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The IMF Executive Board’s lack of revelations in concluding its USD1.3bn Stand-By Agreement (SBA) this week with Angola (initiated in November 2009) was not surprising and moreover the expected final disbursement of 132.9 validates in our view the completion of a paradigm shift in terms of (i) macroeconomic stability and (ii) fiscal accountability (in this case another way of singling out the predictability of oil revenue transfers to the Treasury via [hitherto opaque] quasi-fiscal operations by Sonangol, the state oil-company-cum sovereign wealth vehicle). To the first point the National Bank of Angola’s (BNA) introduction of a benchmark interest rate last fall (in addition to an interbank (LUIBOR) rate, which in practice acts as a guide for monetary policy and as a reference rate for commercial bank lending rates) provided a key fillip to enhanced monetary credibility upon which much of extreme exchange rate volatility traditionally emanates. Indeed the BNA, which manages a floating exchange rate regime and utilizes an auction system as its primary tool for setting the exchange rate, saw inflation reach record lows in H2 2011 (from 15.3 percent at the end 2010 to within the 12 percent targeted band one year later) while its external position grew, allowing it to ease rates by 25bp in January while the 182-day T-bill rate, which began 2011 at 11.4 percent, fell to roughly 4 percent at the beginning of this year.
The disinflationary trend is an ideal backdrop for the newly effected energy sector FX regime requiring the financial intermediation of petroleum operations by banks domiciled in Angola[i], though the efficiency and ease of said defacto de-dollarization will hinge largely, the IMF notes, on the development of kwanza-denominated saving instruments. The implication on domestic bank revenues going forward, needless to say, is quite positive, though what effects increased onshore dollar liquidity will have on the kwanza as well as the monetary aggregate are less clear. To this end an IMF working paper on Angola from 2009 remains pertinent especially given how the country’s M2 and credit growth have rapidly surpassed nominal GDP growth since the global credit crisis:
“Excess liquidity, which is measured by positive deviations of M2 from its equilibrium level, adds to demand pressures, and contributes to inflation with a lag. This underlines the importance of closely monitoring the broad money growth as well as improving liquidity management. In this context, while greater sterilization efforts by the BNA are warranted to curb the rapid money growth, the analysis also suggests that fiscal policy has a role to play in sharing the burden of further disinflation by ensuring that public spending is in line with the existing macroeconomic and administrative capacity.”[ii]
This observation ties into the second point from above, namely the need for fiscal policy to scale up public investment as a prerequisite of sorts to economic diversification and inclusive growth as well as offsetting strong internal demand dynamics in the face of limited access to imported goods due to poor logistics (which underpins sticky core inflation).
Gross savings as a percentage of GDP, for instance, has actually fallen of late, diverging from the country’s growing current account surplus (itself a function of the country’s Cabinda Crude which ended February at an all-time high of 124USD/bl and accounts for ~96 percent of exports) which per the pair’s standing accounting relationship implies that investment has not only fallen in comparison with output but at a much faster rate (growth in surplus/output is 700bp more than the comparable nominal growth figure). The question remains how to manage fiscal accountability with the need to address inherent, “structural weakness” in the non-oil sector (see Mahvash Qureshi’s 2008 study “Competitiveness of Angola’s Non-oil Sector: Challenges and Prospects”) given the latter increasingly looks to act as a long-term monetary headwind given rising internal demand pressures while the former remains a short term exchange rate driver, a quintessential catch-22 for government officials.
[i] Van Welzen, Pieter: New foreign exchange regime for the Angolan oil and gas sector. Available at:
[ii] Klein, Nir and Kyei, Alexander. Understanding Inflation Inertia in Angola. May 2009. WP/09/98.
As hinted here earlier, sub-Saharan frontier markets may be distinguished in part by their monetary prudence and overall macro policies. While foreseeing an impending rise in Eurozone related global market volatility earlier this fall (and by extension the SSA region’s near-term growth prospects), for instance, we theorized that commodity exporters such as Ghana would enjoy enhanced terms of trade, augmenting FX reserves as well as tempering price stickiness such that capital costs remained controlled while the option to ease interest rates remained relatively viable–all in contrast with net importers such as Kenya and Uganda (a notable exception to this ongoing thesis remains South Africa, for reasons outlined here, while Nigeria’s disappointing reserves accumulation YTD and hitherto pesky inflation have in turn brought about six different attempts to normalize rates during the year). That said, a tipping point does exist even in the most price sensitive of countries such that once inflation pressures lessen (a function, it should be pointed out, not only of supply side factors but also demand side ones such as private sector credit expansion) monetary policy can remain static or even perhaps loosen such that local bonds look a bit more palatable. Absa Capital noted yesterday, for instance, that following the deceleration in November’s headline inflation to 29% from the previous 30.6%, the Bank of Uganda’s (BoU’s) MPC left its central bank rate (CBR) unchanged at 23% (up 300 basis points from the last hike in October) at its policy meeting‘last Friday while observing that “prospects for lower annual inflation rates have strengthened”. At the same time, Bank Governor Emmanuel Tumusiime Mutebile pointed out commercial bank lending to the private sector declined by 20.9 per cent between September and October, a trend he expects to continue as “the slowing down of bank credit growth will help to ameliorate inflationary pressures over the coming months”. All this bodes well for fixed income, though an always mindful eye on domestic food prices wouldn’t be for naught.
