Highlights and Key Issues
* Forecast GDP growth for 2007 has been revised down to 22% from just under 30% previously as a result of lower than expected oil production and the appreciation of the kwanza. But this is still one of the highest growth rates in the world, led by strong activity in both the oil and non-oil sectors. Growth should slow in 2008, but is expected to remain in double digits at 13%.
* Inflation is expected to average 12% in 2007, similar to the 2006 result. This is above the government’s target of 8% by end-2007, but still well below rates seen in previous years. Inflation should continue to decline in the next few years, falling below 10% in 2009.
* The current account surplus is forecast at around 20% of GDP in 2007 and 2008. Strong oil and diamond exports, combined with high oil prices, have led to a large trade surplus, and foreign exchange reserves exceeded US$1 Obn in September 2007.
* In October, the government approved a 2008 budget that includes spending for legislative and presidential elections – set to take place (in 2008-09) for the first time in 15 years. Higher spending on reconstruction programmes and infrastructure was also included in the budget, as one of Angola’s major challenges is to diversify its economy and reduce dependence upon oil.
GDP growth still in double digits…
* Since the end of the civil war in 2002, and after more than 30 years of relative decline, Angola’s economy has been recovering strongly. Rising oil output has resulted in double-digit GDP growth for most years since 2002, estimated at around 14% in 2006 after over 20% in 2005. oil production, which represents around 75% of GDP, is projected at approximately 2m b/d at end-2007. Although commercial activity other than oil, construction, distribution and diamonds remains limited, manufacturing production is benefiting from ongoing investment in infrastructure. The agricultural sector is also doing well, boosted by an increase in the area of land farmed. As a result, activity in the non-oil sector as a whole is also experiencing strong growth. Government spending is surging as a consequence of high oil prices and revenue, spurring on other sectors of the economy, in particular construction of infrastructure projects.
* GDP growth for 2007 is now expected to rise by around 22% – lower than the previous official projection of a growth rate of just under 30%. This is the result of lower than expected oil production plus the appreciation of the kwanza (AOA) – the exchange rate climbed to AOA74.9 to the US$ in September from an average of AOA80.4 in 2006 as a whole. In 2008, GDP growth should decelerate but is still expected to remain in double digits at around 13%.
* Now the second largest oil producer in sub-Saharan Africa after Nigeria, Angola will have to adjust its oil production to the quota given it by OPEC from January 2008 onwards, one year after it joined the organisation. But the quota – set at 1.9m b/d – is close to current production levels and just slightly under the estimated output at end-2007. Three new oil fields are expected to go into production in 2008, with annual oil production forecast at 711m barrels.
* A project to extract liquefied natural gas was signed in December between state oil company Sonangol and a group of major oil companies, including Chevron, Total and BP. The plant, located near the city of Soyo in northwest Angola, is expected to produce over 5m tonnes of gas a year from 2012 for export and about 125m cubic feet a day for the local market.
Inflation to slow further…
* Inflation has been falling sharply since hitting 100% in 2002, helped by increased food supplies. The inflation rate fell to 12% in 2006, and probably averaged a similar rate in 2007, though this was above the government’s objective of cutting it to 8%. The strong pace of economic growth and large amounts of government spending should keep inflation in double digits in 2008, before falling below 10% in 2009.
External and fiscal surpluses
* Large volume increases of oil and diamond exports have resulted in strong export growth and a large current account surplus estimated at around 23% of GDP in 2006. Despite deficits on the services and income accounts, the current account surplus doubled from about US$5bn in 2005 to over US$1 Obn (equal to almost 23% of GDP) in 2006. In 2007 and 2008, the current account balance should remain above 20% of GDP despite rapid import growth. Foreign exchange reserves have been increasing as a result, and reached US$1 Obn at the end of September 2007 according to the central bank, up from US$8.6bn at the end of 2006.
* The government budget has also been in surplus since 2005 as a consequence of the surge in oil revenues, and was estimated at around 15% of GDP in 2006, up from 7% in 2005. The original budget for 2007 was revised following a slower than expected pace of activity and the appreciation of the kwanza, and included efforts to curb government spending and increase its effectiveness. The budget for 2008, approved in October, included spending for legislative and presidential elections set to take place in 2008 and 2009. Some of the main challenges now facing Angola are improving infrastructure and creating conditions for the economy to diversify, as well as reducing poverty.
