Angola: Vulnerable to lower oil prices

Frontier country report | December 5, 2014

Crude oil prices

Brent, daily prices up to 05/12/14

120
110

While the growth momentum in Sub-Saharan Africa (SSA) is driven by various

factors including rapid infrastructure development and robust domestic demand,
raw materials remain the backbone of many SSA economies. Falling commodity
prices are a concern, to different degrees, for these countries. Angola provides
a glaring example of high dependency on commodities, given that oil accounts
for 95% of its exports, 75% of government revenue and 40% of its GDP in the
context of a drop in international crude oil prices of 40% since June.

100
90

Fiscal and external accounts under pressure

80

Angolas 2014 budget is based on an oil price of USD 98 per barrel whereas
Brent currently trades below USD 80. This comes on top of an oil production
level which is below government expectation. Crude oil output averaged 1.77 m
bpd in the first half of 2014 (down from 1.89 m bpd in 2013) due to repair and
maintenance work in some oil fields. The combination of lower prices and
smaller production will likely lead to a decline in oil revenue to below 30% of
GDP. However, spending cuts are likely to keep the 2014 budget deficit
contained.

70
60
Jan 13

Jul 13

Jan 14

Jul 14

Source: Bloomberg

Oil production below expectation so far

Million barrels per day

2
1.95

For 2015, the oil price that would deliver a balanced budget is around USD 110
per barrel, assuming no changes in public spending. Thus, if oil prices average
USD 80 dollar per barrel, major expenditure cuts will be needed to prevent the
budget deficit from sharply increasing compared with 2014. In turn, this would
lead to a decline in GDP growth to below 6%.
The current account surplus has been declining for a few years and we expect
this trend to continue given increasing demand for capital goods imports. If oil
prices average USD 80 per barrel next year, export revenue could decline by
over USD 10 bn (7% of GDP), which would translate into a major current
account deficit in 2015.

1.9
1.85
1.8
1.75
1.7
2009

2010

2011

2012

2013

2014
H1

Sources: IEA, Deutsche Bank Research

Kwanza under pressure

Kwanza oer USD, daily figures until 05/12/2014

105
100
95
90
85
80
75
70
08

09

10

11

Sources: BNA, DB Research

12

13

14

With close to half of its oil exports going to China since 2012, Angola has not
been significantly affected by shale production and the loss of the US market
(as Nigeria has). However, the country is thus vulnerable to softening demand
from China.

Prudent fiscal management, FX reserves, SWF and increasing

diversification should increase resilience to oil price shocks
When oil prices dropped by one-third in 2008-2009 (from 92 to 61 USD/barrel),
Angolas GDP growth collapsed from 23% in 2007 to 2.4% in 2009, the fiscal
balance switched from +4.7% to -7.4% of GDP (in spite of a significant cut in
public spending) and the current account balance from +17% to -10%. The
Kwanza depreciated by 18% yoy in 2009 after the central bank loosened the
unofficial peg to the US dollar. In the current episode, several factors could
mitigate the risk of severe economic disruption:
Oil price assumptions in the budget have not been excessive. In the past years,
the budgeted oil price has rarely exceeded the global oil price. Angolas draft
budget for 2015, currently in Parliament, is based on an oil price of USD 81 per
barrel. It also includes a provision that a number of projects will receive funding
only if the oil price exceeds a given threshold.

Global Macro & Sovereign Risk Contact

Claire Schaffnit-Chatterjee | claire.schaffnit-chatterjee@db.com | +49 69 910-31821

Internet
http://www.dbresearch.com

Angola

FX reserves

USD bn
40

Solid GDP growth and a moderate public debt level (38% of GDP in 2014
according to the IMF) will allow Angola to run budget deficits for a few years
while preventing debt levels from ballooning. The IMF estimates that even with
persistent fiscal deficits of around 4% of GDP and rising interest costs, public
debt would stay below 45% until 2019 under the assumption that GDP growth
remains at around 6% on average over the next few years.
Angolas FX reserves are substantial at USD 28 bn (over 6 months of import
cover), although they have been declining since September 2013 (see chart), in
part due to transfers to the newly established sovereign wealth fund. External
financial requirements for 2015 are very low, at around 20% of international
reserves. Angola is a net external creditor.

35
30
25
20
15
10

A sovereign wealth fund (SWF) was launched in 2013, with the transfer of USD
3.5 bn from the Oil for Infrastructure Fund, and is now fully capitalized at USD 5
bn. The authorities have stated that the SWF is set to receive revenues when
the oil price is above a budgeted price but the legislation is still to be finalised.
The fund may thus fulfill a fiscal stabilisation function, apart from providing longterm financing for infrastructure development and investment in targeted growth
sectors.

5
0
04 05 06 07 08 09 10 11 12 13 14
Sources: IFS, Deutsche Bank Research

Superior growth in the non-oil sector

GDP growth, yoy

12
10
8
6
4
2
0
-2
-4
-6
-8
2009

Non-oil

Angolan oil: short-term production on the rise, encouraging longterm prospects

Oil

2010

2011

2012

2013

2014

Sources: IMF, Deutsche Bank Research

Oil production

Million barrels per day

3.0
2.5

The economy is diversifying. The non-oil sector accounted for 60% of GDP in
2013, compared with 40% in 2008. After growing annually at around 8% over
the last five years (see chart), the non-oil sector is set to continue expanding in
the next five years, on the back of investments in the agricultural sector,
electricity, manufacturing and services.

Nigeria

2.0
1.5
Angola
1.0
0.5
0.0

Assuming substantial new investment, which seems realistic, we expect oil

output over the next five years to increase slightly as new oil fields are brought
into production while mature fields experience a decline. Softer oil price limits
returns on investment and deepwater projects have higher costs (around 80% of
Angolan oil comes from offshore fields). Lower oil prices may result in a
slowdown of oil exploration, even though oil majors still intend to spend billions
of dollars developing Africas recently discovered reserves, according to press
reports. Totals decision to proceed with a long-delayed USD 16 bn investment
in the Kaombo project is significant.
Although Nigeria has by far the largest oil resource base in SSA (37 bn barrels
of proven reserves vs 13 bn for Angola), the International Energy Agency
forecasts that Angola will take over as Africas largest crude oil producer over
the next few years (see chart).
Angolas longer-term prospects are encouraging, given potential in the pre-salt
layers. Indeed, the blocks under the Kwanza Basin may be the same as Brazils
oil rich formations, according to the IEA. In May, US-based Cobalt discovered in
the Basin significant quantities of oil, raising hopes of successful pre-salt layer
drilling, which could double the countrys oil reserves. Ongoing pre-salt
prospection should give an indication in 2015 about the amount of commercially
viable oil reserves.

80 84 88 92 96 00 04 08 12 16 20
Sources: National sources, IEA, Deutsche Bank Research

| December 5, 2014

All in all, sustained oil prices in the low 80s would put serious pressure on
Angolas economy. At the same time, this vulnerability needs to be put in the
context of Angolas strengths: moderate public debt, net external creditor
position, substantial FX reserves and increased share of the non-oil sector in
the economy.
Frontier country report

Angola

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| December 5, 2014

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