Angola Scraps Dollar Peg as Foreign Reserves Fall
Kwanza could drop 20% after move that may also lead to renegotiation of external debt
Angola's economy, hit by weak oil prices, has ground to a halt after a decade of double-digit growth © AFP
David Pilling, Africa Editor
JANUARY 4, 2018
Angola’s central bank said on Thursday it had been forced to scrap its currency peg to the dollar because of falling foreign reserves as the country grapples with an economic crisis triggered by low oil prices.
The loosening of the exchange rate, which analysts said could lead to a 20 per cent fall in the kwanza, is the latest sign of the new government’s strategy to shake up Africa’s third-biggest economy.
The move may also result in the eventual renegotiation of the country’s roughly $40bn in external debt, said Jose de Lima Massano, governor of the National Bank of Angola.
Much of Angola’s foreign debt is held by China and other bilateral creditors. The relatively small amount of eurobond debt, at about $1.5bn, may not be immediately affected, said William Jackson, senior emerging markets economist at Capital Economics. However, he thought the bond’s yields could end up rising significantly.
Since João Lourenço was inaugurated as Angola’s president in September last year, he has moved swiftly to dismantle the economic and political legacy of his predecessor, José Eduardo dos Santos, who ruled Angola for 38 years.
The new leader’s shake-up led to the sacking in November of Isabel dos Santos, the former president’s daughter and the richest woman in Africa, as head of Sonangol, the powerful state oil company.
Alex Vines, Africa director of Chatham House, said the push to reform the economy was prompted by an expected drop in oil volumes from next year as mature oil wells peak. “It’s reflective of the state of the economy and the limited choices there are,” he said, referring both to plans for economic diversification and for encouraging new oil investment to “act as a cushion”.
Angola is one of the most oil-dependent nations in the world, with 95 per cent of foreign earnings coming from petrodollars. Run as a virtual one-party state since independence from Portugal in 1975 by the Popular Movement for the Liberation of Angola (MPLA), Mr dos Santos and his predecessor used oil revenues to cement party loyalty.
Mr Lourenço, who is a party veteran and Mr dos Santos’s handpicked successor, would need to breathe life into the moribund economy so he could tackle neglected social problems before elections due in 2022 when the MPLA could face a serious challenge, Mr Vines said.
The economy, hit by weak oil prices since mid-2014, has ground to a halt after a decade of double-digit growth and the country is enduring a severe foreign currency shortage.
Mr Lourenço has already ordered a review of the oil industry and spoken out sharply against corruption. He told an MPLA party conference last year that he would set an amnesty period in 2018 during which funds could be repatriated from abroad with no questions asked. Any illegal funds discovered after that, he said, would become property of the state.
“Lourenço is using the political capital he’s got after coming into office to make big strides,” Mr Jackson of Capital Economics said. “From an investor perspective it’s quite encouraging that he’s looking at the oil sector. Although the devaluation could cause short-term problems, it might be positive in the long term.”
In a statement on Thursday, the central bank said it had established an undisclosed band within which the kwanza could move. Foreign reserves fell from $20bn at the start of 2017 to about $14bn.
“We have an exchange rate that does not reflect the truth,” Mr Massano, the governor, said.
But the move to loosen the exchange rate is not without risks, economists said.
Higher import prices in kwanza terms could push up inflation, already at 30 per cent. A weaker kwanza would also make foreign debt servicing more expensive. The most recent figures from the International Monetary Fund show Angola has a debt-to-gross domestic product ratio of 63 per cent, high by emerging market standards, especially when the price for its main export is low.
Angola's economy, hit by weak oil prices, has ground to a halt after a decade of double-digit growth © AFP
David Pilling, Africa Editor
JANUARY 4, 2018
Angola’s central bank said on Thursday it had been forced to scrap its currency peg to the dollar because of falling foreign reserves as the country grapples with an economic crisis triggered by low oil prices.
The loosening of the exchange rate, which analysts said could lead to a 20 per cent fall in the kwanza, is the latest sign of the new government’s strategy to shake up Africa’s third-biggest economy.
The move may also result in the eventual renegotiation of the country’s roughly $40bn in external debt, said Jose de Lima Massano, governor of the National Bank of Angola.
Much of Angola’s foreign debt is held by China and other bilateral creditors. The relatively small amount of eurobond debt, at about $1.5bn, may not be immediately affected, said William Jackson, senior emerging markets economist at Capital Economics. However, he thought the bond’s yields could end up rising significantly.
Since João Lourenço was inaugurated as Angola’s president in September last year, he has moved swiftly to dismantle the economic and political legacy of his predecessor, José Eduardo dos Santos, who ruled Angola for 38 years.
The new leader’s shake-up led to the sacking in November of Isabel dos Santos, the former president’s daughter and the richest woman in Africa, as head of Sonangol, the powerful state oil company.
Alex Vines, Africa director of Chatham House, said the push to reform the economy was prompted by an expected drop in oil volumes from next year as mature oil wells peak. “It’s reflective of the state of the economy and the limited choices there are,” he said, referring both to plans for economic diversification and for encouraging new oil investment to “act as a cushion”.
Angola is one of the most oil-dependent nations in the world, with 95 per cent of foreign earnings coming from petrodollars. Run as a virtual one-party state since independence from Portugal in 1975 by the Popular Movement for the Liberation of Angola (MPLA), Mr dos Santos and his predecessor used oil revenues to cement party loyalty.
Mr Lourenço, who is a party veteran and Mr dos Santos’s handpicked successor, would need to breathe life into the moribund economy so he could tackle neglected social problems before elections due in 2022 when the MPLA could face a serious challenge, Mr Vines said.
The economy, hit by weak oil prices since mid-2014, has ground to a halt after a decade of double-digit growth and the country is enduring a severe foreign currency shortage.
Mr Lourenço has already ordered a review of the oil industry and spoken out sharply against corruption. He told an MPLA party conference last year that he would set an amnesty period in 2018 during which funds could be repatriated from abroad with no questions asked. Any illegal funds discovered after that, he said, would become property of the state.
“Lourenço is using the political capital he’s got after coming into office to make big strides,” Mr Jackson of Capital Economics said. “From an investor perspective it’s quite encouraging that he’s looking at the oil sector. Although the devaluation could cause short-term problems, it might be positive in the long term.”
In a statement on Thursday, the central bank said it had established an undisclosed band within which the kwanza could move. Foreign reserves fell from $20bn at the start of 2017 to about $14bn.
“We have an exchange rate that does not reflect the truth,” Mr Massano, the governor, said.
But the move to loosen the exchange rate is not without risks, economists said.
Higher import prices in kwanza terms could push up inflation, already at 30 per cent. A weaker kwanza would also make foreign debt servicing more expensive. The most recent figures from the International Monetary Fund show Angola has a debt-to-gross domestic product ratio of 63 per cent, high by emerging market standards, especially when the price for its main export is low.
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