TAR119 – Q2 2022 - ANGOLA

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THEAFRICAREPORT / N° 119 / APRIL-MAY-JUNE 2022

Has JLo made Angola more business friendly?

President João Lourenço came into power in 2017 promising to turn a page on corruption and state predominance in the Angolan economy. Now up for re-election in August, he says he needs more time

By ESTELLE MAUSSION Angola’s President João Lourenço (JLo) started off both 2022 and his presidential term in 2017 by saying that he would reduce the roles of the state, the armed forces and the national oil company Sonangol in the national economy.

“The state wants to divest itself of many assets, and the space freed up must be occupied by the private sector,” JLo told local media in early January of this year. This sentence sums up the ambition of a president who promised in 2017 to be “the man of the Angolan economic miracle”.

He is up for re-election this year, and says that he needs more time to change Angola’s model, which has been in place since independence in 1975. This means diversifying an oil-centric economy, liberalising and privatising, encouraging foreign investment and local entrepreneurship: in short, making Angola more business-friendly.

In a difficult context of low oil prices and Covid-19, the

government’s record has been mixed. It is in terms of discourse that the change is most significant.

“The leitmotif of my governance is the diversification of the economy and the creation of jobs,” Lourenço insisted in early January.

“But to achieve these goals, we need an attractive business climate, which includes good governance and the fight against corruption.”

Sales pitch This message of openness and reform has been repeated during presidential visits to Europe and the United States, during roadshows for investors and at every exchange with donors, including the International Monetary Fund (IMF) and the World Bank.

Aware of the need to improve his country’s image, Lourenço is playing the role of Angola’s chief salesman. This is illustrated by his meeting schedule. Just since the beginning of the year, he has had talks with the African Development

Bank and the New Partnership for Africa’s Development, strengthened cooperation with South Korea, the United Arab Emirates, Greece, Cabo Verde, Senegal and Rwanda, and met with with the Dubaibased DP World for an update on the progress of work on the port of Luanda.

This communication effort has been accompanied by reforms designed to improve the country’s attractiveness. Breaking with the distrust of the IMF shown by his predecessor, José Eduardo dos Santos, Lourenço agreed to talks with the institution in 2017, coming back with a three-year support programme worth $3.7bn in 2018 – which increased to $4.5bn in response to the Covid-19 pandemic.

At the end of 2021, the IMF praised the stabilisation of the economy and the consolidation of public accounts, citing the monetary policies implemented, the reform of the banking sector under way (with the enshrinement

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ANGOLA FOCUS / Has JLo made Angola more business friendly?

Kwanza revaluing The move to a floating regime resulted in a sharp devaluation of the currency to a low point at the end of 2020, at nearly K700 to the US dollar, compared to around K200 in 2018. Since then,

“At first, the banks resisted and preferred to pay fines rather than grant credit. Then they […] ended up playing the game, with some devoting more than 5% of their assets to the programme in 2021,” notes the entrepreneur.

Admittedly, the process was slow, and many of the projects presented lacked credibility. But the results are positive. ‘As of September 2021, there were about 287 projects financed under Aviso 10 for […]

K528.9bn – about $1bn, or 1.5% of the gross domestic product in 2020,’ the IMF reported in early 2022.

the currency has been revaluing, with the rate at around K500 to the dollar in February. “It’s very positive,” the businessman says.

“We now have a transparent system in which the exchange rate is dictated by supply and demand.

This is essential for conducting business with peace of mind.”

‘It’s very positive.

We now have a transparent [exchange rate] system’

Slow progress up rankings

The government is also making progress on supporting finance for the private sector, particularly small and medium-sized enterprises. Help came in the form of a 2018 presidential decree launching Prodesi, a programme to support production, diversify exports and replace imports. A central bank notice, Aviso 10, then forced commercial banks to devote 2.5% of their balance sheet to the financing of projects that meet Prodesi criteria. The financing is at an interest rate of 7.5%, compared to market rates of about 18%.

DP World is investing $190m in Luanda port

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APM TERMINALS

in law of the independence of the central bank), and progress made in financing local private players.

These reforms have been accompanied by other measures that have had an impact on the assessment of ‘Angola risk’: the creation of a chamber dedicated to commercial disputes in the Luanda court, the opening of a one-stop shop for entrepreneurs, the adoption of a law on bankruptcy, and the launch of a credit bureau.

For the Angolan private sector, there are two main successes.

The first is the painful reform of monetary policy, with the liberalisation of the kwanza exchange rate, which was previously fixed, with an official and an unofficial rate.

