International reserves hit 13-year low; Spanish tax authorities investigate dos Santos' Barcelona residence
Welcome to the Angola Economic and Political Risk Briefing for Friday, 21 August
Welcome to the Angola Economic and Political Risk Briefing, Issue 23
brought to you by Zitamar News and Moxico Risk Consulting LLP
Good morning. Net international reserves have fallen below the psychological barrier of $10 billion for the first time in 13 years — and more importantly, below the floor that the IMF had imposed as a condition of its ongoing support programme, though Angola has already requested a reduction in that floor level. The long term outlook for Angola’s balance of payments is not optimistic, however, as the oil majors who have provided the vast majority of the country’s exports for decades are pivoting away from fossil fuels and towards renewables.
The global and local economic slowdown caused by the coronavirus pandemic continues to be felt in Angola, reflected in — among other things — a marked drop-off in new investment projects, by both foreign and domestic investors. Most of the new projects have gone to Luanda — which is also the epicentre of the country’s covid-19 outbreak. Efforts to contain the virus to the capital are being constantly undermined, however — thanks in part to the almost complete centralisation of testing capacity in Luanda.
In this issue
Economy:
South Africa is leading foreign investor, as Luanda and Benguela hog investment projects (Jornal de Angola)
Oil majors’ shift to renewables could undermine Angola oil production (Expansão)
Net International Reserves hit 13-year low (Jornal de Angola)
Politics:
BNA strengthens regulations to prevent capital flight (Novo Jornal)
Spanish tax authorities investigate former president's Barcelona residence (ClubK)
Counterfeit covid-19 test certificates seriously undermine Luanda sanitary cordon (VOA)
South Africa is leading foreign investor, as Luanda and Benguela hog investment projects (Jornal de Angola)
Angola’s Agency for Private Investment and Promotion of Exports (AIPEX) has registered 286 intentions of private investment, both domestic and foreign, in its first two years of existence. The investments would be worth a total of $2.8 billion and create 19,190 jobs. Industrial projects make up $1.4bn of the registered investments — half of the total value. The capital, Luanda, is the preferred investment destination, with 226 proposed projects, almost 80% of the total. South Africa is the biggest source country, proposing to invest $676 million, followed by China with $184m and UAE with $82.7m.
AIPEX was created in March 2018 with the aim of increasing private investments from local and foreign investors, and encouraging the increase and diversification of exports of goods and services. Of the 286 investments registered by the agency, only 57 — worth a total of $909 million — were implemented, creating 4,890 jobs. 41 of those investments were made in Luanda, while more than half of the total value invested was in two projects in Benguela, the coastal province south of Luanda. Of the remaining 229 registered investments, 221 — worth $1.8 billion — are being implemented, APIEX says; three, worth $10m, are yet to be implemented, and five, budgeted at $33m, have been abandoned.
Forecast: In the first six months of 2020, only 47 investment projects were registered, about half the pace of 2019, when 168 projects were registered throughout the year. With the pandemic, it is likely that even fewer projects will be registered and implementation will be delayed, further penalizing already weak investment and aggravating the fifth recession in five years.
Oil majors’ shift to renewables could undermine Angola oil production (Expansão)
A shift toward renewable energy by oil majors BP, Shell and Total is complicating the Angolan government’s plans to halt the decline in production and replenish the country’s oil reserves by making new discoveries. Those companies are among the main candidates for half of the 55 oil blocks that the National Oil, Gas and Biofuels Agency (ANPG) intends to allocate by 2025, but they are starting to invest less in oil, and channelling more funds toward renewable energy.
Only Total is expected — for now — to continue with its global investment programme, including in Angola — but even it is looking for investment partners for activities that it normally would have developed alone. The biggest short-term impact for Angola may come through BP, which announced plans earlier this month to reduce investments in oil and gas by 2030, in favour of investments in zero carbon energy. It is thought to be planning to sell its interests in two Angolan blocks where it is an operator. Shell was expected to return to Angola, but the recent drop in oil prices means this re-entry is expected to be postponed. All this should put a check on the attractiveness of Angola’s deep and ultra-deep blocks..
Forecast: Most of Angola’s production comes from old fields that have already produced more than half of their volume — so production has naturally been falling. Angola is currently producing around 1.173 million barrels per day, compared with 1.881 mb/d in 2008, and that figure is likely to keep declining as it is highly unlikely that enough new investments will be made to boost production. Some observers are predicting a fall to 600,000 b/d by 2030.
Net International Reserves hit 13-year low (Jornal de Angola)
Angola’s Net International Reserves (NIR) dipped under $10 billion for the first time in 13 years, reaching $9,665 million on 18 August, enough to cover seven months of imports of goods.
NIR have been above $10bn since June 2007 — but have been on a downward trend since peaking at $33.9bn in April 2013. The administrative exchange rate regime kept the national currency overvalued for years, providing some exchange rate stability at the cost of dwindling reserves. Angola imports most of the goods that are consumed in the country. It has since adopted a free floating currency regime to help preserve forex reserves, but the decline in oil prices has recently depressed foreign income. Since the start of this year, the reserves managed by the central bank have already fallen by almost 15%. A significant devaluation of the kwanza has also increased the burden of external debt, forcing the government to seek a restructure. Luanda also asked the IMF to review its minimum NIRs requirement in the performance criteria of the EFF agreement. During the second evaluation of the programme, the NIR floor was cut to $10bn. During the third assessment, which is still ongoing, the Angolan government has asked to further lower the limit to around $8bn.
