Fitch: Angola Could Meet BESA Guarantee, but Could Erode Buffers

Tue Jul 22, 2014 7:22am EDT

(The following statement was released by the rating agency) LONDON, July 22 (Fitch) The sovereign guarantee provided by the Ministry of Finance to Banco Espirito Santo Angola (BESA) in December 2013, worth USD5.7bn (5% of GDP), will not undermine Angola's creditworthiness by adding to the government's debt burden if it is called, Fitch Ratings says. But it could further erode liquidity buffers, and raises broader concerns about governance, particularly in the banking sector. We understand the guarantee is extended to all BESA's creditors. We believe it was provided to restore confidence in the bank, which had reportedly been struggling with liquidity problems. Preventing contagion across the wider sector is likely to have been another factor. The guarantee is like a contingent credit line and can be renegotiated after a year. It can be invoked only if other options for selling or restructuring the bank are not possible and liquidity support over and above central bank support is required. Failure to honour the guarantee could undermine the credibility of the sovereign if the challenges facing the bank are not resolved. There is sufficient immediate public sector liquidity to ensure the guarantee can be honoured, if called. Government deposits in Angola, which could be drawn, are equivalent to USD15bn (12% of GDP). Government debt, low at 24% of GDP, would not need to increase to meet the guarantee. But public deposits, built up in 2009-2012, when the budget was in surplus, have fallen from their peak of USD22bn in 2012. The government used deposits to repay foreign-currency contractor arrears built up in 2010-2012. Lower oil prices and stagnant oil production, likely to lead to a budget deficit in the medium term, will make it difficult to rebuild these liquidity buffers. The problems at BESA are unlikely to be symptomatic of extreme problems throughout the banking system. They allegedly reflect weak credit controls and poor lending decisions made by senior management, which has been replaced. But there are broader challenges for Angola's banking sector, with a sharp increase in NPLs from 2.5% in 2011 to 10.2% by October 2013, possibly due to new legislation regarding NPL recognition and challenges in the construction sector and government arrears to contractors - an ongoing problem. The IMF's Financial Stability Assessment Programme identified a lack of transparency and poor governance in the country in 2012. In response, the National Bank of Angola introduced regulations to increase transparency, strengthen its supervisory powers, and improve corporate governance and auditing standards. Nevertheless, the central bank's capacity to monitor banks' activities remains weak, hampered by considerable related-party business, the presence of state companies in the dominant oil sector and the close ties between influential political figures across key economic segments. Weak governance remains a major impediment to addressing Angola's development challenges and raising the 'BB-' rating. It was one cause of our revision of Angola's Outlook from Positive to Stable in April 2014. Angola's World Bank Governance Indicators are among the lowest in sub-Saharan Africa. Our next scheduled review of Angola's credit rating is due on 10 October. Contact: Carmen Altenkirch Director Sovereigns +44 20 3530 1511 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Janine Dow Senior Director Financial Institutions +44 20 3530 1464 Mark Brown Senior Direct Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Angola here SSA Sovereign Credit Overview 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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