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Rating Action:

Moody's upgrades Angola's ratings to B3 from Caa1, outlook stable

13 Sep 2021

New York, September 13, 2021 -- Moody's Investors Service ("Moody's") has today upgraded the Government of Angola's foreign and local currency long-term issuer ratings to B3 from Caa1 and maintained a stable outlook. The foreign currency long-term senior unsecured ratings, and the senior unsecured MTN program ratings have also been upgraded to B3/(P)B3 from Caa1/(P)Caa1 respectively. The foreign and local currency short-term issuer ratings have been affirmed at Not Prime (NP).

The decision to upgrade the ratings is driven by Moody's assessment that Angola's sovereign credit profile is improving to be consistent with peers at the B3 rating level. Stronger governance, in particular in the quality of the country's executive and legislative institutions, albeit from weak levels, is reflected in various aspects of the credit profile, which Moody's expects to last. Fiscal metrics as well as liquidity and funding risks are likely to improve. Higher oil prices compared to last year, and a stable exchange rate, will allow the positive impact of fiscal consolidation efforts and structural improvement in debt and public finance management to be visible in a downward-trending debt burden. Additionally, the stability of Angola's external position through fluctuations in oil prices indicates somewhat more resilience than peers at the Caa1 rating level.

The stable outlook reflects Moody's view that the credit risks to the current B3 rating are balanced between the potential for more positive developments on Angola's fiscal metrics, liquidity risks and external position, if reforms continue and oil prices remain supportive; against a still high government debt burden which remains vulnerable to renewed episodes of kwanza depreciation, a renewed oil price shock or a more rapid global transition to low carbon than Moody's currently assumes.

Angola's local currency (LC) and foreign currency (FC) country ceilings have been raised to B1 and B3 from B2 and Caa1 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 transfers and convertibility risks given the track record of imposing capital controls and restrictions during the oil price shocks.

RATINGS RATIONALE

RATIONALE FOR RATING UPGRADE TO B3

ANGOLA'S GOVERNMENT DEBT IS LIKELY TO FALL STEADILY IN THE COMING YEARS, ALBEIT FROM HIGH LEVELS

Supported by the oil price recovery and a stable exchange rate, Angola's fiscal and debt metrics are set to improve significantly, from weak levels. Assuming that oil prices remain around $65/barrel this year and next and around $45-65/barrel in the medium term, with a relatively stable kwanza, Moody's expects the government debt-to-GDP ratio to decline to 95% this year and below 80% in 2023, from 122% in 2020.

While oil production is unlikely to grow significantly, non-oil GDP has been recovering from the immediate shock of the pandemic. The non-oil economy will continue to strengthen and contribute the bulk of real economic growth, at around 3%, in the next few years. High nominal GDP growth will contribute significantly to reduce the debt burden, as long as the kwanza remains broadly stable.

The recovery in the non-oil economy will also further support non-oil revenue -- and as a result strengthen resilience to oil price volatility -- that has been constantly growing since 2017, to an estimated 10% of GDP in 2021 from 7.4% of GDP four years ago, despite the economic contraction observed during that period. This is mostly due to an array of reforms to strengthen the country's public finances, including the introduction of a VAT that replaced an old consumption tax and is expected to account for around 10% of revenues in 2021 from 5% in 2018. Additionally, the fiscal rules included in the fiscal responsibility law passed in 2020 prescribe a limit to the primary non-oil deficit at 5% of GDP by 2025, which means, given the current interest burden and the level of the oil revenues, that the budget is likely to be in surplus in the future. Moody's expects that Angola will adhere to its fiscal rule, which is more achievable after years of expenditure consolidation, even beyond the elections next year. Fiscal prudence is also reflected in a 2021 budgeted oil price at $39/barrel, far below current oil prices, and Moody's expects a similar approach to the management of public finances to be maintained.

As a result, Moody's expects that debt-to-GDP will approach 60% of GDP by 2025, while the debt-to-revenue ratio will fall to around 300% from 586% last year. Debt affordability will improve accordingly: Interest payments-to-revenues will decline to around 20% in 2025 from 32.6%.

