Angola to tap SWF funds as oil output drops and China debt talks continue
Welcome to the Angola Economic and Political Risk Briefing for 4 August 2020
Welcome to the Angola Economic and Political Risk Briefing, Issue 18
by Zitamar News, Moxico Risk Consulting LLP, and Mark Bohlund
Good afternoon. Angola cut its oil output by 100,000b/d in July to become the most compliant OPEC member last month — but any truce with Saudi Arabia is likely to be short lived as they both look to take advantage of any pick-up in global demand for oil as covid-19 lockdowns are eased.
Angola’s credit rating with Fitch faces continued downside risks as the lower oil price requires it to draw down its sovereign wealth fund, and a debt service moratorium with China is still to be finalised.
Telecom operator Unitel is also in focus this week with an impending battle between state shareholders and Isabel dos Santos that may prompt the state to use their new ‘Golden Share’ initiative to wrest control of the company from dos Santos.
And finally, the covid-19 situation continues to worsen in Angola with confirmed cases in two new provinces providing further weight to the likelihood that municipal elections will be delayed at least into next year.
In this issue
Economy:
Angola most compliant OPEC member in July (Reuters)
Angola to rely on external creditors and sovereign wealth fund (Fitch)
Government seeks golden shares to secure control (Expansão)
Politics:
Municipal elections legislation pushed to next parliamentary year (Novo Jornal)
Covid-19 now in 11 of Angola’s 18 provinces (VOA Portugues)
Deadlock as shareholders battle over the future of Unitel (Expansão)
Angola most compliant OPEC member in July (Reuters)
Angola was OPEC’s most compliant member in July, cutting its output by 100,000b/d amid continued signs of faltering cohesion within the oil cartel. Angola’s oil output was 1.14mb/d during the month, 40,000 below its 1.18mb/d quota, which rose to 1.25mb/d in August, thus delivering some of the compensation required for producing above its quota in May and June. Overall OPEC output rose by almost 1mb/d to 23.32mb/d, largely due to Saudi Arabia ramping up its production by 850,000b/d to within touching distance of its 8.5mb/d quota.
Angola’s July output figure was lower than expected and can be seen as a reaction to the threat of a new oil price war by Saudi Arabia’s oil minister at the beginning of the month. It was not long before Angola again challenged Saudi Arabia’s patience with its September loading programme. Having reduced its shipments to China as part of a tentative debt service suspension agreement still under negotiation (see Angola Economic Briefing - 28 July), Angola has been struggling to sell its oil cargoes elsewhere. China, the world's biggest crude oil buyer, imported a record 53.2 million tonnes in June, confirming its recovery from the economic effects of the covid-19 pandemic. Saudi Arabia is expected to discount its selling prices for the first time since the covid-19 outbreak in August, pushing oil exporters towards other markets — and this is likely to affect Angola’s ability to sell more cargoes in September, as envisaged under the current loading schedules. With Saudi Arabia already discounting its cargoes, more aggressive pricing may be needed for Angola to fulfil its cargo schedule.
Angola to rely on external creditors and sovereign wealth fund (Fitch)
Credit rating agency Fitch expects Angola to need to draw funds from its sovereign wealth fund as well as financing from external official creditors to fulfil its financing needs in 2020, in a new report on Sub-Saharan African oil producers. It said Angola would face continued pressure on its already severely devalued currency, increasing the burden of its external debt service. In a separate report, Fitch singled out Angola as by far the biggest potential beneficiary from the G20 Debt Service Suspension Initiative (DSSI) in 2020, deferring payments amounting to 4.3% of GDP — and said it expected that the initiative would be extended into 2021.
