TEXT-Fitch revises Angola's rtgs outlook to positive
May 23 - Fitch Ratings has revised the Outlooks on Angola's Long-term foreign and local currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed both ratings at 'BB-'. Fitch has simultaneously affirmed Angola's Short-term IDR at 'B' and Country Ceiling at 'BB-'. "The revision of Angola's Outlook to Positive reflects the country's prudent economic policies which have helped re-build and strengthen public and external balance sheets. These measures should ensure that Angola is less vulnerable to an adverse oil price shock," says Carmen Altenkirch, Director in Fitch's Sovereign ratings group. "Angola's economy appears set for a period of sustained growth, supported by improved economic policies and better understanding of the risks associated with the commodity cycle. The budgeting process has improved, enabling better management of revenue and expenditure. A lengthening track record of macro, micro and financial reforms and continued strong economic performance would put upward pressure on the ratings," added Ms Altenkirch. The agency highlights that good progress on macroeconomic management needs to be complemented with further improvements to the regulatory environment, governance and respect for the rule of law. Poor governance and corruption remain major impediments to addressing Angola's developmental challenges and an important constraint on the rating. The government also needs to focus on developing the small formal private sector, in order to reduce oil dependence, broaden the tax base and create much needed employment opportunities. The medium-term outlook for the economy is favourable, with growth averaging above 6%. Crude oil output is forecast to rise from around 1.6 million barrels/day (b/d) to over 2 million by 2014. High oil prices will keep the current and fiscal accounts in surplus, which will continue to enable the government to add to reserves. Fitch currently forecasts a budget surplus of between 7%-8% of GDP, well ahead of the government's forecast, due to a more realistic oil price assumption. The authorities currently estimate a break-even oil price of USD68 p/b, at which level the government could meet its expenditure requirements for a year, before having to seek external funding, run down reserves, or substantially lower expenditure. The establishment of an oil stabilisation fund and moves towards a medium-term expenditure framework are encouraging. However, more needs to be done to improve the transparency of the fiscal accounts and particularly the government's relationship with SONANGOL (the state oil company). Structural inflation remains a problem for the economy, with high transportation costs and a large imported component, keeping the cost of living as well as inflation at elevated levels. However, sound monetary policy and conservative fiscal policy, has helped to bring inflation down and reduce volatility. Fitch will monitor the impact of two recent pieces of legislation on the domestic economy. A law requiring international oil companies to channel 80% of their payments through domestic banks is being implemented. Fitch believes that while this is in the long-term interests of the country, it needs to be implemented very cautiously. Payment delays, which are not infrequent, need to be substantially reduced in order to avoid hampering oil production. Furthermore, the new law promises to provide a large boost to liquidity in the banking system with some estimates pointing to an additional inflow of at least USD10bn per year. The BNA will need to ensure that this does not fuel excessive lending and inflationary pressures. Fitch also has concerns about the new investment law, designed to promote projects in less developed areas of the economy, which may have negative implications for FDI into the non-oil producing sector. The new law aims to attract investment to certain under-developed sectors. However, there is always a danger that focused industrialisation strategies, where governments try to 'pick winners', will not have the desired effect on investment or allocates resources inefficiently. Structural and social issues are weaknesses for the rating. Infrastructure is being addressed but still represents a major ongoing challenge. Reforms to improve the business environment and governance that would encourage non-oil investment, are proceeding slowly, if at all. The economy is poorly diversified. Social indicators and the skills gap are weak, even compared with rating peers, reflecting the war legacy when there was a lack of investment in this area. Angola's UN Human Development ranking is very weak. Angola's prudent policies have helped re-build and strengthen public and external balance sheets. These measures should ensure that Angola is less vulnerable to an adverse oil price shock. Although the agency would view favourably continued formal engagement with the IMF, following completion of the IMF programme, improvements in the policy framework encourage confidence in the authorities' economic management. Positive rating action would depend on continued strong macro and balance sheet performance and the government entrenching and improving macroeconomic policies and management as well as enhancing transparency and taking more decisive steps towards improving governance in the public sector. However, critical for a sustained upward migration of the rating are structural reforms including improved governance and institutional quality as well as creating a more vibrant non-oil private sector. The rise in non-concessional borrowing presents risks and the government would need to implement projects within the context of debt sustainability to preserve creditworthiness.