“Access to foreign currency depended on the goodwill of politicians. There was speculation and no visibility on the purchase price of foreign currency,” says a businessman with a long history in the country.

Despite these efforts, the country has made little progress on some global indicators. On the World Bank’s Doing Business ranking it only went from 183rd position in 2015 to 177th in 2020. The government has also failed to reverse the trend in foreign direct investment, with the annual flow remaining negative since 2016.

“The results of [Lourenço’s] investment missions at the beginning of his term were mixed – in any case not up to expectations,” says Daniel Ribant, a former banker and author of books on Angola. “The Angolan president then turned to less demanding regions of the world in terms of compliance, strengthening his ties with countries such as the United Arab Emirates and Turkey. The country is undoubtedly more open, but structural difficulties remain: energy supply problems, a lowskilled workforce. And it will take time to improve all this.”

The IMF’s assessment of the business environment is similar.

Progress is too slow, especially on three points: access to credit, modernisation of the administration and the opening up of the country. ‘In relation to gross domestic product, credit to the private sector has declined in recent years,’ the

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Lourenço wants to reduce oil dependency

IMF said on the first point.

‘And most of the funds granted, benefiting from state guarantees, are used to finance commercial activities, which only weakly stimulate national production.’ On the second point, the IMF regrets the slowness of administrative procedures and the inertia of bureaucracy, a problem that the Agência de Investimento Privado e Promação das Exportações, created in 2018, has not been able to resolve.

On the third and final point, the IMF notes the lack of openness to cross-border trade. There are cumbersome customs procedures, despite the adoption of a new customs clearance management system.

The SADC promise “For a long time, the executive has been talking about joining the Southern African Development Community free-trade area, which is a logical and natural market for Angola, but it has not yet been done,” says Carlos Rosado, an economist and a professor at the Catholic University of Angola.

“In Angola, the difficulty has always been to move from theory to practice, and this is more than ever the case today,” he adds.

Indeed, while a number of reforms in favour of the private sector have been initiated, it is hard to know whether they will produce the desired effects. For some, including the promised series of privatisations, it is too early to tell.

The process, led by the Instituto de Gestão de Activos e Participações do Estado, has already resulted in the sale of 73 assets or companies for a total of nearly $1.7bn.

But the hardest part remains: concluding the first major asset disposals (including the insurance company ENSA and the bank BCI); listing entities, including the bank BIA, on the stock exchange; and begining to open up the capital of three national behemoths – Sonangol, the diamond company Endiama and the airline TAAG. Other reforms, such as the promise of better governance, are proving difficult to implement.

Although Angola moved up six places in one year in Transparency

‘In Angola, the difficulty has always been to move from theory to practice’

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International’s Corruption Perceptions Index, from 142nd in 2020 to 136th in 2021 (out of 180), problems remain: contracts awarded without competition, claims of conflicts of interest, and the opacity of contracts with China.

Foreign investors still shy “Foreign investors are still cautious, having had their fingers burnt by previous experiences or [because of] the country’s reputation,” notes Ribant. “And certain recent events – for example, the awarding of important contracts, such as the strategic food reserve, to companies close to the government – are not likely to convince them that things have changed.”

Even JLo, who made his mark with thunderous declarations against corruption at the start of his term, is quiet on the subject, as it divides his camp and forces it to change its old habits. Aside from the two pillars of his economic policy – José de Lima Massano, the governor of the central bank, and Vera Daves, the finance minister –, Lourenço seems to lack allies.

For example, he is on his fourth economy minister since 2017.

Change may be coming, but not at the snap of his fingers.

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INTERVIEW

Vera Daves de Sousa ‘We look to our creditors for space to breathe and grow’ Angola’s finance minister sets out her plans to rebuild the economy in the wake of the pandemic and commodity crash, and urges caution on the oil-price hike Interview by PATRICK SMITH and ZOE EISENSTEIN Juggling an onerous burden of public debt, market demands for fiscal discipline, and the ruling party’s bid to win another term in office in national elections in August, finance minister Vera Daves de Sousa faces a year of finely balanced decisions. So far, she has been winning, against the odds.

The Angolan economy, the fifth biggest in Africa, is growing again, and the prospects of a debt-servicing crisis have receded. For the ruling Movimento Popular de Libertação de Angola (MPLA), shoring up the economy after several years of austerity is vital ahead of the elections. Facing budgetary pressures in 2020 and 2021, the government has had to pare back spending, cutting several subsidies. This year, it is likely to open the taps a little.