The two reports cover the countervailing forces which are currently driving Angola’s sovereign credit rating. Fitch downgraded Angola’s credit rating to B- with a stable outlook on 6 March on the back of lower oil revenue and a depreciation of the kwanza pushing up the share of government funds needed to service its large external debt. The downgrade came just before the oil price war between Russia and Saudi Arabia, and the spread of the covid-19 pandemic, both exerting substantial downward pressure on Angola’s creditworthiness. While Angola’s application for the G20 DSSI is yet to be accepted, we have previously highlighted that it is in line to be by far the biggest beneficiary due to its heavy borrowing from China. Fitch has taken a more positive view on the implications of the DSSI than its competitor Moody’s by emphasising the liquidity relief from the deferred bilateral debt-servicing payments as more significant than the risk that private-sector creditors will be forced to participate. But a failure to agree on a debt service moratorium with China would likely prompt both Fitch and Moody’s to downgrade Angola further, in line with the CCC+ rating the country currently has with Standard and Poor’s.
Government seeks golden shares to secure control (Expansão)
The Angolan government is reportedly moving ahead with the creation of so-called ‘Golden Shares’ which would allow it a veto on matters including the composition of senior management, and strategy, in companies where it has sold a majority stake to private investors. The legal change is to be made through an amendment of the Public Enterprise Law (Lei do Sector Empresarial Público) which is currently being discussed by a special parliamentary committee after having passed a first vote in parliament last week.
According to Expansão, the legal change is specifically aimed at Unitel, the telecom operator in which the government has battled for control with Isabel dos Santos. Finance Minister Vera Daves has tried to assure investors that the powers of the Golden Share will only be used in exceptional circumstances but this will do little to dispel fears that the government and politically connected individuals will continue to impede free competition in the economy. Similar provisions are not uncommon in laws governing fully or partially-privatised public utilities across the world but the Angolan authorities do not have the benefit of the doubt of foreign investors in this field. The new administration will need to establish a track record of less-interventionist economic policy in order to win the confidence of foreign investors.
Chart of the Day
BIS data on cross-border banking claims show Angola's overseas assets as well as its liabilities decrease in the first quarter. The sharp increase in reported claims by overseas banks on Angola from $10bn in Q2 2019 to $30bn in Q3 2019 likely reflects the inclusion of claims by the Chinese banking sector. The BIS started including Chinese and Russian banks in its statistics as recently as late 2016, leading to a sharp increase in reported claims on many African countries (but not Angola). The delayed inclusion of Chinese claims gives a better picture of Angola's external indebtedness.
Municipal elections legislation pushed to next parliamentary year (Novo Jornal)
Opposition politicians from the UNITA, CASA-CE and PRS parties have expressed concern that the ruling MPLA is planning to delay municipal elections, due to be held this year, after the National Assembly said the municipal election legislative package would have to wait for the next legislative year. The MPLA have refused to commit to a timeline for elections, but CASA-CE parliamentarian Manuel Fernandes said he suspected the ruling party planned to hold the municipal elections simultaneously with the next general election in 2022.
As we noted on 12 June (Angola Economic Briefing – Issue #3), opposition politicians are very likely fighting a losing battle when it comes to holding the municipal elections this year. Wary of calling street protests (for fear that they may turn violent and discredit the party), UNITA, along with CASA-CE and the PRS, have limited themselves to publicly calling on President Lourenço to make good on his promise to hold the elections this year — though internally they accept that is all but impossible, as they would need to be held before the rainy season starts in September. They are most likely to be run in the second or third quarter of 2021, although the probability of them being bumped to run parallel to the general election in August 2022 is now increasing. CASA-CE appears to be the only opposition party openly discussing the possibility of 2022, with National Executive Secretary Rafael Aguiar telling journalists in Luanda on 12 July that he believed the municipal elections might take place simultaneously with the general elections in 2022 (see Angola Economic Briefing, Tuesday 14 July 2020). UNITA, the most influential opposition party with 51 of the 220 National Assembly seats, seem to have now accepted internally that 2021 is the date to push for. The MPLA continues to use its highly effective policy of ‘gradualism’ — slowing down municipal election preparations by tying up every piece of related legislation in debate in the National Assembly. The Assembly’s upcoming summer break, and the ongoing covid-19 crisis, both provide excellent excuses for the MPLA to continue to delay. But no senior MPLA figure will publicly state that the elections are definitely being delayed, due to the likely negative public reaction.
