The kwanza’s rollercoaster: navigating currency storms, capital flows and revived inflation

Monetary tightening throughout 2023, along with export underperformance, will impact Angola’s growth, which will nearly halve from +3.6% in 2022. Angola's headline inflation had been declining since early 2022 as the country was among the “early hikers” in the current cycle. However, a reduction in fuel subsidies and a strong devaluation of the kwanza in the second quarter of 2023 have reignited fears of high inflation.  In early June, the government partially removed subsidies on gasoline, which now costs 300 kwanzas (USD0.5) a liter, up from 160 kwanzas earlier. Also in June, the national bank, Banco Nacional de Angola (BNA), restricted US dollar transactions as foreign reserves fell, causing the kwanza to drop by 62% by end-June compared to January. As the government continues to reduce foreign debt exposure, reserves must not be dissipated to maintain an artificial peg to the dollar. Repayments this year should amount to some USD9.9bn (around 14% of 2022 GDP and 20% of exports of goods). Oil production is also slowing down, with oil exports reduced by one third y/y in the first quarter, likely the result of import restrictions in 2021-2022 affecting equipment procurement.

Inflation is now expected to remain in the double digits well into 2024 (11.3% in June). The BNA lacks an inflation-targeting framework, but uses a flexible informal target set at 9-11% until the end of 2023. It issued USD350mn in local currency treasury bonds in May, but this did not stabilize the kwanza. The central bank governor was replaced and monetary policy is expected to tighten from 17% to 20% in the next quarters. Lower oil production and lower global oil prices may weigh on the current account surplus, which is expected to stay around 5% of GDP in 2023, thanks to non-oil sector support. 

In the first quarter of 2023, exports fell by -35% while imports went up by +12.5%. Although modest, output from the non-oil sector – especially diamonds, agriculture and natural gas, because of new EU investments – will support exports in the coming quarters. We also expect higher capital investment in mining and energy, which will increase imports of machinery and equipment, and higher consumption on the back of stronger economic growth and contractor-associated spending. In the next year, businesses exporting commodities will play a larger role due to the currency devaluation, but output constraints and increased import costs may reduce the trade surplus to 7-8% of GDP, which remains high compared to peers and neighbors. The services balance will remain negative due to the growth of the mining and energy industries and the importing of foreign knowledge. Tourism revenues will also remain below the pre-pandemic level.

The fiscal breakeven for 2023 is estimated at USD75 per barrel, meaning that current price levels are barely enough. However, depreciation allows a greater multiplier effect for each dollar of exports into the local economy. When government revenue falls and receivables to suppliers rise, the local private sector remains vulnerable and dependent on government contracts. Profit repatriation and paying for Angola's large amount of external debt will weigh on the liquidity tools to mitigate volatility.

Since President Joao Lourenço was elected in 2017, the administration has taken steps to tackle endemic corruption while also relaxing limitations on the press and civil society, although severe governance and human rights issues persist. Even though the opposition contested the results of the 2022 parliamentary election, the electoral process was carried out smoothly and there were only minor disturbances afterwards. The ruling Movimento Popular de Libertação de Angola (MPLA) did not receive the required two-thirds majority in parliament to modify the country's constitution. Since the latter was already amended in 2021 to strengthen the president’s position by increasing forbearance, the current setting should be adequate to prevent turbulence in the medium term.
As a result of income inequality, both purchasing power and educational attainment are quite low in Angola. Despite government efforts to build more schools and educate more teachers, a recent census found that 24% of adults aged 18-24 and 54% of adults aged 25-64 did not complete high school. There are fewer than 3% of college graduates among these adults and only 16% have completed elementary school, which reduces productivity and the construction of local expertise. Since much of Angola's oil and gas is in deep and ultra-deep water, drilling it is a costly endeavor due to the requirement for specialized equipment and expert workers. Onshore costs (e.g. local services) can be significant and paperwork holdups are a constant source of frustration. Even though most contracts are predicated on cost recovery, the substantial upfront investment may still be prohibitive to some businesses. This means that Angola, despite its potential, is more likely to lose oil contracts to other countries due to the lower costs of operations and the greater efficiency of their procedures.