Forecast: International reserves are likely to keep falling until the end of the year. Only an increase in oil prices and/or an agreement on debt restructuring with China — which is likely in the 12-month outlook, but uncertain in the short term — would reduce the pressure on NIR and consequently on the kwanza. (See Angola Briefing 31 July for details on the current situation of debt negotiations with China, and Angola Briefing 11 August for details on Angola’s potential S&P rating upgrade if Angola can secure a multi-year debt moratorium from China with an extended repayment profile).
Chart of the Day
Private sector investment proposals have tailed off in 2020, as the coronavirus pandemic slows economic activity
BNA strengthens regulations to prevent capital flight (Novo Jornal)
Angola’s central bank (BNA) has tightened compliance rules for wiring money abroad to non-resident entities, after detecting an increased number of suspected cases of capital flight or foreign exchange fraud, it said in a circular on 18 August. Commercial banks now have 90 days to review all of their customer contracts and freeze any transfers deemed suspicious. Cases of fraud must be reported to Angola’s Unidade de Informação Financeira and also to the BNA. These changes are intended to ensure “the appropriate use of the country’s scarce foreign currency resources”.
Contracts paying for consultancy, management, marketing or procurement services from abroad in particular have been singled out as too vague, and will need to be fully justified to the banks, as these services can only be sought abroad if they are not already available in Angola. Know your customer (KYC) requirements are also outlined, as banks will need to judge whether the amounts transferred tally with the activities carried out by the customer, their business size and the complexity of their operations. BNA is correct that current KYC compliance in Angola's commercial banks needs significant improvement, as evidenced by multiple examples in the Luanda Leaks, including the allegedly fraudulent transfer of $38m from Sonangol to Matter Business Solutions by Isabel dos Santos in November 2017. The changes will be positively received by the IMF, which continues to highlight the strengthening of anti-money laundering regulations as a key objective of their program in Angola.
Forecast: The cost of compliance for Angola’s commercial banks and also their customers is now highly likely to increase in the three month outlook. Contract non-payment risks (or the risk of delays to payments) for foreign companies selling consultancy, management, marketing or procurement services to Angolan entities are likely to increase as a result.
Spanish tax authorities investigate former president's Barcelona residence (ClubK)
Spanish tax authorities have allegedly sought clarifications from former President dos Santos on the value of rent he is paying to stay in his €6 million home in Pedralbes, in the Les Corts district of Barcelona. There were concerns about tax evasion on the part of the Ultimate Beneficial Owner (UBO) of the property, which led to an anonymous tipoff to the tax authorities.
Former President dos Santos has spent increasing amounts of time in Barcelona since November 2013, when he was air-evacuated there to seek treatment for a renal condition. He has been based there permanently since April 2019. The UBO of the property in question was not revealed, but the Spanish tax authorities appear to have been satisfied with the details of the rental arrangement provided by dos Santos. The incident nevertheless casts another unwelcome spotlight on the financial affairs of the former first family, which may soon be illuminated further in the September trial of Rui Pinto, the Portuguese hacker responsible for the Luanda Leaks (See Angola Briefing, Issue 22) relating to Isabel dos Santos’ business dealings.
Forecast: All the revelations against the dos Santos family serve to strengthen President Lourenço’s position relative to his predecessor, and reduce political instability risks in the 24 month outlook. The implicit threat of prosecution when his immunity expires in 2024 will serve to keep dos Santos and his remaining supporters in line in the run up to a series of important events over the next 24 months. These include the renewal of the MPLA’s Central Committee (which must happen before August 2021), the municipal elections (which should have happened this year, but have now been moved to 2021 or 2022) and the next legislative elections in August 2022.
Counterfeit covid-19 test certificates seriously undermine Luanda sanitary cordon (VOA)
The Serviço de Investigação Criminal (SIC) has arrested two men for involvement in a network selling counterfeit covid-19 negative test certificates for 25,000 Kwanzas each, it said on 18 August. One of those arrested admitted to selling the certificates in a part of Luanda where vehicles depart for the interior of the country. Angolan investigative journalist Rafael Morais commented that “this new facet of corruption is being stimulated by the lack of decentralization” of testing, which is currently heavily concentrated in Luanda.
Angola currently has 92 deaths and 1,225 active cases of covid-19, including one detected in the last 72 hours in Lubango that was confirmed as imported from Luanda. In our 7 August Angola Briefing we commented on the ineffectiveness of the Luanda Sanitary Cordon and particularly how counterfeit test certificates were being used by commercial truck drivers to pass through checkpoints and exit Luanda Province. Bengo, Benguela and Malanje all recorded covid-19 cases imported from Luanda in the past three weeks, including some who deliberately snuck through the Luanda Sanitary Cordon, leaving only four of Angola’s eighteen provinces as yet unaffected (Cuando Cubango, Huambo, Lunda Sul and Namibe). While the dismantling of this ring is positive news, the fact that Angolans are willing to pay almost $45 in such a depressed economy for a counterfeit certificate shows the strong demand for them.
Forecast: These certificates will highly likely continue to be sold by other criminal groups, and will likely contribute to the pandemic spreading to the remaining four unaffected provinces of Cuando Cubango, Huambo, Lunda Sul and Namibe in the three month outlook.