Moody's Investors Service has today upgraded Angola's government bond rating to Ba2 from Ba3 and changed the outlook to stable from positive. The short term ratings remain Not Prime.
The key drivers for Angola's Ba2 rating are:
1. The strong medium-term economic outlook
2. Moody's expectation that government credit metrics will continue to improve
3. The government has demonstrated progress in implementing some structural reforms, despite very weak institutional framework
4. Key credit constraints (low economic diversification as well as very weak institutional strength) remain
-- FAST-GROWING ECONOMY, UNDERPINNED BY RISING OIL PRODUCTION
The first driver underlying Moody's decision to upgrade Angola's Ba2 government bond rating is the strong medium-term economic outlook, given the robust growth prospects of the oil and non-oil economy. Angola's non-oil economy has grown rapidly (10% in real terms) over the past five years. The non-oil sector accounted for about 60% of GDP in 2013, up from 42% of GDP in 2008. It is projected to grow in the upper single digits in the coming years, led by construction, manufacturing and agriculture.
Having stagnated since 2008, oil production is poised for a rebound.
French oil firm Total S.A.'s recent investment of $16 billion in the Kaombo's project, as well as the discovery of significant offshore deposits in the Kwanza Basin, will boost oil production in the coming years and bolster Angola's production potential in the long run. Total S.A. estimates that Kaombo has reserves of 650 million barrels of oil and a projected daily output of around 230,000 barrels by 2017. Kaombo's production will add to an additional 300,000 barrels per day (bpd) that is slated to come on stream over the next 18 months. 160,000 bpd of the latter will come from Total's CLOV project that began in May 2014 and 140,000 bpd from projects with ENI and ESSO in Block 15 slated to come on stream in 2015. All of this underscores the high likelihood that Angola's daily oil production, which averaged 1.73 million bpd in 2013, will rise to 2 million bpd or above from the end of 2015 until 2020. This gradual expansion of oil output, despite current difficulties at some fields, will continue to support economic diversification and infrastructure development.
-- FURTHER STRENGTHENING OF THE GOVERNMENT'S BALANCE SHEET LIKELY
The second driver for the upgrade to Ba2 is the expectation that the government balance sheet will strengthen further with rising oil production. Compared with Ba rated peers, Angola has one of the lowest debt-to-GDP ratios, one of the lowest debt affordability ratios (interest payments accounted for 2.1% of revenue in 2013), and the lowest debt-to-revenue ratios (60% in 2013). Indeed, due to oil revenues, the country has been able to generate substantial fiscal surpluses in recent years (averaging 7.0% of GDP since 2010) that have enabled it to bring its debt-to-GDP down to 23% in 2013 from 27% in 2010. It has also started to capitalise the newly created Sovereign Wealth Fund (SWF) - the Fundo Soberano de Angola (FSDEA) - with $3.6 billion (of $5 billion) as of April 2014. As of the end of April 2014, foreign currency reserves stood at $32.4 billion or roughly 7.8 months of import cover. The accumulation of foreign-currency reserves slowed in 2012-13 mainly due to larger-than-expected outlays for subsidies and arrears, and in 2013 as a result of government transfers to the FSDEA from its accumulated surpluses deposited at the Central Bank--the latter are estimated in the vicinity of $15 billion. Moody's forecast foreign currency reserves reaching $36-38 billion by the end of 2014. Angola's government is already a small net external creditor country, with more external financial assets than external liabilities. In addition, the accumulation of foreign currency reserves in the newly created sovereign wealth fund constitutes a formal mechanism to increasingly shield the Angolan economy from adverse shocks such as lower oil prices. The SWF is separate from the Central Bank's foreign currency reserves, but is part of the government's assets.