The combination of expected-persisting monetary accommodation along with a hitherto sticky, macro-proof global demand profile for diesel (influenced further by the looming likelihood in China of a weather-aggravated supply shortage in the coming months) make West African crude and, by proxy, its sovereign credit our holiday frontier market wish list security of choice. The latter phenomenon–i.e. the burgeoning diesel/gasoline spread (see chart below)–continues to play on an ongoing theme, namely per one pundit the “diverging drivers behind the consumer and industrial activities as [developed market] high unemployment and stagnant wages continue to crimp consumer spending, while industrial and manufacturing activity [particularly in developing economies] are revving up.” Barclays energy wonk Paul Horsnell further elaborated on diesel’s EM-fueled, relative buoyancy in a research note from last week:
“Ever since the migration of non-OECD countries to the margin of the oil market, diesel demand has received a significant boost on a global scale, given the bias of diesel in the oil mix in these countries. Its dominant position in commercial freight traffic has made it a fast growing demand component in countries characterised by large distances in internal trade and by strong underlying economic growth. For instance, in China, significant government investment in the road system and a mandate in 2000 that all trucks should run on diesel by 2010 facilitated the rapid expansion of domestic diesel demand. Beyond road transport, diesel also continues to be the primary fuel employed in China’s rail system, as well as being a major fuel for several significant types of marine transport. A similar picture can be painted for India, where diesel makes up 70% of road fuel use due to the intensity of truck and bus fuel consumption as well as the increasing penetration of diesel within the passenger car segment. In a country with some degree of oil product price subsidisation still in place, diesel prices are considerably more politically sensitive than gasoline. It has, therefore, usually proved easier to allow retail gasoline prices to rise with international markets, while retail diesel prices can often be stickier, with the current retail price discrepancy between gasoline and diesel almost double in India.”
Thus despite this weekend’s report indicating Asia would cut its African sourced imports to a three-month low, we expect lower or “sweet” sulfur blends (about half of the average Brent) from Angola and Nigeria (versus heavier or “sour” grades from Saudi Arabia and Iran) and their associated higher (up to twice more) distillate yield to continue to be in vogue. The Chinese in particular continue to suffer from tight supply side dynamics–“especially in the country’s Northern, Eastern and Central regions” per Horsnell–such that net product imports (at 322k b/d in October, higher than the year-to-date average of 286 thousand b/d) will likely continue to trend up. And while Nigeria, Africa’s largest oil producer, plans to export 2.18m b/d of crude next month, with Angola second at 1.72m, we remain impressed with the relative price stability in Ghana in the face of oil output that, while growing, still fell short of expectations. Granted, Ghana’s fiscal targets (both its own and those set by the IMF) were predicated on abnormal output, and thus the initial 5.5% of GDP deficit estimate may turn out to be a bit pollyanna given President John Atta Mills’ looming showdown with Nana Akufo-Addo (close runner-up in 2008) next year. Yet inflation expectations remain sanguine enough (CPI +8.6% y/y in October from 8.4% in September, in line with consensus, while non-food inflation was unchanged at 11.3% y/y, suggesting still modest inflationary pressure per analysts) that the country’s 12.5% policy rate will most likely remain unchanged into 2012. To echo our sentiment from last spring, therefore, Ghana’s 2017 Eurobonds remain attractive versus peers.
