Alert 123 – Angola’s economy buckles under Covid-19 pressure as global oil prices plummet

With Covid-19 cases in the country still at a low 71 on 27 May, Angola moved from three consecutive states of emergency into a less restricted “state of calamity” that will be in effect from 26 May to 9 June 2020. With only 10 000 tests completed, the real number of cases is likely far higher, with Angolan Minister of Health, Silvia Lutucuta, promising more testing capacity amid parallel warnings that Angola could be one of the worst hit countries in Africa. The United Nations Economic Commission for Africa (UNECA) has also warned that Angola’s capacity to respond to the virus will be constrained by its high debt levels.

The easing of the state of emergency so early in the virus’s trajectory highlights the prevailing sense of urgency to get the economy moving, as Angola’s economy has already started showing signs of severe strain. President João Lourenço’s aggressive reform plans, including rapid infrastructure development, widespread privatisation of state-owned enterprises (SOEs), and the diversification of the economy away from oil, also came to a near standstill during the lockdown, with resumed economic activity expected to reinvigorate these much-needed reforms.  

The pandemic has, meanwhile, wreaked havoc on the global economy, threatening to take Angola down with it. While the longer-term implications are unknown, some of the immediate consequences for Angola’s economy and the broader political sphere include the following:

• Angola’s economy is forecast to contract by 4.1% from prior estimates of 1.2% growth.
• The oil price has plummeted, hitting negative territory in April as global demand for oil dried up, with dire consequences as oil contributes 50% to Angola’s gross domestic product (GDP), 70% of government’s revenue, and 90% of the country’s exports.
• The state budget, currently based on US$55 per barrel, has been revised based on an oil price of US$35 per barrel. This leaves Angola dangerously vulnerable to further shocks amid some forecasts that the oil price could average between US$32 and US$35 for the remainder of 2020, and warnings that US-China tensions and the oil price war between Russia and Saudi Arabia could see oil prices tank again.
• Inflation is expected to go to 24% with a further devaluation of the Kwanza expected.
• A series of downgrades by ratings agencies, including Fitch Ratings and S&P both downgrading Angola in March, while Moody’s placed government’s B3 long-term issuer ratings under review for downgrade.
• Government leadership positions have been cut by 237 positions, from 559 to 313, and a cabinet reshuffle in March saw 12 ministries merged and cabinet reduced to 21 from 28.

While the cuts to government’s expenditure from the merging of ministries and departments are commendable, it may be a case of too little too late amid already unsustainable debt levels. Angola had a debt to GDP ratio of around 90% before Covid-19 and government will be under considerable pressure in the coming months to restructure its debt. It will also increasingly need assistance from financing institutions like the World Bank and the International Monetary Fund (IMF). Plans to privatise SOEs will need to be accelerated to give government coffers a boost, although the price tags could be far lower than pre-Covid-19 expectations. Government will need to brace itself for more austerity measures, while simultaneously driving reforms to diversify the economy in strategic sectors such as agriculture and telecommunications in coming months, to avoid further economic instability and a further downgrade by Moody’s.  With all eyes on Finance Minister Vera Daves’s revised budget, government’s measures to address the challenges of a weaker global economy and lower global oil prices will prove pivotal in coming months, especially as the country is set to enter a recession. Another economic contraction will exacerbate poverty, hunger and desperation, which comes with a heightened risk of social instability, violence and criminality.  

For a president already under scrutiny for his selective pursuit of corruption cases and ongoing police brutality and general human rights concerns, saving the economy while containing the local Covid-19 threat with minimal resources will be a big ask. However, action will need to be fast and decisive, as the ramifications of the potential long-term weakening of Angola’s vital oil sector mean that diversification is no longer just a necessary economic policy but a critical and urgent intervention.