Macro-brief: angola january 2010



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MACRO-BRIEF: ANGOLA

January 2010






HIGHLIGHTS


  • The consumer price index jumped by 2.16% in December and end of the year rate increased to 13.99%, above the 13.18% verified for 2008.

  • 2009: A year that will not be missed.

  • 2010: Allegro ma non troppo.

  • Stand-By Arrangement First Review soon.

RECENT DEVELOPMENTS

End of the year inflation, as measured by the CPI, reached to 13.99% in 2009, the second consecutive year of increasing inflation since the 11.78% registered for 2007. Chart 1. The year-over-year (y/y) inflation increased to 13.99% despite the sharp decline in economic growth in 2009 and the slower growth of monetary aggregates. However, the depreciation of the Kwanza, first in the parallel market and in the reference market in the last quarter of the year, most likely impacted prices of imported goods upward and pushing inflation up. The y/y “Core-inflation,” meaning CPI excluding “food and non-alcoholic beverages”, increased in 2009 to 9.8% from 6.17% in 2008 while food inflation decreased from 20.1% in 2008 to 17.7% in 2009.i Price pressures will remain strong in 2010 as economic growth improves, the lag effect of the Kwanza devaluation continues in the first half of the year. The expected tight fiscal and monetary policies could help in keeping prices under control.

2009 is gone: not a day too late.

The impact of the global financial and economic crisis in Angola’s economy was hard and deep. Real economic growth came to a halt after an average rate of 18% in the previous five years. Despite sharp fiscal tightening, for the first time since 2005, the budget registered a deficit and the government accumulated substantial levels of arrears with domestic suppliers. The kwanza depreciated in both the reference (from 75.17 to 89.4 Kwanzas per US dollar) and parallel (from 77 to 98.8 Kwanzas per dollar) markets. Inflation remained at two digit level, from 13.18 in 2008 to 13.99 in 2009, despite the tight monetary policy (although M2 experienced substantial growth due to large increases in current and time deposits in both domestic and foreign currencies). The sharp drop in export revenues and proportionally less decrease in imports resulted in a Current Account deficit after years of surpluses. The international reserves felt by 30%, from US$ 17.5 billion in December 2008 to US$12.3 in December 2009, although net international reserves have been stable since April 2009. In summary, the global financial-economic crisis hit hard the economy of Angola as price of oil started a free fall trend in the second half of 2008. It has been a rough economic ride in 2009, as high levels of uncertainties, nervousness of economy agents and rumors on the direction of macro policies resulted in large imbalances in some markets especially the foreign exchange and government securities markets in the first half of the year. Low oil prices resulted in sharp declines in oil revenues and both external and fiscal positions shifted from large surpluses of recent past to deficits. The government took strong measures which helped to stabilize the international reserve position as the central bank (BNA) tightened monetary policy, and the 2009 supplementary budget tightened fiscal policy substantially. In November, the IMF Board approved a US$1.4 billions Stand-By Arrangement (SBA) with Angola. By the end of the year, imbalances were largely diminished and, overall, macroeconomic stability was under way, although substantial challenges remain in place.






2008

2009

2010

Real GDP (% growth rate)

13.2

-0.5 to +0.5

6.5 to 7.5

Oil

11.9

-5

6.5

Non-oil

14.8

5.5 to 7.8

6.5 to 8

Nominal GDP (US$ billions)

85

70

86

Inflation (end of the year)

13.18

13.99

14.0

Food Inflation

20.1

17.7

-

Core Inflation

6.2

9.8

-

Kwanzas/US$ Reference (31/12)

75.17

89.4

-

Kwanzas/US$ Parallel (31/12)

77.0

96.8

-

Net International Reserves (US$ billions)

17.5

12.3

-

M1

74.2

32.5

-

M2

66.2

62.6

-

M3

104.1

21.5

-

Average Oil Price (OPEC Composite)

94.45

61.06

-

2010: New Year, new hopes, old challenges.

