ECONOMY OF ANGOLA. Brief Portrait of the Economy of Angola

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1 ECONOMY OF ANGOLA Brief Portrait of the Economy of Angola 1. Global Framework The economy of Angola, which is today the second major oil producer in Africa, grew at the remarkable rate of 4,4% in 2013 according to the World Bank evaluation. Compared with the growth rates of the main Economies of the European Union, the United States or even with the biggest economies among the Asian powers, this is a positive and exceptional scenario. This context was due to non-oil sectors, namely Energy, Agriculture, Fisheries, Manufacturing Industry, Real Estate and Construction Industry. Future perspectives are even more encouraging because the growth rate is expected to exceed 7% in 2014, and around 9% in 2015, promoted by the expected large public spending in infrastructures. The Government has striven towards the promotion of structural investments that can enhance Business Activities and the increment of the Quality of Life of the Population. The focus of this Strategy has been on the infrastructures relating to Electric Power and Water. In this context, it has also been given special attention to the conditions of accessibility roads, seaports, airports and rail links whose present lack of capacity greatly hamper the efforts to reach foreign markets. There is an increasing awareness that Angola needs to speed up its economic diversity and reduce its subjection to the Oil Sector that corresponds to the excessive 46% of the GDP, 80% of State revenues and 95% of the Country s exports.

2 O Governo, em consequência, tem procurado promover a criação de competências locais e aumentar a participação das empresas nacionais nos sectores considerados críticos em termos de contributo para o desenvolvimento e modernização da Economia. In consequence, the Government has tried to promote the creation of local skills and increase the participation of national companies in sectors considered critical in terms of contribution to the development and modernization of the Economy. Practically all major goods and services required by the Oil Industry are imported. So, Angola tries to a reach nowadays a more prominent position in the Value Chain on the Global Oil Industry, as well as extending its participation in similar Business Areas such as liquefed natural gas and methanol.

3 2. The year 2013 and Future Prospects In 2013, the Angolan economic activity was impaired because the rate of implementation of the oil activity was lower than originally predicted. But despite this environment, the GDP growth was one of the most interesting on a planetary scale, driven by the solid non-oil activity, namely Energy (22% of the growth), Fisheries (10%), Agriculture (9%), Manufacturing Industry (8%) and Construction Industry (8%). We know the risks arising from the adverse progress of the Global Economy may pose real threats to the growth projections. However and in the opposite direction there are internal clusters in the Economy of Angola that strongly promote the growth was the proof of this new macroeconomic reality that may even strengthen a change of Paradigm of the Economy of Angola as a whole. The envisaged enhancing of the growth rate of the Economy, planned for the biennium 2014/2015, relies however on the assumption of compliance with two conditions. The frst condition is that Oil Exports will reach US$ 62.9 billion in 2014 and US$ 67.4 billion in 2015, based on a Target of an average price of US$98 per barrel. The second condition is that US$ 15.7 billion strong foreign direct investment should materialize in In order of the external support to the funding of the Economy, workers' remittances are designed to stabilize at US$529 million in 2014, wherein the volume of external funding must duplicate its value in 2013, i.e. to reach US$10.4 billion in 2014, due to the expected large increase in external debt intended to fnance the capital expenses of the Public Sector. 3. Oil Industry Angola is making efforts to increase its oil production and to consolidate its position as the second larger producer of Africa. Production is supposed moving from 1.8 million barrels per day (bpd) in 2013 to 2 million bpd in 2016 with the exploitation of new felds, namely the complex composed by the felds Plutão, Saturno, Vénus e Marte, held by British Petroleum, the exploratory deep water wells, held by Cobalt International

4 Energy and the development project of Mafumeira Sul, off the Angolan coast. The Country exports 90% of its oil production, mainly to China (44%) and the United States of America (25%), according to sources of the Ministry of Oil Industry. The State is encouraging oil companies to strengthen their links with the rest of the Economy because, in fact, this pivotal industry employs only 1% of the Angolan workforce. It should be noted that according to a study made by the African Development Bank, Angola will have better chance of integrating The Chain Value of Oil and Gas and to play the role of catalyst on a regional level if Angola focus on: a. A bigger investment in liquefed natural gas, b. The adoption of a gradual approach to the development of oil and gas downstream industries through projects of high impact, c. The additional investment in fertilizers, methanol and gas for liquids intended for downstream industries. 4. Non-energetic Natural Resources The Law of Mining enacted in November 2012 that reduced the taxes on the revenues from 35% to 25% led to the uptake of a signifcant investment of companies such as the diamond producer De Beers and Sumitomo Corp that is developing a factory of ammonium and urea. Angola is also the fourth largest producer of rough diamonds. The data from the National Institute of Statistics show that diamonds are responsible for 1% of Angola s GDP which is the second African producer in quantity after Botswana. An investment of US$ 900 million is expected on the iron mine of Cassinga; of US$ 400 million in manganese projects; at the same time a production of tones of fertilizers will be developed.

5 5. Agriculture The high quality of soils and the good water supply make the Angolan Agriculture an important Sector which attracts increasing investments, already accounting for 11% of the GDP and 70% of the overall Employment. In 2013, the agricultural production grew 8,6% due mainly to a strong growth of cereal production. According to the National Institute of Cereals, Angola needs 4,5 million tones of cereal annually but produces only around 55% of the maize it needs, 20% of rice and only 5% of the necessary wheat, what mirrors the size of the Business Opportunity to new investments in this subsector. Angola already has been the fourth major world coffee producer but, in general, the Agricultural Sector is even today affected by the limited number of strong economic agents and also by the weakness of infrastructures to the processing of commodities. The Government invests circa US$2 billion annually in Agriculture, with around 75% of the resources being fnanced by China Export-Import Bank, in addition with the bilateral agreements with Brazil, Spain and Israel. 6. Manufacturing Industry The annual growth of the Manufacturing Industry increased from 6,5% in 2012 to 8% in 2013, driven by the Timber, Cement and Production of Electrical Materials. There is a Plan to the construction of new cement factory in Lobito, with a production capacity of tones of clinker annually and circa tones of cement annually. In 2013, the Japanese Company Marubeni Corp announced an investment of US$ one billion, in order to renew three textile factories which will employ workers. Its production should start in 2015.

6 7. Services Angola has been using the oil exploitation to promote the fast development of other sectors, with particular emphasis on Services. This Sector is in a marked development phase with a growth of 5,4% in Representing circa 21,7% of GDP is one of the sectors with a higher potential of market penetration for foreign companies. 8. Real Estate Sector and Construction Industry The emerging middle class is the main growth engine of these areas. As a response to this demand, from 2011 until 2013, around US$ 4.1 billion were invested in real estate, mainly by Angolan, Brazilian, Chinese and Portuguese companies leading to the construction of new centres which had often the support of the State of Angola. The National Agency for Private Investment (ANIP) noted that several multinational companies with interests ranging from the Retail Sector to Hotel Business are planning to establish one real estate- commercial development project in the amount of US$ 2.5 billion in Luanda Bay.

7 9. Macroeconomic Policies Budgetary Policy The expansive Budgetary Policy pursued in 2013 aimed to promote growth, employment and macroeconomic stability. This Strategy proved robust. Despite the reduction of international oil prices, the State Budget registered a surplus of 0,3% of the GDP, in A detailed analysis allows us to state that the 92% level of implementation of the expense was satisfactory. In the medium term, an expansive Budgetary Policy should be kept, with capital expenses registering a 38% growth in the State Budget to 2014, according to projections of the Ministry of Finance. It is understand that this Policy will lead to a 5% global budget defcit of the GDP in The public investment fnanced by domestic resources, in percentage of budget revenues, also increased from 15% in 2012 to 20% in 2013, due to the investment increase registered in hydro energy, telecommunications and scale agricultural projects. Tax revenues, in GDP percentage, decreased due to the oil prices volatility and the oil revenues slow growth. The Government wants to reduce the dependence on oil taxes, from 81% of the total revenues in 2012 to less than 70% in 2014, and increase the non-oil budgetary revenues from 6,6% of the GDP in 2012 to 9,6% of the GDP in 2014, as a result of the current economic diversifcation. Concerning the Public Expenditure in the medium term, the budget priorities are the Investment in Education (6%), Health (4%), infrastructure rehabilitation and incentive to Agricultural Production (19,5%) as well as the strengthening interventions in the Social Welfare.

8 Monetary Policy In 2013, the Monetary Policy of Angola had the main scope of ensuring the stability of infation, exchange rate and endurance to external shocks. Banco Nacional de Angola (BNA) lowered its main interest rate three times in that year. By the end of 2013 the reference rate stood at 9,25%. The favourable trend of the monetary policy led to an expansion of the annual growth of credit to the Economy that had an average rate of 21,13%, although lower that the 30% rate registered in Most of the credit growth was due to the commercial activity. Infation in consumer prices dropped from 9% in 2012 to 7,7% by the end of 2013, the lowest value registered in two decades, but is still high and is mainly driven by consumer goods and logistic services. The short-term infation remains within the BNA 7-9% target. The currency of Angola, Kwanza (AOA) remained stable, supported by the increment of foreign reserves. Net foreign reserves are projected to close the year with a record in US$ equivalent to eight months of imports. In addition, the fow of foreign investment is going to increase even more, to a US$15.7 billion in 2014, mainly directed to oil industry, real estate, construction industry, hotel business and tourism. By the end of 2012 and beginning of 2013, the spread rates of the formal and informal exchange market increased to almost 10% due to the uncertainty created by the new Exchange Law and by the excessive liquidity. However, since then it decreased to 4% due to the policy discouraging the use of the USA dollar dollarization imposed in July Market interest rates have signifcantly decreased the interest rates of loans maturing in 181 days to 1 year, which dropped from 14,5% in 2012 to less than 13% in December Nevertheless, the average spread between credit and deposits is still high, standing at 8,4%.

9 In 2014 the Central Bank announced that it would maintain the infation rate under severe vigilance in order to reduce the uncertainty and to contribute to a more effcient fnancial system. Consolidation of the Monetary Policy and dollarization of the exchange market through the implementation of a new exchange regime in the oil Sector should be deepened in 2014 with new measures to limit the exposure of the foreign exchange market and regulate the limits of credit and rationalize and defne the imports regulations. Public Debt Debt indicators remain sustainable with an average External Debt of 20,4% of the nominal GDP in 2013, compared with 19,5% in In 2013, the Domestic Debt remained stable at circa 9,5% of the nominal GDP: External Debt of Angola and the Public Debt public administration and the main state enterprises are sustainable, with IMF classifying Angola as a country of moderate risk of debt distress but vulnerable to oil price and external shocks. The main part of the External Debt of Angola was contracted with commercial banks (13% of the GDP), international creditors including IMF (7,1% of the GDP) and other Private Sector entities (0,4% of the GDP). In 2014, external loans should increase to US$ 10.4 billion, mainly through credit lines to fnance the capital expenditures. Thus the ratio of the total public debt of Angola shall increase from 31% of the GDP in 2012 to 32,9% in IN 2013, the Government contracted a Debt of around US$ 5.7 billion to the adequate funding of large infrastructure projects. These investments were guaranteed through 20 years maturity Treasury Bonds, the traditional lines of credit for exports and public investment programs.

10 Government has sought to ensure that the conditions to longterm new loans are sustainable, improving the Public Debt management and ensuring a better distribution of the periods of maturity of the domestic debt. With these developments, the fnancial rating agency Fitch maintained in 2013 the debt rating of Angola in BB- with longterm positive perspectives for rating in national and foreign currency. Standard and Poors confrmed the respective ratings in BB- and B. Economic Cooperation, regional integration and commerce Both the Current Account and the Trade Balance deteriorated during 2013 due to the expected oil revenues lower growth. This fact highlights the lack of diversifcation of the national pattern of exports. Angola improved the cooperation with other members of the South African Development Community (SADC) and made efforts to negotiate an economic partnership agreement with the European Union.

11 Angola is also eligible for the trade preferences under The African Growth and Opportunity Act (AGOA) promoted by the USA. Investments are being made in aviation and maritime transport and rail and road links in order to boost the integration of the Economy in the SADC and in the Central African markets. Angola is the main supplier of African crude oil to China that buys 44% of the total of its oil exports, sign of the quality of this bilateral relationship. Imports of the country are predominantly machinery and metal equipment, vehicles and transport equipment and food, creating a potential strategic opportunity for joint ventures of companies of Angola with European Partners who can fll these market gaps. 10. Economic Governance Public Action The Government has promoted substantial regulatory reforms with signifcant favourable impact in 2014, either through important investments in infrastructures either through a clear commitment to improve the Business Environment in Angola. One issue of this Policy was embodied by the reforms of the Energy Sector with an Investment Program estimated at US$ 13 billion until Within the same strategic frame, the works to connect the three railways (Benguela, Moçamedes and Luanda) are underway.

12 Plans are also being developed for a Deep-water Port north of the Capital and also for the implementation of a fast public transport system in the region of Luanda. The national airline, TAAG Angola Airlines and the Civil Aviation Authority are among the state entities being restructured. In the medium-term, signifcant changes in the Labour Law are expected in order to cover the needs of the minimum wage, the social security system and setting of contributions and benefts of workers. Banking Sector The fnancial Sector of Angola is highly concentrated. The fve major banks represent 77% of the total of assets. The rate of banking coverage increased from 22% in 2010 to 51% of country s area in 2012, although still very concentrated in Luanda. The percentage of adults with access to formal banking services increased from 13,5% in 2011 to 22% in 2012, due to the expansion of the banking network and the undertaken advertising campaigns. The capital adequacy rate in the banking system remained strong at 18,3% in 2013, well above the minimum requirement of 10%. Angola fully applied 6 of the Basic Principles of the Basle Agreement on Banking Supervision and partially implemented 16 other. Although the liberalization of the market of private pension funds has created some momentum, its penetration rate and that of the micro-fnance institutions is still less than 1% of the GDP.

13 11. Social Contexts and Human Development Angola has made signifcant improvements on many of the Millennium Development Goals but challenges still remain specially those of promoting employment along with the economic growth, as well as to improve the social services and reduce poverty. Under the Joint Programme that started at the beginning of June 2013 between the Government of Angola, the United Nations Children s Fund (UNICEF), World Health Organisation (WHO) and the United Nations Food and Agriculture Organisation (FAO) more than 27 hospital facilities and 307 outpatients care centres were created in 10 provinces and more than children were attended. According to the 2013 edition of the Integrated Household Survey of the Wellbeing of the Population Report, the Domestic Poverty Index having 2001 as reference was reduced from 68% to 37% of the population. The Country needs a broad Social Protection Network, reason for which the Government has given great importance to the development of Social Systems to protect the social groups more vulnerable to poverty. As a result the State Budgets for 2013 e 2014 sought an increased allocation of resources to these objectives. The Government settled an Institutional Framework for the Development of Entrepreneurship and Job Creation through the Ministry of Employment and Social Security. The data from this Ministry show that the capacity of professional training has signifcantly increased having nowadays 159 thousand trainees, attending more than 460 training centres. In 2013, the Vocational Training Program created 110 thousand new jobs, especially in the energy sector (39.000), transport (29.000) and construction industry (24.000).