Previous Quarterly Editions
Expropriation Risk: 54 51 54 55 Political Violence Risk: 45 42 44 45 Terrorism Risk: 28 28 28 28 Exchange Transfer and Trade Sanction Risk: 64 62 63 63 Sovereign Default Risk: 54 54 54 56
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The government has again postponed the introduction of its new VAT regime. Angola is the only country in the 16-member Southern Africa Development Community not to have a valued add tax, and President Lourenço’s administration had been expected to bring one into force at the start of the year. However, having originally pushed back the start date until July, it has now delayed the introduction of VAT for a further three months until October, citing a lack of readiness in the bureaucracy. It is true that, despite the training which Portugal has been providing to tax administration officials, progress towards implementation has been slow. However, the ruling MPLA is also worried about the economic as well as the political effects of introducing such a wide-ranging tax at the rate of 14%. Government figures issued in July confirmed that the economy shrank by 0.4% in the first quarter of 2019, following on from an annual contraction of 1.7% last year. Many sectors of the economy experienced negative growth but the most significant was the oil and gas sector, which contracted by 7%. Only power generation, construction, real estate and government spending made a positive contribution to the economy. The country has now been in recession for four years, the longest downturn since it emerged from decades of civil war in 2002, and the outlook remains bleak. The economy is expected to contract by a further 3.8% in 2019 and 3.6% in 2020 before growth resumes in 2021. The central problem for the government is that oil revenues continue to slip amid soft prices and falling output. President Lourenço has been trying to encourage the major companies operating in the country to raise production from existing fields and is using tax incentives to encourage more exploration. However, these initiatives are only likely to have any significant impact in the medium term. Meanwhile, average oil export prices fell by almost four dollars to 62.70 dollars per barrel during the first half of the year, contributing to a fall of 12.4% in oil receipts to 13.2 billion dollars. Oil accounts for more than 90% of Angola’s exports and 95% of foreign earnings, so reduced oil revenue means that the government has been forced to slash spending in a forlorn effort to balance the budget. Further cuts in public spending are now likely following the government’s latest postponement of the new VAT regime, and the continuing uncertainty about its implementation may have discouraged much-needed investment.
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The new VAT regime is meant to replace the current consumption tax with a flat rate of 14% for all goods and services, with the aim of generating income to offset declining oil revenues. The business sector will have an increasing role in collecting the tax, but international companies will be familiar with this. Investors will also be aware that some countries in the region, notably Zambia, have been using a delay in issuing VAT refunds as leverage in their relations with the business community. This is not expected to be an issue in Angola, but some companies may experience minor problems as the system beds down. Despite his strong start in office, it is increasingly clear that President Lourenço must still tread carefully to maintain the support of economic elites that retain links to his predecessor and the wider dos Santos family.
The ruling MPLA is acutely aware that the new VAT regime risks reviving the displays of public anger at the nationwide fuel shortage earlier this year, which was widely blamed on government incompetence. It is prepared to delay the gathering of VAT revenue until October, and possibly until the end of the year, in order to prepare the political ground as carefully as possible. Its real worry is the impact of the new tax on the many Angolans who are outside the formal economy. Although not affected by most forms of taxation, they will be hit hard by the 14% increase in prices for basic goods and services. It was sharp price rises in these areas that helped trigger the violent protests in Sudan recently, as the country’s leadership is well aware. The security services are more than capable of neutralising any public disturbances arising from localised discontent, such as the fuel shortages in Luanda. But a nationwide tax increase at a time when economic conditions do not seem to be improving may produce greater and more widespread protests unless very carefully handled.
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There is no recent history of external terrorist activity in Angola, and it is unlikely to be a major target for jihadi fighters moving from the Middle East to Africa. Cabinda separatists continue to exist, although they have not been active for many years.
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The central bank kept its main benchmark rate unchanged at 15% in July. The annual inflation rate is now under 17%, which is down significantly from previous levels and suggests that the current high interest rate level is having an impact. However, inflation is expected to stay in double figures well into next year due to the continuing weakness of the kwanza. Most consumer goods are imported and have to be paid for in hard currency, which remains extremely scarce. A budget deficit of 2-3% of GDP is expected this year and next before turning positive in 2021.
Revised estimates suggest that Angola’s debt-to-GDP ratio is significantly higher than previously estimated and could in fact be as high as 100%. This indebtedness is due largely to the oil-for-infrastructure swaps with China. As a result of its December 2018 agreement with the IMF, which provided a loan facility of 3.7 billion dollars, Luanda has agreed not to negotiate any more oil swaps. The country also has significant exposure to international capital markets through its outstanding Eurobonds. The IMF arrangement reduces any risk of outright default, but reserves fell to 16.2 billion dollars in June from almost 18 billion a year earlier and the continuing delay in introducing VAT may be straining the government’s relationship with the Fund.
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