Investors remain cautious after the more than 50% drop in the oil price and recent credit rating downgrades in Angola, but recent signs of price stability and quick government action to manage the situation are expected to encourage development opportunities in the future.
Oil export revenue accounts for close to 98% of total export revenue in Angola, which is the second-largest oil producer in sub-Saharan Africa, behind Nigeria.
The government had planned for an US$80 per barrel oil price in 2015, but had to revise that down to just $40 after the crude oil plunge that started in June last year. This meant it had to reduce $14bn off this year’s budget and raise its budget deficit expectation to at least 7% of GDP.
“The government is reducing investment plans for this year and there is some reduction in terms of government spending. This is affecting the whole country in terms of economic activity,” says Luis Teles, executive head of corporate and investment banking, Standard Bank Angola.
The Angolan government has acknowledged it needs to raise funding to finance the 7% deficit. While its view is that the oil price will not go back to $100 a barrel any time soon, it feels the price could be above $60 in the second half of the year. The general view is the price could move toward $60 – $70 a barrel in the next 18 months. If this happens, then it will act as a buffer and help reduce the deficit.
The US Energy Information Administration estimates that Angola earned $24bn in net oil export revenue in 2014 (unadjusted for inflation), $3bn less than in 2013 because of decreased production and the decline in average annual crude oil prices.
However, one of the solutions to bringing about stability to the market is coming from the government and banks themselves, which are acting quickly to find new avenues of funding. The government is already working with major banks like Standard Bank to ensure enough dollars can be provided to help specific industries, like the food and oil industries.
“We have been in discussions with the government and the central bank to come up with answers. We are certainly seeing the government moving quickly to counter the negative effects of the drop in the oil price. The government is pushing hard to diversify the economy and is coordinating with the Central Bank to find new ways to incentivise banks to lend more to the real economy,” says Teles.
Standard Bank hopes that by using its experience and track record in the country and working with authorities to help improve access to capital by introducing new products, that it will allow clients to cover their shortfalls.
“There is no derivative exchange for example, and we are busy with discussions to improve access to capital and create more liquidity,” says Teles.
Other important facilitation roles being played include: pushing for more local content development and production by advising local investors at a strategic level, raising financing for production facilities, advising on mergers and acquisitions, the provision of financing for joint venture structures, trade and receivables finance down the value chain and bridge facilities for equity investors.
According to the US Energy Information Administration the vast majority of Angola’s natural gas production is associated gas at oil fields, and it is vented and flared (burned off) or re-injected into oil wells to enhance oil recovery. There is however a lack of the infrastructure needed to commercialise more of Angola’s natural gas resources at this stage.
Teles says significant development opportunities exist, including in the downstream sector but it is all about balancing timing.
“This could be a good time to invest. The country is keen to attract foreign direct investment and is making it easier and faster to come in. Investors can then take time to find a local partner and invest in their structures without feeling pressure to be profitable immediately. Of course, when the oil price increases, the growth potential will arise quickly again,” said Mr Teles.