Things just got a lot 'messier' for Africa's largest oil producer

Angola announced last week that it wants to discontinue talks with the International Monetary Policy Fund about getting a loan.

Africa’s largest oil producer had first turned to the Washington-based lender back in April amid ongoing stresses from lower oil prices.

This latest decision to abandon the talks has folks worrying about possible negative effects in the struggling oil producer’s economy.

“The Angolan government’s decision to discontinue talks with the IMF on a potential loan increases risks to the sovereign’s external financial position if no other sources of external funding are available,” a statement by Fitch Ratings said.

“We’ve long held a below-consensus view on Angola, but Luanda’s decision to abandon an IMF bailout has increased the risk of a messier crisis,” argued Capital Economics’ Africa economist John Ashbourne in a note to clients.

“A recession and accompanying debt crisis are now possible,” he continued, noting that his team now estimates that the country’s current account deficit will be around 12% of GDP in 2016.

Angola is yet another oil producer struggling over the last year and a half. The country relied on oil for about 70% of government revenues and 97% of its export revenue in 2014 — so lower prices were not exactly a welcome surprise.

Over the past year, Angola’s currency lost about 35% of its value against the dollar, foreign-exchange reserves declined to about $22 billion from $32 billion, and the government imposed new currency controls, which only helped drive up the cost of key imports, as
RBC Capital Markets’ Helima Croft previously observed. Plus, inflation hit 29.2% this May — the highest level since January 2005.

So without getting a loan from either the IMF or Beijing, authorities in the country won’t be able to do much to tackle the problem.

Again, here’s Ashbourne:

“Instead, it looks like external imbalances will force an even sharper fall in imports, which will squeeze domestic consumption. Imports are already collapsing — they fell, in US$ terms, by an average 66% y/y over the three months to January. This will be a very painful adjustment.

At the same time, the authorities will also be forced to allow the kwanza to weaken further. […] A weaker currency will add to already sky-high inflation; we now expect that inflation will peak at over 35% later this year.”

Ultimately, Angola could still figure out a way to negotiate a foreign-financed bailout, Ashbourne suggests.

“But if it doesn’t, then the country faces a severe economic contraction,” he warned. And “this could threaten the government’s ability to pay its debts.”

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