High FCY Debt:  Fitch Affirms Angola Ratings with Stable Outlook

Fitch Ratings has affirmed Angola’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook.

According to the note, Angola’s credit ratings reflect weak governance indicators, high inflation, high levels of foreign-currency (FCY) denominated government debt and one of the highest levels of commodity dependence among Fitch-rated sovereigns.

The global rating agency however added that these are balanced by higher international reserves relative to peers, current account surpluses and manageable debt repayment risks due to a still supportive oil price environment over the next two years.

The rating note stated that Fitch expects Angola to continue to run current account surpluses, of 5.8% of gross domestic product (GDP) and 2.2% in 2024 and 2025, respectively, from 4.7% in 2023.

The widening of the surplus in 2024 reflects broadly stable crude oil export receipts, underpinned by assumption of an average Brent price of USD80 per barrel (bbl) from USD82/bbl in 2023.

This also supported by a lower import bill driven by the weaker kwanza and FX scarcity in the domestic economy, according to the rating note.

“The narrower surplus in 2025 mostly reflects our expectation of lower crude oil export receipts underpinned by our assumption of a decline in the average Brent price to USD70/bbl”, Fitch stated.

“We expect international reserves to remain strong relative to peers over 2024-2025. We forecast reserves to remain broadly stable at USD15.4 billion in 2024, from USD15.2 billion in 2023, before declining to USD14.0 billion in 2025 due to sizeable government debt repayments.

“Nevertheless, reserve coverage of current external payments will average 5.3 months over 2024-2025, above the 4.2 months we forecast for the ‘B’ median over the same period”, the global rating agency said in its update.

Fitch said it considers that FX liquidity in the economy remains constrained, as analysts understand the increase in sales in the domestic FX market has been insufficient to reduce the demand backlog in the banking sector or change market expectations of FX liquidity conditions.

“The increased supply was driven by a return to the market by the Treasury, which sold US dollars mostly borrowed from the central bank.

“We expect FX supply to remain tight over our forecast horizon, with declining Brent prices, fiscal deficits and high government external amortisations meaning the authorities will chose to preserve international reserves”, the rating note stated.

Fitch estimated that the government’s external debt amortisations will increase to USD6.5 billion in 2024 and USD6.0 billion in 2025, from USD5.6 billion in 2023.

It explained that Angola’s higher amortisations reflect the end of the moratorium with Chinese creditors in June 2023.

“Amortisations will be met through a combination of the government’s oil revenue, disbursements from bilateral and multilateral sources, financing lines from commercial banks, and liquidity in escrow accounts related to oil-backed loans to China”.

The rating note explained that Angola’s debt servicing capacity will also be supported by the recently-announced agreement with Chinese creditors, which will allow government to use part of the liquidity held in escrow accounts (between USD150 million-USD200 million per month) for the service of debt to other creditors.

“We estimate Angola’s fiscal balance to have shifted to a deficit of 2.3% of GDP in 2023, based on preliminary data, from a surplus of 0.7% in 2022”.

The rating note explained that this reflected an oil-driven decline in revenue due to lower prices and production and higher external interest payments -caused by both kwanza depreciation and the end of the moratorium from Chinese creditors.

“We expect the deficit to widen to 2.5% by 2025, reflecting a further decrease in revenue, mostly due to the decline in Brent prices.

“We assume a decline in expenditure over the same period, owing to lower capital expenditure and expense on fuel subsidies, but a more a significant adjustment will be prevented by higher interest payments”, Fitch said in the note.

Analysts said they expect the authorities to continue with the fuel subsidy reform over 2024-2025. Gasoline prices were increased by 87.5% in June 2023 and diesel prices by 40.0% in April 2024.

“Our figures assume further cumulative increases of 60% in diesel prices and 40% in gasoline prices through 2025. Our assumptions of fuel subsidy reform are subject to risks from Angola’s weak macroeconomic environment and the potential delay in implementation of the reform”.

Angola’s government debt/GDP increased to 85.2% in 2023, from 64.7% in 2022, driven by the impact of the 33% depreciation of the exchange rate on the total debt stock.

“We expect the debt/GDP ratio to decline to 72% and 68% in 2024 and 2025, respectively, above the projected ‘B’ median of 53.0%, due to strong nominal GDP growth and our expectation of moderate exchange rate depreciation”.

Fitch forecasts GDP growth of 1.8% in 2024 and 2.2% in 2025, from 0.8% in 2023, driven by the non-oil economy. We expect oil production of 1.08 million barrels per day (mbpd) in 2024 and 1.07mbpd in 2025, from 1.1mbpd in 2023.

Growth will be dampened by high inflation, partly due to the fuel subsidy reform, and continued domestic FX liquidity constraints. Also, analysts forecast inflation will average 28% in 2024 and 18.0% in 2025, from an average 15.2% in 2023. #High FCY Debt:  Fitch Affirms Angola Ratings with Stable Outlook

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