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Coronavirus: Will a price war force change in Angola?

Kurt Davis Jr.
By Kurt Davis Jr.
Investment banker

Kurt Davis Jr. is an investment banker focused on Europe, Middle East, Africa, and Turkey and is a member of the Council on Foreign Relations. He earned an MBA. in finance, entrepreneurship and operations from the University of Chicago Booth School of Business and a J.D.. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at kurt.davis.jr@gmail.com.

Posted on Friday, 8 May 2020 07:52

Russia: Presidents of Russia and Angola meet in Sochi
Angola's President Joao Manuel Goncalves Lourenco during a meeting with Russia's President Vladimir Putin on the sidelines of the 2019 Russia-Africa Summit. Alexei Druzhinin/Russian Presidential Press and Information Office

The impact and longevity of COVID-19 and low commodity prices are putting acute pressure on African economies and pushing some sovereigns close to default. Besides Zambia, which has already begun the process to potentially hire an advisor for a sovereign restructuring, Angola is becoming the country with the highest risk for a potential debt restructuring.

A recent ranking by The Economist of 66 countries that are in distress and are relatively safe, places Angola just ahead of Bahrain, Zambia, Lebanon, and Venezuela.

READ MORE Angola: Finance Minister Vera Daves has one of Africa’s toughest jobs

The ranking uses four measures to assess the financial resilience of each economy:

  1. 2020 forecasted public debt as percent (%) of GDP.
  2. 2020 forecasted foreign debt as percent (%) of GDP.
  3. Cost of borrowing
  4. Reserve cover (i.e., foreign exchange reserves relative to 2020 foreign debt payments and current-account deficit).

To put such ranking in context, Lebanon defaulted on a $1.2bn bond in March; Venezuela defaulted in 2019 on the last bond that was not already in default; and Zambia, as mentioned, is considering the hiring of a financial advisor for a potential sovereign restructuring.

READ MORE Angola: Where did all the money go? Part 1, a family feast

This story is not new…

Angola has been in this situation before; the country debt-to-GDP approached 90% in 2018. That said, debt-to-GDP may match numbers (north of 100%) that haven’t been seen in nearly two decades since 2001.

The truth of Angola remains an economy still attached to oil and banking on a price rebound to save it in the long term that is likely not to come.

For reference, most historians argue that the Angolan Civil War continued until 2002, when Jonas Savimbi, leader of National Union for the Total Independence of Angola (UNITA), was killed.

READ MORE Angolans feel let down two years into new presidency

The situation today is not new but it’s definitely harsher. The return to growth – projected by most analysts for 2020 in Angola – following a small decline in 2019, is all but undone by COVID-19.

As a result of the pandemic, the International Monetary Fund (IMF) now projects the global economy to contract by 3% in 2020, which is significantly higher than the circa 1.7% decline during the financial crisis.

Provided containment efforts ideally unwind in the second half of 2020, the global economy can expect growth to return in 2021. But what does that mean for oil and in particular, this oil state?

READ MORE Angola is collateral damage of coronavirus hit on oil, China

The last couple months for oil have been devastating. The recent demand decline (about 20% to 25%) underwritten by a global economic slump was simply an add-on (albeit major one) to an already ruinous market for oil exporters.

The unsuccessful efforts by OPEC Plus to make cuts, dimmed prospects for the market and culminated in a short period of negative prices on trading. Angola (and its fellow oil countries) will have to take a view on the oil price and ALSO hope that the market is buying into that same story.

READ MORE DRC-Angola: Tshisekedi and Lourenço locked in oil struggle

To be clear, oil prices will bounce back because demand cannot stay this low. But it is unlikely to rebound to $70 territory anytime in the near term. Without that type of rebound, Angola cannot escape the reality of its weak economy and impending debt crisis.

The truth of Angola remains an economy still attached to oil and banking on a price rebound to save it in the long term that is likely not to come.

Economic reform…

President João Lourenço acknowledges the challenges underlying today’s economy in Angola. But he still is hamstrung by the reality of paying Angola’s significant social welfare bill with less resources than his predecessor.

READ MORE Lourenço is changing Angola. But the end destination isn’t clear

For example, the country’s significant infrastructure deficit and challenges seemed surmountable in previous years because the projected oil revenues created an imaginable base against which his predecessor could borrow. But the cash simply is not there anymore and the cost of doing business remains higher due to the infrastructure reality alongside various red tape issues in the country.

Angola may never become the diversified multi-faceted economy cooked up in economic models by unrealistic analysts in a university study room.

An extensive IMF-backed privatisation programme offers an avenue towards some cash and subsequently debt relief.

But state asset sales and tendering is not exactly the norm for a country more associated with state-run institutions and state-associated wealth.

The removal by Lourenço’s administration of the dos Santos family from the by-line of Angola’s present and future suggests change…but the challenge with privatization is not simply changing leadership.

READ MORE: IMF optimism and oil-dependent countries: be wary of sunny projections

The rules of engagement with Angola’s public and private sector do not necessarily set the standard for the globe or for Africa. Thus the privatization of state oil company Sonangol, diamond company Endiama, and the national airline TAAG alongside several banks, including BAI, BCGA, BCI, and Banco Económico does not immediately change the nature of how business is conducted.

The country will have to wait for the culture change within the system to emerge as well as be patient for private businesses to modernize, grow, and generate revenue for the country. In the short term, the main benefit for this state may simply be the cash received in any tender process.

Therefore the greater question for Lourenço’s administration may be how to create a vibrant economy in conjunction with any sovereign restructuring. The country can right-size its debt, which could require reducing the sovereign debt by $20 to $40bn. It is not exactly clear how this could be achieved outside an outright default and subsequent comprehensive restructuring, especially considering the China-Angola debt situation.

Similar to Zambia, where China’s deep ties to the country and extremely private debt documents concern many creditors to the country, Angola has borrowed north of $20bn from China, largely secured against oil.

These type of oil-linked loans often have clauses that provide for a repayment review as oil prices move in the market; many deals were drafted on oil prices significantly greater than the current $20 to $30 range. Within sovereign restructuring circles, it is understood that the Chinese ‘behind-the-closed-doors’ project finance debt with the Zambian government will surely be the biggest hurdle in getting a true picture of Zambia’s debt position and negotiating a solution.

Expect the same in Angola if it pursues a similar path.

READ MORE: Mike Pompeo’s Africa trip is about China, not Africa

There will not be a big group lining up to help Angola if its economy drops quickly in the next six months. Western partners would likely exert pressure for structural and economic reforms with the IMF insisting on painful reforms.

Bottom line: The country will have to create a new economic model, which includes introducing new rules for both the private and public sector (and introduce mechanisms for enforcing them).

To be fair and set expectations, Angola may never become the diversified multi-faceted economy cooked up in economic models by unrealistic analysts in a university study room. That said, it does not mean the country cannot transform into something in between that version of utopia and the land of oil drills.

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