NS4301 Summer 2015 Angola

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NS4301 Summer 2015Angola
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Overview

• After gaining independence from Portugal in 1975
• Angola was in a civil war for next three decades
• Most infrastructure was destroyed
• Estimated one million people died
• About one third of population fled to neighboring
  countries or were internally displaced
• Sustained peace was only attained in 2002
• Since then
• Country has been experiencing notable
  improvements in its reconstruction and economic
  performance
• Growth averaged 15.2 2002-08, and 4.3 2009-14
  as opposed to 2.1 from 1980-2001
• However still plagued with poor social
  development indicators

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WEF Angola I
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Patterns of Governance I

• The overriding pattern of governance in Angola is
  one of extremely low levels at the time the World
  Bank Governance Indices were first compiled in
  1996
• Since then the country showed some improvement in
  all dimensions of governance until various years
  in the mid-2000s.
• From the mid-2000s to the present little gains
  have been made outside of political
  stability/absence of violence
• In several areas including government
  effectiveness, regulatory quality, and corruption
  there has actually been a deterioration since the
  mid-2000s. 
• Rule of law consistently bad never improving
  since 1996 

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Patterns of Governance II

• The inability of the country to translate its
  economic growth into broader socio-economic gains
  is also apparent in the Legathum Prosperity
  Index.
• Over the last several years (2012-2014) despite a
  significant improvement in the countrys ranking
  in economic performance and a slight improvement
  in health, there was a sharp deterioration in
• Entrepreneurship
• Governance
• Education
• Personal freedom and
• Social Capital

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Voice and Accountability
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Political Stability
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Government Effectiveness
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Regulatory Quality
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Rule of Law
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Control of Corruption
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Economic Freedom
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WEF Angola II
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WEF Angola III
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Economic Freedom I
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Economic Freedom II
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Oil Price Drop 2014-15 I

• With oil prices remaining well below 2010-14
  levels, government passed and revised a 2015
  austerity budget
• Based on a benchmark oil price of US40/barrel
  instead of the US81/barrel included in the
  original 2015 document.
• Outlined are a series of steps to reduce
  expenditures
• Cuts in subsidies with further reductions planned
• Freeze on public sector hiring
• To counter possible public unrest
• Government pledged that social programs such as
  health and education will be protected
• Will implement a US5bn social housing program
• Clear risk that introducing ad hoc austerity
  measures especially in area of capital spending
  could create
• Longer-term problems for economy and
• Slow down much needed attempts at diversification

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Oil Price Drop 2014-15 II

• Reacting to its revenue short-fall the government
  is seeking to negotiate loans with a number of
  financial institutions for use in public
  investment projects
• In July 2015 secured US650 million from World
  bank to implement reforms to
• Increase revenues
• Strengthen public investment management systems,
  and
• Reduce fuel subsidies
• Government also aims to issue bonds and treasury
  bills
• May be forced to resort to IMF support if oil
  prices remain depressed
• Politically unpalatable option one authorities
  are likely to seek to avoid.

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Debt Strategy I

• Government has entered into a number of
  lifeline deals concluded with donors and
  creditors in attempt to cushion effects of the
  oil price drop
• Important for meeting
• Debt repayments and
• Development goals
• In June 2015 government announced it plans to
  borrow 25 billion dollars during 2015 to cover
  budget shortfalls and continue with various high
  profile infrastructure projects
• Bulk will come from treasury bills and bonds
  (around 15 billion dollars) and the remainder
  from international loans

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Debt Strategy II

• Diversifying Debt
• Historically, Angola engaged a diverse range of
  economic and political parteers to ensure it does
  not become reliant on a singly one
• Strengthens its bargaining position as an equal
  partner and power in its own right
• Attempting to extend this strategy as it
  negotiates new and restructured credit lines from
  sovereign governments, banks and multilateral
  instituions
• Chinese connection
• China remains the single largest creditor
• It has loaned Angola around 20 billion dollars
  since 2003 (Reuters)

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The Angolan Model

• Historically Angolas connection with China has
  been defined by the Angolan Model.
• Model has been in effect since around 2004
• Involves the manner in which credit lines are
  extended to Angola by China
• Money is used to finance the governments key
  capital projects.
• Payment is specified in oil with the requirement
  that that 70 of project inputs be sourced in
  China.
• May be other elements favorable to Chinese firms
  on contracts
• No governance or reform demands placed on Angola

