Infrastructure and human resources are still major bottlenecks in the economy. In addition, Angola's moderate susceptibility to event risk is driven primarily by political risks based on uncertainties related to a change in leadership and growing dissatisfaction among younger citizens demanding higher living standards, improved access to education, and employment. Finally, the fast-growing banking sector could potentially add further contingent liabilities to the sovereign.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Upward pressure could develop on the rating if the recently established SWF grows large enough to be able to shield government finances from protracted external shocks and if the rules surrounding its financial relationship with the government budget prove to be clear and based on global best practices. Further sources of upward pressure would be sustained progress in addressing institutional weakness, which is a long-term constraint on the rating, as well as economic diversification that reduces the government's revenue dependency on oil proceeds.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure would be exerted on the rating in the event of (1) sustained deterioration of the fiscal and/or external accounts, leading to a sharp weakening in the country's net foreign asset position; (2) a reversal of recent structural reforms; or (3) the emergence of major political and/or social tensions that would in turn significantly hinder the country's medium-term growth prospects.

COUNTRY CEILINGS

Moody's also upgraded Angola's foreign currency ceilings for bank deposits to Ba3/NP from B1/NP. Moreover, Moody's left unchanged the following ceilings for domestically based issuers of corporate and structured ratings: the foreign-currency bond ceiling at Ba1/NP; the local-currency country risk bond and deposit ceilings at Baa3.

The local-currency country ceilings of Baa3 reflect the maximum credit rating achievable in local currency for a debt issuer domiciled, or a deposit in a bank, in Angola. They reflect a range of risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. The ceilings on foreign-currency bonds and bank deposits capture foreign currency transfer and convertibility risks.

GDP per capita (PPP basis, US$): 6,247 (2013 Actual, also known as Per Capita Income)

Real GDP growth (% change): 6.8% (2013 Preliminary, also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.7% (2013 Actual)

Gen. Gov. Financial Balance/GDP: 4.2% (2013 Preliminary, also known as the Fiscal Balance)

Current Account Balance/GDP: 8.4% (2013 Estimate, also known as External Balance)

External debt/GDP: 21.9% (2013 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 6 August 2014, a rating committee was called to discuss the rating of Angola, Government of. The main points raised during the discussion were: the issuer's economic strength, institutional strength/framework, fiscal or financial strength, including its debt profile, and lastly its susceptibility to event risk. While risks in the banking system have increased, Moody's sees no material increase in overall susceptibility to event risk, which is driven by political risk assessment. This level was also considered relative to its peers.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 rating action, if applicable.

The Local Market analyst for this rating is Aurelien Mali, +971 (4) 237-9537.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Rita Babihuga
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Alastair Wilson
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Angola's issuer ratings to Ba2; outlook stable.
No Related Data.
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