Rising Angolan state arrears on payments to Chinese contractors highlight the risks of sovereign debt distress amid an uncertain outlook for global oil prices, economists say.

Outstanding arrears owed by the Angola government rose to 3.9% of GDP in 2023 from 2.1% in 2022. The IMF has estimated that the arrears have stabilised at around 2.6% of GDP this year. But the arrears may be set to move higher again, says Ayodeji Dawodu, head of Africa coverage at BancTrust & Co in Lagos.

Much of the backlog is denominated in dollars, against which the kwanza has depreciated by about 6% this year. Angola owes about 1.6% of its GDP in dollars to Chinese contractors for infrastructure projects, Dawodu calculates. The government has not yet established a clear plan to clear the backlog.

A step forward, Dawodu says, would be to incorporate the arrears into the budget, thereby sending a signal that the problem will be tackled.

Angola’s total debts to China, excluding the infrastructure arrears, stand at about $17bn. China in March agreed to a revision of debt-service repayments which frees up between $150m and $200m per month for Angola. That creates some headroom, Dawodu says, but avoiding debt distress depends heavily on the global oil price, which Angola can’t control.

Brent crude oil trades at around $78 per barrel. Angola needs the price to be above $75 to be comfortable in debt servicing, so “the margin is not great”, Dawodu says. Anything below $70 makes it “challenging” for the government to service its debt, while a sustained price below $60 would be “distress territory”, which could prompt the government to go to the IMF, he says.

Angola will have external debt service requirements of $9.5bn per year from 2025 to 2027, according to S&P Global. It would be better for Angola to approach the IMF before the situation becomes desperate, Dawodu argues. Ghana left it too late and ended up having to accept high levels of conditionality for a bailout, he says.

Inflation and diversification

Over the past 10 years, oil has had extended periods below $60 in 2014, 2015, 2016 and 2017 as well as during Covid-19. The previous decade saw oil below $60 for 2004 and much of 2005. So the biggest risk for Angola may be a temporary increase in the oil price which could create a sense of sustainability and push economic diversification down the policy agenda.

Angola has suffered from “severe sensitivity” to oil-price shocks ever since the global price decline of 2014-2016, says Gerrit van Rooyen, an economist at Oxford Economics in South Africa. That sensitivity, he adds, was compounded by a rapid accumulation of external debt in the final years of Angola’s Dos Santos administration.

“A sustained drop in the oil price to below $70 per barrel or a decline in oil production to below one million barrels per day would require serious interventions,” he says.

Dawodu forecasts that Angola’s production level of 1.1 million bpd can be maintained, but sees no evidence that it can be significantly increased. The 2014 slump, he notes “really deterred investors” and has led to years of underinvestment in oil.

High inflation constricts the government’s room for manoeuvre. The annual inflation rate rose to 31.0% in June from 30.2% in May. There’s a risk of high inflation persisting, which could lead to protests and strikes, forcing the government to scale back on fiscal consolidation, van Rooyen says.

The Oxford Economics baseline forecast is for annual inflation to slow to below 26% by the end of the year, and to drop further towards 13% in 2025, due to base effects and tight monetary policy.

Current progress towards economic diversification and non-oil revenue mobilisation is slow, with little prospect of a rapid breakthrough, van Rooyen says. The obstacles to doing business in Angola “will take a long time to reform”.

Dawodu says that the economy needs to become more focused on agriculture, but that oil receipts offer the only clear way to finance such a shift. “A good oil price is the only way to diversify.”