Covid-19 now in 11 of Angola’s 18 provinces (VOA)
Secretary of State for Public Health Franco Mufinda told the press on 31 July that covid-19 had been detected in Zaire and Moxico provinces. Luanda, Bengo, Cuanza-Norte, Cuanza-Sul, Cunene, Cabinda, Huíla, Uíje and Lunda Norte already have confirmed cases, meaning that eleven of Angola’s eighteen provinces now have confirmed cases. As of 3 August, Angola had recorded 1,199 positive cases with 55 deaths and 913 people in state quarantine centres.
Zaire province is in the very north-west of Angola, on the border with the Democratic Republic of Congo (DRC). Moxico province is the easternmost province of Angola, sharing borders with Zambia and the DRC. Covid-19 has now spread to Angola’s northern, eastern, southern, coastal and central plateau regions. Sources have expressed concern about the Angolan government’s abilities to prevent covid-19 spreading across their porous international borders, although most of the evidence currently points to cases in Angola’s outermost provinces being imported from Luanda rather than from neighbouring countries. On 2 August the governor of Bié Province in central Angola noted that the village of Capeio (Cunhinga municipality), about 30km north-west of the provincial capital Kuito, was being locked down. This followed an Angolan citizen illegally passing through the health cordon around Luanda Province, and making his way to the village in Bié Province. The cordon around Luanda and Cuanza-Norte Provinces remains in place at least until midnight on 9 August 2020, although it is highly likely to be extended in the coming week. It is likely that we will see covid-19 cases detected in the remaining seven provinces of Bengo, Benguela, Cuando Cubango, Huambo, Lunda Sul, Malanje and Namibe in the three month outlook, given the porous nature of the Luanda and Cuanza-Norte sanitary cordons and the lack of widespread testing.
Deadlock as shareholders battle over the future of Unitel (Expansão)
The publication of a 13-page report into Isabel dos Santos’s offshore empire from weekly Portuguese news magazine Sábado on 23 July has led to tensions between dos Santos and other Unitel shareholders in the runup to their meeting which was scheduled for 3 August. The Sábado report contained allegations of illegal transfers of funds from Unitel to Vidatel Ltd., which is owned by dos Santos. However, she has claimed that Unitel has unpaid debts to Vidatel Ltd. of over $300m, relating to a 2016 loan from her company. The ownership structure of Unitel could lead to deadlock in these tense discussions. The state, represented by Sonangol, holds 50% of the shares, with dos Santos’s Vidatel holding 25%. The other 25% are held by Geni, a company whose largest shareholder is General Leopoldino do Nascimento ‘Dino’.
Unitel is under increasing pressure to perform commercially, with the impending entry of a fourth mobile operator, Africell, into the Angolan market. In July 2019 Africell founder Ziad Dalloul told Reuters that Angola was attractive due to the vulnerability of state-owned operators: “Day one, we can just change the whole thing … drop market prices, expand into rural areas, provide faster, better service on internet. These are the things we know how to do. So that’s why we are keeping an eye on Angola.” Such an approach would have dramatic negative impacts on Unitel’s market share, but would likely reduce the high data costs for consumers (Angola had the 10th most expensive mobile data in Africa in 2018 and 19th most expensive in 2019). The Sábado report noted that Portuguese authorities are investigating Isabel’s alleged transfer of up to $654m funds, which she might ultimately be forced to return to Unitel. However, 25% shareholder General ‘Dino’ is a key ally of former President dos Santos, and is himself suffering loss of business and expropriations under President Lourenço’s anti-corruption drive, so he is unlikely to side with the Angolan state against Isabel on this issue, most likely leading to deadlock in the shareholder discussions. The state will likely then have to use their new golden share powers, which Expansao claims are being brought in specifically to wrest control of Unitel from Isabel dos Santos - see Government Seeks Golden Shares to Secure Control, above.