Angola gets lukewarm response to FX changes

According to the finance ministry, public debt to gross domestic product stood at 67% in 2017.

12 January 2018 | Economics

They have been losing reserves quite aggressively and they have obviously had to do something. - Stuart Culverhouse, Exotix.

Karin Strohecker - Angola's 10% currency devaluation needs to go much further to take the kwanza to a fair value, according to investors who remain doubtful the shift will lure capital inflows into the oil exporting country.

Following the examples of African peers Nigeria and Egypt which devalued last year, Angola allowed its kwanza to depreciate around 10% against both the US dollar and the euro. The central bank held its first foreign exchange auction on Tuesday since switching from a dollar peg to a currency trading band.

Relaxing the currency rules is the latest of several policy and personnel changes since President João Lourenço came to power in September in Africa's number two oil producer whose economy has been battered since oil's mid-2014 price crash.

But the move, described by Fitch analyst James McCormack as "a little late, but better late than never", needs to go further, markets suggest.

Quoted at 184.5 to the US dollar, the kwanza remains way above the 440 level it trades on the streets of the capital Luanda where years of suppressed oil prices have resulted in acute foreign exchange shortages.

"We would have expected a weaker exchange rate actually - maybe they are testing this and not doing it overnight, maybe they are doing it gradually, so I think we might see more to come," said Stuart Culverhouse, head of sovereign and fixed income research at Exotix.

"They have been losing reserves quite aggressively and they have obviously had to do something - and correcting that imbalance would be positive."

Foreign reserves

Angola has seen its foreign currency reserves more than halve since 2013 to about US$14 billion. Meanwhile, fellow OPEC member Nigeria which has relaxed its currency regime in recent months has seen FX reserves rise again.

Fuels accounted for 97% of Angola's exports in 2016, according to UNCTAD.

Non-deliverable forwards (NDFs) showed on Wednesday how markets were reassessing expectations of how far policy makers were prepared to go in making adjustments in the US$90 billion economy.

Derivative products used to hedge against future exchange rate moves, Angola kwanza NDFs indicate markets expected exchange rates at a bid/offer rate of 235/275 in twelve months time. Those rates stood at 255/300 on Tuesday and at 292/392 last week.

"This significant flattening of the dollar-kwanza NDF curve possibly reflects investor expectations of more moderate devaluation after an initial partial adjustment," said Samir Gadio at Standard Chartered.

Renaissance Capital calculates that fair value implied by the long-term real effective exchange rate (REER) stood at 348 to the US dollar, adding that the kwanza before its adjustment had been the continent's most overvalued currency.

Samantha Singh, Africa strategist at Absa estimated that the backlog of FX demand was in the region of US$2.5 to US$5 billion in Angola, adding that further adjustment was required.

Debt

But lacking much of a domestic equity or debt market that could draw in foreign investment flows, Angola may not be able to replicate the benefits reaped by emerging market peers which recently relaxed their currency regimes.

"If one compares this devaluation to those in Egypt and Nigeria, the key question is whether Angola could experience the same turnaround on the financial account side," said Gadio.

Investors had also taken a step back from Angolan dollar-bonds. The issue, which has US$1.5 billion outstanding, extended falls for a third straight session and has been losing more than 1.2 US cents since the start of the week.

According to the finance ministry, public debt to gross domestic product stood at 67% in 2017. A weaker exchange rate would further increase that level, and make it more costly for Angola to service its obligations. According to Standard Chartered, the government debt service-to-revenue ratio reached 89% in 2017. – Nampa/Reuters

Kassie 1

BoN still owed more than N$1.2 bn

Banco Nacional De Angola (BNA) currently owes the Bank of Namibia (BoN) US$102.1 million – about N$1.27 billion at yesterday’s exchange rate.

The debt stems from the currency exchange agreement between Angola and Namibia in June 2015, which resulted in a massive outflow from the neighbouring country. The BNA subsequently struggled to repurchase kwanza from the BoN on a monthly basis due to foreign reserve pressure. A new repayment schedule had to be negotiated.

Commenting on figures reported by Market Watch on Wednesday, the BoN pointed out that the BNA made another payment of US$51 million in December.

“As per the agreement signed between the two central banks there are two remaining payments in 2018 to settle the outstanding amount, i.e. US$51 million in the first quarter and the last payment expected by June 2018,” the BoN said.

Kassie 2

Dos Santos’ son sacked

LUANDA - Angolan President João Lourenço removed the son of his long-serving predecessor Jose Eduardo dos Santos as head of the country's US$5 billion sovereign wealth fund on Wednesday, the latest in a series of moves that sidelined Dos Santos allies.

He announced that he was replacing the board of the fund, including its head Jose Filomeno dos Santos, after an external inquiry into the fund's performance and governance.

The new board chairman was named as Carlos Alberto Lopes, a former finance minister. – Nampa/Reuters

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