ANGOLA'S LIQUIDITY AND FUNDING RISKS ARE SET TO DIMINISH

Liquidity risk has been a key credit constraint for Angola over the last few years. In 2020, lower oil prices and large domestic debt repayments contributed to government borrowing requirements (GBRs) rising to close to 18% of GDP from 12% in 2019. GBRs would have been even more challenging to fund last year without the significant reduction in external debt service (estimated at $2.5 billion in 2020 negotiated with some bilateral lenders), financial support from the International Financing Institutions, with an additional $750 million disbursed by the IMF on top of its existing financial package, the drawdown of $1.5 billion from the Sovereign Wealth Fund (SWF), and the rebound in oil prices observed in the second half of 2020.

While Angola will continue to benefit from debt restructuring by some bilateral lenders in 2021 and 2022 (for an estimated $4.5 billion over the period), the return to fiscal surpluses and significant steps to pay down short-term debt in the last few years lower GBRs to below 10% of GDP, broadly in line with the average of B3-rated peers at 13.7% of GDP.

Fiscal consolidation and the lengthening of debt maturities will mitigate liquidity pressure when, starting in 2023, external payments start to increase again although Moody's expects overall GBRs to remain at around 10% until 2025.

ANGOLA'S EXTERNAL POSITION IS EXPECTED TO CONTINUE TO STRENGTHEN IN THE COMING YEARS

With the oil price recovery, the improvement in Angola's external position is illustrated by the stabilization of the exchange rate. After years of adjustments and the liberalization of the exchange rate, the kwanza has been relatively stable at around AOA650 per dollar since the final quarter of 2020 (it was AOA165 at the end of 2017). Additionally, the gap with the parallel exchange rate has been reduced to less than 5% which further evidences improvements in the country's external position.

Moody's expects the current account surplus to exceed 5% of GDP in 2021 and to remain in surplus in the coming years. This is explained in part by the rebound in oil prices but also by the structural reduction in the import bill. The latter is due to the significant depreciation of the kwanza over the recent years and the imposition of custom tariffs on goods for which the government wants to promote local production.

Moody's expects Angola's gross official foreign exchange reserves to reach at least $16 billion at the end of 2021 (corresponding to around 11 months of imports cover) from $14.9 billion in 2020, having declined by $3 billion last year. This does not include Angola' SDR allocation from the recent increased allocation for all IMF members, estimated around SDR1 billion, and any share of the government fiscal surplus that may be kept at the Banco National of Angola (BNA) as part of the reserves. As current account surpluses accumulate and more than offset capital outflows, Moody's expects that reserves will reach $21 billion by 2025, providing significant coverage of imports and external debt payments.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that the credit risks to the current B3 rating are balanced between the potential for more positive developments on Angola's fiscal metrics, liquidity risks and external position, if reforms continue and oil prices remain supportive; against a still high government debt burden which remains vulnerable to renewed episodes of kwanza depreciation, a renewed oil price shock or a more rapid global transition to lower reliance on hydrocarbons than Moody's currently assumes. We currently expect the government to remain committed to its reform agenda, even in the face of the 2022 elections, which fosters confidence the improvements are unlikely to be reversed.

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 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 credit 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$): 6,932 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -5.2% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 25.1% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -1.9% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1.5% (2020 Actual) (also known as External Balance)

External debt/GDP: 85.4%

Economic resiliency: b2

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

On 08 September 2021, a rating committee was called to discuss the rating of Angola, Government of. The main points raised during the discussion were: The issuer's institutions and governance strength, has materially increased. Other views raised included: The issuer's economic fundamentals, including its economic 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 ratings if its fiscal metrics improved faster than Moody's currently expects further reducing the risks associated with an elevated debt burden such as liquidity and funding risks. Similarly, a sustained rebound in official foreign-exchange reserves, and stronger non-oil GDP growth than Moody's currently expects, would further shelter government revenues from oil price 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 rating.

Moody's would likely downgrade the ratings if it were to conclude that the expected decline in the debt burden looked increasingly less likely, either because of external shocks that the government cannot effectively mitigate such as a prolonged period of lower oil prices and/or a significant depreciation of the exchange rate; or because of a change in policy stance that slows or reverses the pace of fiscal consolidation. Such developments would also likely raise liquidity and external risks.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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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