Oct 23 - Angola's decision to set up a sovereign wealth fund is positive
news, Fitch Ratings says. It reaffirms our view that government policies are
reducing the economy's exposure to movements in the oil price, and laying a
foundation for sustainable growth.
This view was reflected in our revision of the Outlook on Angola's 'BB-' rating
to Positive from Stable in May. We said that setting up a sovereign wealth fund
could contribute to an upgrade if it were coupled with a longer track record of
prudent fiscal and monetary policy management.
As Africa's second biggest oil producer, Angola's economy and its public and
external finances are highly exposed to oil prices. Nevertheless, expenditure
restraint and faster reserve accumulation have enabled the authorities to
improve government finances, keep the debt stock at 20%-25% of GDP and rebuild
buffers (through government cash balances at the central bank) that insulate the
economy from oil price falls.
The authorities have introduced a stabilisation account to better protect fiscal
revenues. The government's continued efforts to eliminate SONANGOL's
quasi-fiscal operations as well as ensure SONANGOL's timely payment of oil
revenue to the state are also encouraging.
The launch of the new fund - Fundo Soberano de Angola, or FSDEA, with USD5bn in
assets - was announced last week. FSDEA will invest in Angola and
internationally in infrastructure including energy, water and transport; in
financial assets; and in industrial, agricultural, hospitality and other
sectors. Its broad objective is to promote social and economic development and
generate wealth for future generations.
Creating the new fund could help cement the recent improvements in Angola's
credit profile. FSDEA has been modelled on international best practices, which
should enhance transparency, and are legally binding. The government has
committed to having the new fund's accounts audited by international auditors.
An advisory council, which includes the ministers of finance, economy and
planning and the central bank governor, will make recommendations to the
president, who will approve FSDEA's investment policies. Building a track record
of transparency and rules-based operations will be important in securing the
The full impact on Angola's sovereign credit profile will also depend on whether
FSDEA spending is fully transparent, ideally through Angola's budget.
FSDEA replaces the existing Oil for Infrastructure Fund. Indeed, given its
development objectives, it is possible that its initial investment focus will be
on local infrastructure. This would be appropriate given Angola's state of
development, but it will be interesting to see how far FSDEA moves beyond this
function and builds a portfolio of foreign assets. Press reports Monday indicate
that the fund will seek to invest in emerging economies in both Africa and Asia.
The capital for the fund has been built up by setting aside revenues equivalent
to the sale of 100,000 barrels of oil per day in recent years. These revenues
will continue to be directed towards the fund.
If the FSDEA results in better management and utilisation of windfall oil
revenues, it could boost long-term growth. We forecast real GDP growth in Angola
of 8.2% in 2012, and 8% in 2013 and 2014.
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: