Predicting Politics Isn’t Easy In Angola. Now The Same Is True About Oil

Kurt Davis Jr.
Written by Kurt Davis Jr.

It is time to have a serious discussion about the outlook on Angola. The dramatically lower oil price has soured the country’s growth prospects, with some analysts suggesting flat- to sub-2-percent growth. The economy remains insufficiently diversified to fight off the devastating effect of the oil price drop.

Oil prices and the Angolan budget

The Angolan parliament passed the 2016 budget at the end of 2015, assuming a $45-per oil-barrel average for the year and production of 1.88 million barrels a day. The numbers are ambitious in the current environment. Oil production fell as low as 1.63 million barrels per day at the end of 2015. The Mpungi oil field in the West Hub Development is expected to deliver full production by the end of the first quarter for an estimated 100,000 barrels per day. Any additional output will not approach 1.88 million barrels.

The plummet in revenues continues to drain Angolan coffers. Officials are targeting a fiscal deficit of 5.5 percent of GDP in 2016, compared to 6 percent in 2016. Economists and business managers alike privately question the reality of this target in the current situation. The government has already ended diesel subsidies and reduced electricity and water subsidies.

The spending cut to the oil sector may be the larger story. Multiple projects have been postponed or reduced. BP Angola – with partners Esso, Sonangol, Statoil and Marathon – suspended the ultra-deepwater Leda oil field project. A consortium including Galp Energia is slowing its timeline in the CNE area of Block 32. Project Orca is meeting a similar fate.

Trailing effects on the economy

The trailing effects on the economy are hard to ignore. A drop in oil exploration implies low reserve prospects for the end of 2016 and decreased export revenue. The decline in oil exports consequently pushes down Angola’s dollar supply. Importers are struggling to pay suppliers. Shippers are delaying arrivals to the ports of Angola to provide importers a more appeasing option than simply going out of business. But banks are wondering if their dollar deficits — if they persist until 2017 — will sour relationships between Angolan importers and global suppliers.

The currency deflation is another concern. A 50-percent-plus decline in the kwanza vs. the dollar from January 2015 to January 2016 is problematic for a country operating in the global oil market.

Local operators appreciate the decline in local operating costs, but it is important to remember that operators use a significant number of expatriates. Local costs remain very high for those expats. A 1000-square-foot apartment still hovers between $25,000 and $30,000 US per month. Yearly fees for international school tuition runs $100,000 to $150,000.

Inflation is rising, approaching 15 percent, with compounding effects on local consumer businesses. Consumers are spending less and businesses are cutting staff accordingly, which further complicates the picture. Unemployment is rising slowly but surely which worries officials. Families have less access to food and some NGOs privately worry that malnutrition will rise. Other side effects are a slowdown in telecom growth and access to electricity. When it comes to spending on food, phone and/or electricity, food wins.

A presidential election in 2017

The presidential election is also hanging over this economy. President José Eduardo dos Santos has already picked August 2017 as the next election month. The ruling MLPA party will hold its seventh congress from Aug. 17 to Aug. 20, 2016, when the party will nominate its presidential candidate. Dos Santos has not confirmed if he will seek re-election but he has said that 45 percent of the top party posts will be reviewed. All the political reshuffling will be under a microscope, including Graciano Francisco Domingos being recently replaced with Francisco Higino Lopes Carneiro as governor of Luanda province.

Isabel dos Santos may still be the person to watch.

As it goes in this country, predicting politics is not easy. The problem now for Angola is that we are saying the same thing about oil.

Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.