INSIDE AFRICA | MARKETS | BUSINESS
Angola‘s economic outlook has improved, but the International Monetary Fund is warning that a more favorable external environment should not be mistaken for a resolution of the country’s underlying vulnerabilities.
In its latest assessment, the IMF said Wednesday that stronger external conditions, improved access to international markets, stronger activity outside the oil sector and declining inflation have supported the Angola’s macroeconomic stability and strengthened its external position. provided some breathing room for policymakers.
But those gains have also given policymakers more breathing room to delay some of the difficult fiscal adjustment and reforms the economy urgently needs to become less dependent on oil.
The warning comes as Angola moves to deepen its domestic capital markets and broaden the pool of investors willing to finance the government. The country is working to open its roughly $18.6 billion domestic government bond market to foreign investors and is in discussions with J.P. Morgan about potential new frontier-market local-currency debt index, according to news reports.
A deeper local bond market would provide Angola a broader source of financing and help reduce its reliance on dollar-denominated borrowing. But bringing in more foreign investors also means the government will have to face greater scrutiny over its fiscal position, its domestic currency Kwanza and risks around the economy’s continued dependence on oil.
The IMF said Angola needs to sustain macroeconomic stability through fiscal consolidation and prudent monetary policy while allowing greater exchange-rate flexibility. It also called for structural reforms to improve the business environment, strengthen governance, attract foreign investment and diversify the economy.
The risks remain closely tied to oil.
Oil-price volatility remains a major risk for Angola’ economy whose public finances and external position are closely tied to the commodity. The IMF noted that tighter external financing conditions and delays in fiscal consolidation and reform implementation are downside risks.
The government’s push to open the domestic bond market makes those issues more important for investors closely watching the country for potential investment opportunities.
The local bond market currently remains relatively difficult for international investors to access. Foreign investors can buy Angolan government securities, but the process involves central-bank approval and local banking arrangements. The government is looking to remove some of those barriers as it seeks to attract more international portfolio capital.
The strategy could give Angola a larger and more diversified source of financing. It could also help reduce the country’s dependence on foreign-currency debt and potentially lower its borrowing costs if international demand develops.
But attracting investors will require more than opening the market. Angola will need to convince investors that the improvement in its macroeconomic position is durable and that the government is using the current period of stability to address the vulnerabilities that have repeatedly left the economy exposed to oil cycles.
That puts diversification at the center of the reform agenda.
The IMF is calling for further changes to improve the business environment and attract investment into the non-oil economy.
Businesses and investors will also be watching whether Angola’s economy can generate growth, foreign exchange and government revenue from a diversified economic activities.
While Angola’s recent gains have created an opportunity to make that transition. The risk, the IMF suggests, is that a sharp move in oil prices, tighter financing conditions or a delay in reforms could put pressure back on the economy.
The IMF’s assessment is expected to be discussed by the Executive Board in November.
