In a report issued last week, Moody’s Investors Service says Angola’s Ba2 government rating reflects the country’s limited institutional capacity and vulnerability to oil price volatility, but is supported by the economy’s robust growth prospects and the strength of the government balance sheet.
The rating agency’s report is an update to the markets and does not constitute a rating action.
Moody’s says that Angola’s rating support comes primarily from its oil endowment and rising oil production. The latter has allowed the country to generate a track record of fiscal surpluses and embark on a substantial increase in capital expenditure to diversify the country away from natural resource extraction. Should these efforts result in better infrastructure and more efficient use of the country’s large non-oil resources, such as agriculture and mining, positive pressure could develop on the sovereign rating.
“As Angola’s oil output expands to roughly 2.1-2.2 million barrels per day by 2016, the growth prospects of its economy will improve,” says Aurelien Mali, a vice president-senior analyst in Moody’s sovereign group. “We forecast economic growth of 7.8 percent in 2014 and 8.4 percent for Angola in 2015. Such prospects offset, from a credit standpoint, the country’s relatively low per capita income.”
Further support for Angola’s rating comes from the strength of the government balance sheet, with debt-to-GDP at 23 percent, and the gradual growth in foreign-exchange reserves that represent a credible buffer against economic shocks. Another credit positive is the recent creation of the sovereign wealth fund, which is nearly fully capitalised and may be used to soften the impact of any economic or financial shock to the country.
Constraints on Angola’s rating include the country’s very limited institutional capacity, oil price sensitivity, and a degree of uncertainty surrounding issues of political succession and continuity in economic policy given Angola’s short post-independence history. The rapid rise of the budget oil breakeven price from $66 to $98 over the last four years makes the country more vulnerable to an oil shock while the government builds fiscal buffers. Risks in the banking system stem from elevated non-performing loans and a high, but falling, level of financial dollarisation.
As for most other commodity dependant economies, the establishment of a significant fiscal stabilisation fund or sovereign wealth fund large enough to cushion the impact of a protracted external shock on government finances would exert positive pressure on the rating. The latter would also build following substantial progress in institutional reform. The Ba2 rating could be downgraded should the government finances and/or the external accounts register a substantial deterioration.