The perspectives for the economy have improved substantially in 2010, with real GDP growth rate expected to stay between 6.5 and 7.5%, depending on the performance of the non-oil sector. The oil sector is likely to grow by 6.5% as oil production increases from 1.79 million barrels per day in 2009 to 1.9 million barrels per day in 2010. Growth of the non-oil sector will be positively impacted by the expansion of the oil sector, increased capital expenditures by the public sector, and some private investment in agriculture and manufacturing. The banking sector would keep their expansion as well. On the other hand, tight fiscal and monetary policies will keep growth below two-digit level. If non-oil growth stays between 6.5 and 8%, total real GDO growth will vary from 6.5 and 7.5%, respectively. Inflation should remain around the rate registered in 2009, 14%, as tight monetary policy counterbalances the lagged effect of the Kwanza devaluation. As the world economy improves, demand for oil will increase slightly in 2010 and oil prices should remain around current levels, corresponding to a price of around US$70 for Angola’s oil. These two price increases (oil and Angola’s CPI) will result in a nominal GDP growth rate between 21 and 24%. In dollar terms GDP is expected to increase from 70 billion dollars in 2009 to around 86 billion in 2010. The Current Account is likely to to shift back into a surplus, improving net international reserves position and softening the pressures in the foreign exchange markets as a result of higher oil prices and increased production associated with continuous disbursements from the IMF Stand-By Arrangement and multilateral and bilateral external financing. Higher oil revenues and improved efficiency in collecting non-oil revenues as non-oil GDP increases, will increase government revenues. Faster growth of revenues compared to expenditures (as fiscal policy remains tight), the budget should also sift into positive territory even while the government reduces or eliminate arrears with domestic suppliers. The economic scenario has improved dramatically from 2009, but the old challenges remain. First, the high dependency on oil will remain a reality for some years in the near future. Second, the tight fiscal and monetary policies proposed for 2010 will not be easily implemented since there will be increasing pressures to increase public spending and to expand credit as oil prices remain at current levels. On the other hand, there is always a possibility that the global economic recovery slows down and oil prices decline. In other words, the economic music will be executed at a faster pace, but not too fast, “an allegro ma non troppo.”



The IMF Stand-By Arrangement (SBA) First Review Mission.

According to the SBA between Angola and the IMF, quarterly review of the program will take place with the quarterly performance criteria set out in the Technical Memorandum of Understanding. The first review mission is expected in February with completion of the review report around March 2010. The quantitative performance criteria and indicative targets for the first review reflect the economy in December 2009. The criteria and targets are as follows:

The IMF Stand-By Arrangement


  1. Performance Criteria (December 2009):

  1. Usable net international reserves, floor (US$ billions) = 9.076

  2. Net domestic credit of the BNA, ceiling (billions of Kwanzas) = -311

  3. Net credit to the government by the banking system, ceiling (billions of Kwanzas) = 268

  4. Non-accumulation of domestic arrears (from November 23, 2009) = 0 (zero)

  5. Non-accumulation of foreign arrears (continuous criteria) = 0 (zero)

  6. Non-concessional borrowing, ceiling (billions of US$) = 2

  1. Indicative Targets:

  1. Floor on social spending, cumulative (billion of Kwanzas) = 786

  2. Nonoil fiscal deficit (accrual basis), ceiling (billions of Kwanzas) = 1800.

Most of the criteria can be adjusted upward Downward) by the shortfall (excess) in oil revenues received by the Treasury and by the excess (shortfall) of the central government’s external debt service relative to program assumptions. In other words, if oil revenues are lower than predicted in the program, both criteria for net domestic credit of the BNA and net credit to the government by the banking system will be adjusted upward by the amount of the shortfall in revenues. The same applies with the external debt services are higher than previously expected. The opposite adjustments are made in the case of higher than expected oil revenues and/or lower debt services. It is very likely that criteria 1, 4, 5, and 6 will not present any problem and similarly to both targets. Criteria 2 and 3 will depend on the adjustments to be made depending on oil revenues especially and, in a smaller scale, the external debt service. Looking at preliminary data (up to November 2009), it seems that total oil revenues will stay below program assumptions and, thus, upward adjustments will be made in criteria 2 and 3.




Chart 1:

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Chart 7






i In this brief “core inflation” is the CPI index after excluding the “food and non-alcoholic beverages” component from the consumer basket, which represents 46.09% of total consumption. The core-inflation was calculated by creating a series of all the other components, recalibrating their respective shares of the consumption basket to sum 100%, and creating the new “core-inflation” index.


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