Fitch Revises Outlook on Angola to Stable; Affirms at 'BB-'

Fri Apr 11, 2014 12:04am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Angola - Rating Action Report here LONDON, April 10 (Fitch) Fitch Ratings has revised the Outlook on Angola's Long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Positive and affirmed the IDRs at 'BB-'. The agency has also affirmed the Short-term foreign currency IDR at 'B' and Country Ceiling at 'BB-'. KEY RATING DRIVERS The revision of Outlook of Angola's IDRs reflects the following key rating drivers and their relative weights: Medium Expanding the hydrocarbon sector has proved more challenging, compared with what was expected when Fitch revised Angola's Outlook to Positive in May 2012. Over this period, SONANGOL's, the state-oil company, target of reaching 2mb/d has repeatedly been pushed back due to technical problems and high decline rates of 200,000b/d per year. Production averaged 1.725mb/d in 2013, still below the average production of 1.9mb/d reached in 2008, albeit up from 1.66mb/d in 2011. The new USD10bn liquefied natural gas facility due to come on stream in 2013 is also now only expected to reach full production by 2016. Without substantial new investment, Angola's oil production will start to decline in 2016. The USD18bn Kaombo Project scheduled to start in 2017, producing 200,000 b/d is therefore important, but its approval by Total remains uncertain. Angola's public finance outlook is less positive compared with when the Outlook was revised to Positive. Stagnant oil production and falling prices have pushed oil revenue as a percentage of GDP down from 39% to 29% between 2011 and 2013. As a result, the budget moved to a 1.9% deficit in 2013 from a surplus of 5.1% of GDP in 2012. The budget is expected to remain in deficit over the forecast horizon, with oil revenue growth likely curtailed by lower oil prices, partially offsetting any modest gains in oil production. The authorities' commitment to improve the country's weak infrastructure is forecast to keep expenditure rising relative to GDP. The expected deterioration in Angola's sovereign balance sheet does not undermine the current rating due to low debt (22.2% of GDP) and large deposits (12.3% of GDP), but limits Angola's upgrade potential. The USD5bn Sovereign Wealth Fund, due to begin investing during 2014, will receive no additional capital while the budget is in deficit Progress in addressing challenges facing the business environment has been slower than expected. Angola's percentile ranking in the World Bank's Doing Business Survey has fallen from a low 6.1 in 2012 to 3.9 in 2014. In 2013 the government announced plans to raise Angola's ranking by 10 points over the next five years, which is an unambitious target that would still leave Angola well short of even the 'B' median. The weak governance and business environment remain a major impediment to addressing Angola's development challenges and improving the rating from its current level. Angola's 'BB-' IDRs also reflect the following key rating drivers: Growth has picked up steadily from a low of 2.4% in 2009, rising above the 'BB' median of 3.6%. Fitch expects growth of 5.5% for 2014 supported by government-led initiatives, focusing on agriculture, increased spending on infrastructure, particularly roads and power, as well as additional generation capacity. The authorities forecast growth in excess of 9% for 2014, which seems over optimistic given that oil production is expected to expand only modestly. Inflation was 7.7% at end-December 2013 - the second consecutive year of single digit inflation - reflecting exchange-rate stability and tighter monetary policy. Prudent economic policy has supported building up external and fiscal buffers, albeit not as quickly as expected. Government debt has declined since 2010, from 37% of GDP to 22.2% in 2013, well below the 'BB' median of 35.9% of GDP. Government deposits totalled USD15bn in 2013 - sufficient to fully fund projected fiscal deficits over the next three years. Reserve cover of current external payments (CXP) has risen to 6.4 months, up from a low of 3.3 months in 2009. Arrears totalling USD6.07bn were accumulated between 2010 and 2012, largely by the Ministry of Construction. Arrears reflect poor administration, rather than cash shortages, with the authorities repaying USD4.44bn verified arrears by end-2013. Reforms to better account for arrears have been passed. The authorities continue to work towards the implementation of a medium-term fiscal framework, while the quasi-fiscal activities of SONANGOL were again included in the 2014 budget. Social indicators and human capital are weak compared with peers according to the UN Human Development Index (HDI). Angola was ranked 148 in the 2013 UN HDI, the bottom 20th percentile of countries Fitch rates and well below the 'BB' median of 46.7%. The authorities have improved the HDI score to 0.51 in 2013 from a low 0.37 in 2008, above the sub-Saharan African median. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main factors that individually, or collectively, could trigger positive rating action include - A steady rise in oil production, which supports a return to fiscal surpluses. - A continued track record of improved economic management and further regulatory reforms being reflected in improvements in the business environment and per capita income as well as improvements in governance measures. - Strengthening the non-oil revenue base. The main factors that individually, or collectively, could trigger negative rating action include - Further delays in raising oil production in the short term, or a deterioration in medium-term oil production potential. - An adverse external shock that materially eroded external and fiscal buffers and failed to bring an effective policy response. - A sustained weakening in public finances due to rapid increases in current expenditure, leading to large deficits and a sustained increase in debt. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: Fitch assumes Brent oil prices will remain high, at USD105/bl in 2014 and USD100/bl by 2015. Fitch assumes a continuing stable political environment, with no significant challenge to the current ruling establishment. Contact: Primary Analyst Carmen Altenkirch Director +44 20 3530 1511 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Gamble Director +44 20 3530 1623 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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