Market frenzy received additional filips this week upon rumors that not only may China opt to essentially underwrite Italian debt (adding further confusion, perhaps, to the whole ‘Made in Italy/China” kerfuffle), but furthermore that perhaps the entire BRIC contingent would pass around a continent-wide, boosting collection jar in what some cynics quipped would ultimately amount to an ironic albeit ill-fated form of reverse-colonization. The comment ties nicely with last week’s Economist piece noting Angola’s sudden Portuguese shopping spree, a “first for Africa” whereby national oil company-cum-sovereign wealth vehicle, Sonangol, “acts as the government’s main dealmaker and overseas investor.” This got us to thinking that despite Absa Capital’s recent warning to clients that “the current bout of financial market turbulence and fears of a global economic slowdown . . . provide a new impediment to [sub-Saharan] growth . . . which may have a dampening effect on growth prospects in the region” there should emerge a divergence in performance between the region’s commodity net-buyers and sellers, which in turn should augment their respective monetary policy flexibility (i.e. to not have to choose between growth and inflation, a priceless luxury for any economy and especially against a stagnating global backdrop). The former group, admittedly, is commodity-derived cash rich and thus dependent on its exports to help build FX reserves, temper policy rates and buoy credit. Yet, per Absa, “in the absence of a sharp deterioration in global growth, commodities should remain an important pillar of growth [in Ghana, Nigeria and Angola], where firm oil prices of above USD110/bbl continue to support growth [and help] economic activity remain robust.” The latter group, meanwhile, already victims largely to poor diversification among its economic sectors, may get stuck in an inflation-importing conundrum a la Kenya currently, where climbing inflation (16.7% in August) sits in stark contrast with, per comments made by the country’s monetary policy committee, a relatively glum growth outlook for 2011H2.
Not only does Angola’s status as the continent’s second largest oil producer (the West African state produced 1.75 million barrels a day of crude in October, according to data compiled by Bloomberg, while Nigeria pumped 2.1 million barrels) make it an intriguing macro story, but so does its Chinese connection: in addition to almost $10bn in loans since 2002, roughly 70,000 Chinese people work in Angola, from crane and bulldozer operators to more-skilled railway technicians, though some commentators contend the cozy relationship has run its course. And while theoretically such a loss of credit could be somewhat muted against the backdrop of continued IMF largesse, a lower budget deficit, international debt investors lured by S&P’s B+ grade back in June (a rating fueled by the country’s low 22.8% external debt/GDP ratio in 2009 per London’s Exotix), healthy projected domestic output (7.6 percent in 2011 against 6.7 of 2010, per internal reports) and improving foreign reserves, such realization has been thwarted, at least in the short-term, by vexxing decisions that make some critics question the once-communist, now market-wed and ever-opaque MPLA party and José Eduardo dos Santos, its autocratic leader of three decades. Debts owed to foreign firms and central bank-neutering legislation historically don’t do wonders for a country’s cost of capital, nor necessarily does accomodative monetary policy in the face of inflationary pressures. To this last point, however, analysts point to the link between Angola’s import driven, non-oil primary fiscal deficit and the need for a more robust private sector to ultimately increase price stability. In the meantime, eager investors will have to wait for Angola to test the debt waters again in order to see what kind of yield China’s once-playground gets this time around.
Editor’s Note — I’m currently writing for “The Business Diary Botswana” and will be reproducing my columns on this site a few weeks after they appear in said publication.
Angola, a recently added OPEC member now ranked slightly ahead of Nigeria as sub-Saharan Africa’s biggest oil exporter and with production at nearly 2m barrels a day, held its first election in 16 years on September 5th, the second multiparty election since its independence from Portugal in 1975. The first election, held in 1992, lead to the renewal of a brutal civil war that continued until 2002. This time, however, there is little expectation of renewed conflict. Rather, the parliamentary elections are expected to pave the way for both presidential and local ones next year. Furthermore, these elections were especially noteworthy for two reasons. One, legions of foreign observers were allowed in to observe and monitor the proceedings, bolstering their credibility. And two, state money was provided to opposition parties, the largest of which is the National Union for the Total Independence of Angola (UNITA), led by Isaias Samavuka. Altogether, The Economist noted this week, “voters had a choice from 10 political parties and four coalitions.”
The recent elections come at an extremely crucial point for Angola, which is awash in capital (especially from China, its biggest importer of oil) and is widely considered to be the continent’s fastest growing country, growing by 21% last year, and by an expected 16% in 2008 (compared to an African average of roughly 6%). In the past six years, GDP per person has increased several times over. And inflation thus far has been muted, with prices rising only 12% in 2007. But as billions of dollars enter the country in search of the oil and related industries, it is critical that capital be spent and invested wisely for future growth. So far, The Economist wrote, “the government is using some of its revenues (with help from Chinese, Brazilian and Portugese contractors) to embark on projects to rebuild and modernize roads, bridges, sewers, schools and hospitals, and other public services smashed by decades of civil war.” Yet, while commendable, this kind of investment is not adequate. The paper remarks that “two thirds of Angolans still live on less than $2 a day,” and unemployment is still a whopping 40 percent. Public infrastructure is good, and indeed essential to lubricating the operations of increasingly competitive industries as well as to the overall quality of life for ordinary citizens. New infrastructure projects, for example, will improve road and rail links between the capital city, Luana, and the countryside, which will enable farmers to market their products. But it will take a truly self-sustaining middle class, coupled with an aggressive stance against poverty and increased funding and staffing of social services such as education and health care, as well as liberalized markets and most importantly the opening of credit markets to all ranges of income groups, that will lead to tangible and sustainable growth over time, not just one or two boom years. On the social front, visible progress has already been made. But it is just a start.
