Plummeting oil revenue hits Lusophone prospects

Commentators are increasingly pessimistic about the Angolan and Mozambican economies.


Angola and Mozambique may have very different economies but their current economic problems have the same two root causes: low energy prices and economic mismanagement.

Low oil prices have slashed Angolan revenues and slowed the development of gas and coal projects in Mozambique. At the same time, Maputo’s borrowing resulted in default in January, while Luanda’s continued opacity and state control has not created an economy sufficiently robust to weather the period of low oil prices more comfortably.

Most forecasters have become more pessimistic about the two countries’ prospects. The World Bank has downgraded its forecasts for Mozambican growth in 2017 and 2018 by 2.5% and 1.4% respectively, to the still respectable figures of 5.2% and 6.9%.

It forecasts growth of just 1.2% and 0.9% in those years for Angola. There is little likelihood of strong growth in Angola for the foreseeable future. The Angolan kwanza and Mozambican metical were both among the 10 biggest depreciating currencies in the world in 2016, losing 18.9% and 33.2% of their value against the US dollar respectively.

Readers of African Business will be well used to this refrain, but the long-term answer is of course economic diversification. The rapid improvements in Mozambique’s transport infrastructure – and not just with regard to coal transport – offer some hope, while the tourism and agriculture sectors have huge scope for growth.

However, Ruth Bookbinder, Africa analyst at risk analysis company Verisk Maplecroft, says: “Productivity gains in agriculture remain limited at 3.2% per annum. There is some interest in agribusinesses but the sale of large tracts of land is always contentious and projects struggle to get off the ground. The manufacturing sector continues to underperform, partly due to a high minimum wage, which is likely to deter investors.”

Angola may be the third biggest economy in sub-Saharan Africa but it has made even less progress on diversification. Although there are plenty of other hugely oil-dependent countries, Verisk Maplecroft rates it as the least diversified economy in the world.

Just a few years ago Luanda was the focus of a big property boom and immigration from Europe, as the economy blossomed on the back of oil revenues, at least for the wealthy, although poverty levels and income inequality were always very high. However, the jobs have begun to dry up and there have been numerous reports of empty properties in gated communities.

The official Angolan exchange rate has fallen from 97 kwanza to the US dollar in 2014 to 165 now, although the black-market rate is more than three times as high. This has pushed up the already high cost of imports. The rate of inflation increased from 17.3% at the start of 2016 to 45% by the end of the year.

Some reports suggest that the government is running down its foreign exchange reserves at an alarming rate. The central bank has responded by repeatedly raising interest rates, which now stand at a record 16%. Luanda has improved its finances by cutting expenditure, including the reduction of fuel subsidies, which are eventually to be phased out.

IMF advice

In its most recent report on Angola, which was published in early February, the IMF advised Luanda to cut its budget deficit for this year to 2.25% of GDP. It warned: “The shock of oil prices that began in mid-2014 significantly reduced tax revenues and exports, with stagnant growth and a sharp rise in inflation, which has highlighted the need to respond more forcefully to vulnerabilities and the dependence on oil and to diversify the economy.”

Assessment of state finances is difficult because the government does not publish details of most of its loans. The IMF would publish any support it gave, but talks with Luanda over potential financial support ended in July.

However, the IMF reports that government debt as a percentage of GDP reached 71.6% in 2016. Total tax revenues fell to K3 trillion ($18bn) in 2015, from K4.9 trillion in 2012.

John Ashbourne, Africa economist at Capital Economics, warns that Angola “has a struggling economy, an over-valued currency, and large public and private debt loads. And given Angola’s opaque – and at times overtly secretive – government, it’s also the country most likely to spring a Mozambique-style surprise by announcing that things are much worse than the official figures suggest.”

Cabo Verde builds a new reputation

In its World Economic Situation and Prospects 2017 report, the UN Department of Economic and Social Affairs forecast reasonable growth for the other three Lusophone countries: São Tomé and Principe (5.5%), Guinea Bissau (4%) and Cabo Verde (3.5%).

Cabo Verde’s current experience is particularly interesting. It joined the ranks of the world’s middle-income countries in 2008, one of very few sub-Saharan states to do so.

This posed the government a number of challenges, as it affected its eligibility for donor support. In addition, the country’s lack of natural resources has left it overly dependent on tourism and overseas remittances.

Over the past few years, the government has managed to stabilise the economy, although its deficit peaked at a rate of 7.4% of GDP in 2014. It has also helped promote the archipelago nation with an unusual economic strategy: it is seeking to become the first country in the world to generate all of its electricity from renewable energy projects.

This is particularly difficult given that the population is scattered over nine islands with no transmission links between them. However, the cost of importing diesel for thermal power plants is also very high, with power generation feedstock accounting for 20% of the country’s entire import bill.

The government is confident that it can produce all the electricity it needs from wind and solar. Wind power will also be used to desalinate water. Wind farms on the four most populated islands already produce 25% of the country’s electricity and so last year the government increased its renewables target from 50% of all power production by 2020 to 100%. This fits in with its environmental image, which in turn complements its role as a popular tourist destination, attracting an estimated 640,000 visitors in 2016.

Neil Ford

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