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Debt Strategy II

• Speculation is Santos recent trip to China to
  negotiate new arrangements. These will
• Support construction projects,
• Maintain debt stability, and
• Increase downstream construction suppliers
• Likely that Angola has
• negotiated a moratorium on debt repayments until
  its macroeconomic situation improves and
• For the extension of new credit lines
• Any new and rescheduled loans are probably backed
  by cash for oil deals, a position supported by
  recent Chinese announcements that will scale-up
  imports of Angolan crude
• Such commitments reduce the governments scope to
  negotiate potentially more lucrative deals with
  other buyers.

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Debt Strategy III

• Crisis Creditors
• Government eager not to rely entirely on China
• Has pursued an array of funding streams from
  Europe, the United States and Russia
• In addition to sources such as
• Goldman Sachs,
• Ecotech, Societe Generale,
• Russias VTB Capital, and
• multilateral lenders the World Bank and African
  Development Bank have pledged 450 million dollars
  and 124 million respectably
• These loans are small and dispersed
• None of the non-Chinese creditors can exert
  substantial influence over government decision
  making

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Assessment I

• Non Oil Emphasis
• The Dos Santos administration has emphasized that
  new investments include at least some components
  aimed at sponsoring non-oil activity,
  particularly construction the single largest
  non-oil contributor to GDP growth
• However construction deals that are announced as
  new are unlikely to be so.
• Instead deals are likely to represent stalled
  existing projects that have been re-packaged
  with additional financing.
• Ruling MPLA does not face serious electoral
  competition, but wants to avoid opposition
  activists citing examples of abandoned
  construction sites as evidence of financial
  mismanagement

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Assesssment II

• Rising inequality and living costs, along with
  corruption concerns are driving protests,
  especially in urban areas
• Resisting Reform
• World Bank loans include provisions on improved
  transparence and fiscal management
• Angola has historically successfully avoided
  governance-related conditionality by turning to
  bilateral lenders such as Brazil, Russia and
  China
• However its scope to do so appears to be
  weakening under its current budgetary pressures
• Government will avoid implementing governance
  mechanisms, despite having agreed to do so
  formally

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Assessment III

• The MPLA is strongly opposed to measures that
  appear to infringe on Angolas sovereignty or
  expose the business interests of political
  elites.
• Even when faced with economic collapse during the
  civil war (1975-2002) it avoided aid linked to
  governance reform
• This could complicate future funding tranches
  from the Bank.
• However investor deals and credit from other
  sources are unlikely to be affected.
• Angola has a fairly good record of paying its
  debts
• Unlikely some regional states it tends to service
  its loans quickly (when funds are available)
  rather than seek prolonged repayment schedules
  which may entail reforms.

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Assessment IV

• The government also may offer private investors
  business facilitation services and relief from
  certain regulatory burdens to offset their
  transparency concens.
• Future
• Angloas debt to Chinese entities is likely to
  grow, eroding its ability to enter negotiations
  as an equal partner
• This may improve Chinas hand in oil supply
  contract negotiations and in secreting state
  construction projects
• Rumors China taking advantage of Angolas weak
  bargaining position to negotiate some land
  grabs
• Deals with non-Chinese creditors and donors are
  sufficiently small and dispersed to ensure that
  none have sufficient leverage to shift government
  intransigence on governance reform.

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Assessment V

• Clearly Angloans dont want to return to the
  post-independence era of violence and war
• However a danger of increasing protests given the
  countrys fiscal difficulties
• Revenue shortages have already prompted the
  authorities to
• Raise fuel prices three times in seven months,
  and
• Introduce a freeze on public sector hiring
• Scale back or postpone many large infrastructure
  projects
• Such moves could reinforce perceptions that only
  a small political elite has benefitted from
  Angolas wealth
• Government likely to continue to crack down
  strongly on anything it perceives is a threat to
  stability or its authority

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Assessment VI

• However crackdowns and pre-emptive arrests could
  backfire on the ruling MPLA as the cumulative
  effect of the growing list of police cruelty
  provokes new tensios