One goal will be for the state to employ larger swaths of its own people (where possible) in the very industries that have created its impressive growth, and even more so in new ones. While oil and diamonds make up 60% of the economy, for example, and most of the government’s revenue and almost all the country’s exports, neither industry actually employs many people. For this reason, the government has openly stated that it is seeking to diversify its economy into agriculture and industry. “Agriculture is key because it will increase jobs and help our economy grow as a whole,” Joaquim Duarte, a senior official at Angola’s Ministry of Agriculture, told Reuters, referring to the government’s strategy for the sector. Duarte pointed out that Angolan farmers use less than 10 percent of 35 million hectares of arable land, making the country one of the continent’s “most promising” agricultural nations.” Moreover, states Manuel Monteiro, a once small-time farmer from Benguela who started off with a tiny plot of land and has since become the country’s biggest banana producer, only a small fraction of Angolan farmers actually sell their products in Luanda. In fact, 98 percent survive on subsistence farming. But Monteiro argues that new investments in the industry will “help Angola regain its agricultural glory.”
Once an exporter of food (it was the world’s fourth biggest coffee producer and a top exporter of sugarcane, bananas, sisal and cotton, before the 27-year war) Angola now imports most of its food from abroad. Yet foreign investors could be the key to reversing that. For instance, U.S.-based Dole Food Co., the world’s largest fresh fruit and vegetable producer, and Chiquita Brands International, owner of the namesake banana label, are in talks with local authorities in Vale do Cavaco in the eastern based, Benguela province, to help revive the valley’s once thriving banana industry. Brazilian builder Odebrecht recently announced plans to invest in Angola’s sugar and ethanol sector. And swarms of other foreign companies are expected to invest millions of dollars in the war-ravaged coffee, sugar, cassava and palm oil industries. “There is massive foreign interest. Many European, U.S. and Asian companies have knocked on my door to say they want to invest in our land,” said Abrantes Carlos, director for rural development in Benguela.
Another sector experiencing rapid growth is the nation’s banking industry. According to the Angolan central bank, there are now 19 banks operating in the country, up from just six in 2002. The sector is dominated by five key players that make up almost 85% of the sector’s total deposits, including Banco Africano de Investimento (BAI), which helped raise raised $1 billion for the government’s reconstruction of the nation’s infrastructure in 2007. Analysts note that the government is “keen to encourage more overseas banks into the sector,” although it still requires them to be at least 49.9% owned by a local partner. Despite the growth however, laments one observer, Angolan banking remains in its infancy, and the majority of its loans are made to corporate customers. Moreover, the absence of a credit bureau means that the retail sector is practically non-existent outside Luanda. In fact, at present just 20% or less of banks’ deposit bases are from individual accounts. There is thus vast room for improvement, analysts point out, in not only the array of products and services offered by banks, but also in the further extension of credit to all types of consumers. “The country’s non-oil sector is growing faster than its oil sector,” notes The Banker, and thus financing opportunities are plentiful, especially to meet the country’s growing infrastructure needs and the once-dormant agriculture industry. At present, however, critics contend that the banking system must achieve more scale to truly be effective. Most local banks are tiny, with a minimum capital requirement of only $5 million.
Correlated with this problem is the argument that the Angolan financial sector cannot improve until an effective stock exchange is established. For businesses to grow, says the theory, firms must be able to raise money through issuing equity, and investors must be granted a more dynamic setting to plop their money. A stock exchange, it is offered, “would also encourage a more transparent culture and breed better corporate governance.” To this end, the government plans to open a stock market by early 2009 and is also trying to get a B+ credit rating from a top agency to attract more investors. One of the few Southern African countries that does not have its own stock market (the two others being Tanzania and Congo, both of which have relatively minor economies in comparison), Angola will launch its exchange with ten listed companies and an initial capitalization of $6 billion. According to the Angolan Industry Ministry’s coordinator of the Centre for Capital Markets, Antonio Cruz Lima, the Luanda government can expect to collect about $940 million in taxes from exchange-related activities. “There are no real financial investment alternatives in this country,” says Luís Folhadela, an associate director of financial advisory services for KPMG, a consultancy, in Angola. “A stock exchange would allow an effective channeling of the savings and investment of the country and match the needs of investors and the people.” Angola hired KPMG in 2004 to advise it on passing its own securities exchange law, which it did a year later. But it has yet to reap any of the law’s benefits.