Elections to take place in 2008-09
* Elections have not yet been held since the end of the civil war in 2002, having been delayed twice in 2006 and 2007. Parliamentary elections are now set to take place in September 2008 and presidential elections in mid-2009 -with President Jose Eduardo dos Santos confirming recently that conditions are now in place for the country to hold transparent elections.
* For almost 30 years prior to 2002, Angola was devastated by civil war between the three political movements that emerged during the 1960s amidst the struggle for independence from Portugal, eventually achieved in 1975. The armed conflict between the three main parties saw the National Front for the Liberation of Angola (FNLA) and the National Union for the Total Independence of Angola (UNITA), backed by forces from South Africa and Zaire, trying to wrest control of the capital Luanda from the Popular Movement for the Liberation of Angola (MPLA), which also controlled the increasingly lucrative oilfields in the Cabinda enclave. Various peace accords in the late 1980s and 1990s saw the withdrawal of foreign troops but attempts to hold elections under the auspices of the UN failed to achieve lasting peace. However, a lasting ceasefire between the main parties was finally reached in April 2002, with UNITA returning all the territory it held to the government headed by President Jose Eduardo dos Santos, who had defeated UNITA’s Jonas Savimbi in the country’s first elections in 1992 (although these were controversial in that Savimbi withdrew from the second round of voting).
* Although nominally a multi-party democracy, Angola has a strongly presidential system, where the government is based on decrees and decisions from the president, with the parliament very much subordinate to the executive and the prime minister and the 30-member council of ministers all appointed by the president. There thus remain few opportunities for opposition parties to mount a serious challenge to the continued dominance of Dos Santos and the MPLA, which holds 59% of the seats in the National Assembly. Elections were originally scheduled to be held in 2006, but these were postponed and parliamentary elections are now due in mid-2008 and presidential elections a year later. A multi-party constitutional reform process may resume after the elections.
* The government has sought major international aid in its effort to rebuild the country’s infrastructure damaged in the 27 years of civil war. Talks have been held with the IMF over a lending programme but progress has been held up by the government’s inability to provide information on foreign debt and to provide timely macroeconomic statistics and to clarify its central bank accounts and oil revenue management. Indeed, timely and reliable economic and social statistics are scarce, in particular on capital spending, making proper analysis difficult.
* After contracting by about 1% p.a. over the period of the civil war, the economy has begun to grow rapidly in the last few years, attributable partly to the surge in oil prices and rising oil output and partly to the rebound after many years of economic devastation. oil accounts for about 95% of government revenues and exports. Diamonds are the only other significant export, accounting for almost 5% of the total. Real GDP growth accelerated into double digits, averaging nearly 14% p.a. in the 2002-05 period, and the forecast is for continued strong growth. But despite its natural resources and the sharp pick-up in growth rates seen since 1992, Angola remains one of the poorest countries on the African continent, with subsistence agriculture supporting as many as two-thirds of the population. According to the 2007 UNDP human development index, Angola was ranked 162nd out of 177 countries, even though its GDP per head on a purchasing power parity basis was relatively high in an African context at US$2,335 in 2005. The period of economic decline in the 1990s was also marked by hyper-inflation, which peaked at 4,145% in 1996, but there has been a marked slowdown since then, to a little under 12% in 2006. The external economy is increasingly reliant on oil revenues, which have pushed the trade account into substantial surplus in recent years and have swung the current account balance from its traditional deficit into a large surplus in 2005.
* Prospects for development rest heavily on expanding oil production. Angola is now the second largest producer in Africa after Nigeria, with output surging in the last 20 years from 280,000 b/d in 1986 to around 2m b/d at end2007. With the improved political situation resulting in increased investor interest, proven oil reserves have risen sharply in the past few years and were estimated at 10bn barrels in 2007, the majority of the reserves being located in offshore blocks. oil production is projected at 1.9m b/d in 2008 under the quota set by OPEC, with three new oil fields expected to go into production. Domestic oil consumption is small, at about 60,000 b/d so the bulk of production is for export. In addition to its oil reserves, Angola has proven natural gas reserves of 1.6 trillion cubic feet as at January 2006, and extraction of liquefied natural gas expected to start in 2012 should result in the production of 5m tonnes of gas a year for export.
Copyright Oxford Economic Forecasting Dec 14, 2007
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