ANGOLA: Making a clean sweep
For the new president’s economic and finance reforms to succeed, and for the country’s economy to grow, Angola needs to attract more foreign direct investment
When João Lourenço was sworn in as Angola’s president on September 26, he came into office promising sweeping reforms. Just over 100 days on, his progress has astounded sceptics.
Lourenço’s first move was to rid Angola of the legacy of former president José Eduardo dos Santos, who in his 38 years in office had taken nepotism to new heights and led the country down the path of corruption.
Out went the former president’s daughter, Isabel dos Santos, as head of state oil company Sonangol. Her brother, José Filomeno dos Santos, got the boot as head of Angola’s US$5bn sovereign wealth fund. They joined dozens of other Dos Santos loyalists who were axed, including the central bank governor, intelligence agency head and police chief.
Lourenço is now turning his attention to economic reform through a macroeconomic stability programme. It is vital for the oil-dependent economy (oil accounts for about 90% of Angola’s exports and government revenue). Since the collapse of the oil price in 2015, the country has faced a severe shortage of foreign currency, particularly of the US dollar.
The first key move towards economic reform came on January 3, when newly appointed central bank governor José de Lima Massano announced the abolition of the Angolan kwanza’s peg to the US dollar. The peg at 166 kwanza to the dollar had been in place since April 2016.
The peg has cost Angola dearly in terms of foreign exchange reserves, which have halved since 2014 and fell from $20bn at the start of 2017 to $14bn in November.
Reflecting the severe shortage of dollars, the unofficial black market exchange rate is about 430 kwanza to the dollar.
The dollar shortage has left many foreign companies sitting high and dry, including Nampak, which at the end of September had R2.2bn tied up in Angola.
Massano emphasised that the foreign exchange market will not become a free for all in which the kwanza’s value will be at risk of wild swings. Instead, the central bank will allow the currency to float within an unspecified range.
How far the kwanza will be allowed to devalue is hard to determine. Ratings agency Moody’s goes no further than to say it expects a "marked depreciation".
Taking a stab at a possible level, Capital Economics senior economist William Jackson predicts in a research note that the kwanza will be at 200/$ by the end of the year — a 20% depreciation.
"It is hard to determine the extent of the devaluation, says Phumelele Mbiyo, head of Africa research at Standard Bank. "But the exchange rate could eventually settle between the current official and black market rates."
A foretaste of the kwanza’s depreciation was provided by the central bank’s auction of dollars on January 9 — its first in two months. With banks not permitted to trade dollars, the central bank is the only source of the currency.
There were no fireworks at the auction, with the kwanza settling at 184.5/$.
"The devaluation of the kwanza will not solve the dollar-shortage problem in Angola," says Mbiyo. "The country must find ways to attract more foreign inflows."
As a possible solution Mbiyo points to the Nigerian autonomous foreign exchange (Nafex) market.
Introduced by the Central Bank of Nigeria in April, Nafex permits investors, importers and exporters to undertake foreign currency trades outside of the Nigerian inter-bank foreign exchange market.
"The introduction of the Nafex market [has] significantly improved dollar liquidity," says Nampak CFO Glenn Fullerton in the company’s annual report.
Says Mbiyo: "Nigeria did the correct thing in creating a second window to allow foreign investors to buy treasury bills and bonds. Since the introduction of Nafex, Nigeria’s foreign exchange reserves have increased from $29bn to $38bn."
Arguably, Lourenço has enough on his plate for now. Hard on the heels of the news of the kwanza’s unpegging, finance minister Archer Mangueira announced that Angola will move to renegotiate maturities and interest rates on both its domestic and foreign debt.
It is a much-needed move. The state of public finances is "precarious", says Jackson.
Angola’s public debt totals about $75bn, of which $30bn is domestic and $45bn external. "[There is] no doubt policy makers are concerned that a sharp fall in the exchange rate — as now seems likely — would push the debt ratio [now 63% of GDP] up to unsustainable levels," says Jackson.
Lourenço’s economic reforms will not be painless for Angolans. Moody’s notes that the depreciation of the kwanza, while positive in the longer term, will mean higher inflation [now 25%] for longer and will likely "weigh on growth".