Categorized | Africa, China, Global Economy, World

Angola on the Brink After Oil Price Slump

Image by jbdodane

Image by jbdodane

Emerging from a nearly three decade long civil war that began at the time of the country’s independence from Portugal and which did not end until 2002, Angola experienced an oil production boom in the years that followed. With the discovery of massive amounts of oil at several deep water fields south of the Congo River, near Angola’s northwest coast, the World Bank estimates that gross domestic product (GDP) grew by an impressive annual average of 15% during 2002 and 2008. Despite the global financial crisis, earnings from the 1.7 million barrels produced daily have given it an impressive 5.3% annual growth rate each year since 2009. However, cash-strapped Angola is once again struggling as chronically low oil prices mar the economy. President Dos Santos’s ineptitude to diversify the economy and protect the country from fluctuating oil prices is fomenting public anger towards him.

Angola’s economy is inextricably linked to oil. As Africa’s second-largest oil producer after Nigeria, it has become highly dependent on its production. Oil revenue accounts for close to half of its GDP, 80 percent of its tax revenues, and a whopping 90 percent of its export earnings. Angola, a member of the Organization of the Petroleum Exporting Countries (OPEC) since 2007, is estimated to have earned a hefty $24 billion in net oil export revenue last year alone, according to the U.S. Energy Information Administration. This is a slight drop from its $27 billion revenue in 2013, as a result of decreased production and falling crude oil prices.

Home to nearly 24 million people, Angola is a country of glaring disparities. Despite boasting the third-largest economy in sub-Saharan Africa, over 30% of Angolans live below the poverty line. Dos Santos’ government is often accused of using the spoils of peace to enrich the ruling elite at the expense of the poor. His daughter, Isabel dos Santos, is worth $3.5 billion and presumed to be the wealthiest woman in Africa.

Because governments use a benchmark price for oil to estimate national revenue, the abrupt fall in oil prices has forced many oil-exporting countries to amend their budgets. With a budget once based on sales at US$81, sliding oil prices and mounting public debt have compelled Luanda to adjust that number to $40 a barrel. In an effort to mitigate the deteriorating domestic economic situation, the Angolan parliament has slashed public expenditure by 25%. While Dos Santos has admitted that some large infrastructure projects will be delayed, he has carefully avoided mentioning which ones. The Finance Ministry has also reduced spending on education and imposed a government hiring freeze to offset the impact of declining oil prices. Desperately trying to avoid a budget deficit, the government recently disclosed that fuel subsidies would be decreased, increasing prices on gasoline and diesel by 20 percent. Elias Isaac, country director at the Open Society Initiative for Southern Africa is convinced that military and security expenditure will remain intact. “They will cut development and social services that help the real people,” he said. The possibility of social upheaval should not be excluded as tensions reverberate across the country.

The International Energy Agency estimates that over half of Angolans do not have access to electricity and are forced to resort to traditional biomass and waste to meet their household energy needs. Scanty power generation and the lack of adequately skilled workers to manage the electricity sector are some of the many problems that beset the electricity sector. Moreover, there is the issue of inefficient revenue collection: over 80% of users are not metered. Mindful of the array of problems that plague the country’s electricity sector, the Angolan government has pledged to invest $23 billion within the next two years and more than double electricity production to 5,000 megawatts by 2017 from 2,062 megawatts. Furthermore, within three years, 2,400 kilometers of new roads are expected to be laid, ensuring access to potable water for 65 percent of the population. Less than four months ago, Angola’s sovereign wealth fund, the Fundo Soberano de Angola, worth just shy of $5 billion, allocated $1.1 billion to an Infrastructure Fund focused on investments in energy, transport and large industrial developments across Sub-Saharan Africa.  Sure enough, this fund is run by one of the president’s children, José Filomeno de Sousa dos Santos.

Even though net foreign reserves stand at around $26 billion, it cannot be overlooked that they were $30 billion just six months ago. A major strategic and economic goal for this southwest African country is to lessen its dependency on oil and diversify its capital-raising resources. Earlier this year, it borrowed $250 million from New York based Goldman Sachs and London based Gemcorp Capital LLP in separate deals. Additionally, the World Bank is preparing to offer Angola a $500m loan and the possibility of bilateral credit lines with the likes of Brazil, Spain and China, an already major investor in the country. In light of the severe headwinds triggered by the tumble in crude prices, economy minister Abrãhao Gourgel recently divulged that Angola is seeking to inaugurate its Eurobond. Its debut would make Angola the first African sovereign bond borrower, raising somewhere between $1bn and $1.5bn.

While plans to ramp up foreign investment and jump-start the economy are in full force, corruption remains a major challenge. It is particularly noticeable in the extractive industries through the deft looting of state assets, embezzlement of public resources and a deeply rooted patronage system that operates outside state channels. For 2014, Angola was ranked 161 out of 175 by the Transparency International, a Berlin-based anti-corruption lobby. With fears the economy may actually shrink this year, Dos Santos and his entourage must reinvent themselves, and quickly, if they want to maintain their grip on the government.

Image courtesy of jbdodane

Itziar Aguirre

About Itziar Aguirre

Itziar currently works as a Property Sector Analyst at HFF, a commercial real estate capital intermediary. She holds an MBA in Accounting and Finance from the University of St. Thomas and an MSc in Comparative Politics from the London School of Economics.

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