With 95% of its foreign exchange coming from oil exports, Angola, like Africa’s other oil and gas producers, could be a net beneficiary of the price hikes triggered by the Russia-Ukraine conflict.

But Daves de Sousa warns that the market is too volatile to allow Angola to relax. She also wants to press ahead with structural reforms

to speed up the diversification of the economy away from oil and diamonds.

Through the economic and social mayhem of the pandemic, Daves de Sousa has led her team at the finance ministry to push tough policy reforms against a backdrop of some of the direst economic conditions the country has known since the end of the civil war.

Now the International Monetary Fund (IMF) and a slew of commercial banks forecast that Angola will consolidate its recovery after five years of recession. Its economy should bounce back strongly this year with growth of around 3%, and then more than 4% in successive years, according to their figures.

Daves de Sousa has scored some successes in her efforts to restructure some of Angola’s foreign debt.

Her team agreed a new arrangement

‘WE STILL HAVE A HIGH DEPENDENCY ON OIL. SO IT’S GOOD TO BE PRUDENT AND CREATE BUFFERS’

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with a Chinese bank and took advantage of the G20’s Debt Service Suspension Initiative to delay about $3bn in payments in 2020 and 2021.

That helped the treasury to manage its resources and reach the end of 2020 with no fiscal deficit, despite plummeting export revenue.

Last year’s receipts improved, and the IMF positively reviewed Angola’s performance under its $4.5bn aid programme.

But there are more difficult bilateral negotiations to come as the government’s programme with the IMF winds up. Although the IMF commended the government for improving budgetary discipline, it urged Luanda to move faster on the sale of state assets.

TAR: How fast do you expect the economy to recover?

VERA DAVES DE SOUSA: We are expecting 2.4% growth this year. We need more than 3% to compensate for the growth of our population. But 2.4% is a good start because we are coming out of five years of recession. If we see more growth, it will be a good surprise.

How will higher oil prices this year help Angola?

It’s such a volatile market that we need to be very careful about this price. We keep a kind of buffer if we see more coming in compared to the reference price in our budget.

We will also be ready if we see a turnaround and the market moves against us, because we are working a lot on diversification, the non-oil sector. But we still have a high dependency on oil. So it’s good to be prudent and create buffers, to avoid what we had to deal with when the pandemic was at its worst.

As you diversify, what are your priorities?

We are expecting a lot from agriculture, which we’ve seen grow in the past four years,

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despite all the other problems. If we keep investing in infrastructure, roads, electricity and water to ensure farmers can transport their goods I think we will see even more interest in this sector.

Also, we are expecting to see a lot happening on fisheries.

The informal economy is growing strongly, but we are putting efforts into formalising it to create space to see growth coming from that. Tourism has a lot of potential, as soon as we put in the infrastructure and services in those areas where it could develop.

The IMF says that many of your policies have made ‘significant progress’ but advised you to do more on diversification and developing business.

Yes, we are quite under our potential and still have a high dependency on the oil sector. […]

So the IMF and the government know we need to keep working hard to ensure that we have a strong private sector, a local one, but also a foreign one that plays a key role and contributes to our GDP and fiscal revenues.

At this stage we are able to pay salaries, wages and shortterm expenditure with our fiscal revenues. But we need more: for example, to progressively decrease the amount of money from nonfiscal sources used to service debt.

What would speed up the development of local companies?

We did a lot on the legal framework – private investment law, competition law, trading rooms – so we have the legal infrastructure and institutional package to attract investment. What we need to keep working on is the mentality of the public servants to ensure we are less bureaucratic, not involved in acts of bribery, and very strict with any acts of corruption. Also, to keep investing in infrastructure.

How are the privatisation plans going, especially of the two biggest state companies, Sonangol and Endiama?

First, their balance sheets need to be clean and transparent. All the legal processes regarding the assets of those companies need to be resolved before starting the due

diligence. This will ensure that the final value that the government gets from this sale is as good as possible. It involves prosecutors, judges and international cooperation to recover some assets, so it’s a lot. We have the Banco de Comércio e Indústria, a state-owned bank, that we’ve privatised. We have started the privatisation of the state-owned insurance company, Empresa Nacional de Seguros de Angola, which will end this year.

How can you bridge the gap between implementing good policies and getting positive change on the ground?

All the government, all the public and private institutions, need to be totally committed to the quality of expenditure. It’s something that we need to keep working on. That’s my flag as minister of finance: open procedures, transparency, saving money, choosing projects well, putting the people first. That’s my role doing this. As I mentioned, I’m only one, but I can shout loud.

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