Since the end of its three-decade long civil conflict in 2002, Angola has registered strong growth fueled by crude oil exports, allowing high public spending and driving the emergence of the country’s consumer class. Since the oil price decline—and quick rebound—of 2009, the government has consistently cited economic diversification as a top priority. However, with recent years’ high oil prices, the flow of easy money from oil exports has given the government little incentive to move forward with diversification efforts. Oil currently accounts for 95 percent of Angola’s exports and 80 percent of its tax revenue. As a result, oil remains the largest component of Angola’s GDP, and the country’s economic outlook is tied to its price.
The effects of low oil prices
The Brent oil price slumped by 44 percent between June and December 2014 and is not expected to recover significantly. Angola’s vulnerability to external market forces is now apparent with its currency, the kwanza, steadily depreciating against the US dollar, stoking inflation and muting consumer demand for imported products as consumers’ purchasing power decreases.
As crude oil now commands lower per-barrel prices, fewer US dollars are entering the country. This causes foreign exchange shortages that disrupt business: Repatriating profits is costly and time-consuming, distributors are delaying payments as they struggle to access US dollars, and banks are increasing interest rates.
Companies should develop sound strategies to repatriate profits and should tap into direct lines of credit between Angola and their countries of origin if possible. By maintaining an account with a top Angolan bank, companies can also maximize chances of obtaining US dollars during central bank auctions, now reduced from three to one per week.
As Sub-Saharan Africa’s third-largest spender, Angola remains attractive for multinational corporations selling into the public sector. However, the low oil price is forcing the government to adjust its spending, consider alternate forms of financing, and reassess its priorities, which will affect projects that multinationals may be involved in.
Having already revised its benchmark oil price from US$ 81 to US$ 40, cut its budget by 26 percent, and eliminated fuel subsidies, the government is also proactively seeking new financing for some of its commitments. President Jose Eduardo Dos Santos recently returned from China, where he campaigned for financial assistance. As ties between the two countries strengthen, companies should expect intensified Chinese competition on the ground, particularly in the construction sector. China will only offer greater assistance if its companies receive preferential treatment, which means that Chinese companies will enjoy a stronger competitive position for some government projects.
Angola’s history of over-reliance on oil for economic growth is leading to a shift in attitudes and policies affecting businesses beyond the oil and gas sector. A newfound urgency is informing government decisions, particularly regarding the investment process for foreign companies. Policies to improve the business environment and encourage economic diversification are being quickly enacted.
For example, the influence of ANIP, the national agency for private investment, which is well known for its slow and highly bureaucratic approach to decision-making, is progressively declining. A new law that will change ANIP’s mandate is expected to be passed imminently, and under the new law, power to approve investments will devolve to relevant ministries.
While multinationals should be cautioned that the skill sets and experience of the ministerial staff varies among departments, they will benefit from greater bargaining power and more efficient decision-making when interacting directly with ministers.
Moreover, new legal and tax incentives are rapidly passing. Angola’s labor law is now more employer-friendly and the incorporation process for companies has been simplified. The corporate tax has been reduced and certain sectors, such as water, electricity, and local manufacturing, receive significant customs and tax exemptions.
Multinationals looking to enter the market should still demonstrate how they will create jobs and add value to the overall economy. Those already present on the ground should seize the opportunity to reinvest locally and acquire more cheaply priced local assets, while maintaining a long-term outlook on their return on investment.
The current economic climate represents a new normal of low oil prices and lower-than-usual government spending. Consumer preferences are evolving, as consumers move away from big-ticket, elite products, and toward cheaper, mid-range items. As consumers trade down, companies are capitalizing on this shift in consumption patterns by investing in local production and packaging. Kero, a supermarket chain; and Brazuca, a clothing chain, are expanding rapidly, demonstrating their firm belief in the expansion of the country’s consumer class.
Uncertainties will still abound. Angola’s resilience against low oil prices and the sustainability of its debt will be tested, as it takes on dollar-denominated debt to compensate for lower revenues while its own currency continues to depreciate. Internal politics are opaque, with succession plans unclear. President Jose Eduardo Dos Santos—a father-like figure to Angolans who has been at the country’s helm since 1979—has yet to signal whether or not he will run during the 2017 elections. Social tensions remain an issue, particularly as Angolans adjust to the new normal of low oil prices.
Opportunities, however, are emerging amid the economic slowdown, and government diversification incentives offer additional opportunities. Angola remains a top market for multinationals. Few are halting investment because of the crisis, and many realize that investing in Angola requires a long-term approach and patience regarding business hurdles.
For an in-depth analysis of Angola’s economic outlook in 2015 and beyond, and the impact by industry, FSG clients can read our Angola Market Spotlight report. Not a client? Contact us to find out more.