Excess liquidity puts Angola’s economy at risk, Portuguese bank BPI says

15 May 2006

Lisbon, Portugal, 15 May – The Angolan economy is going through a period of excess liquidity due to a rise in foreign currency circulation in the market, which puts the country at risk of rising inflation and interest rate pressure, said Portuguese bank BPI in its latest report on Angola.

According to BPI analyst Cristina Casalinho, director of the bank’s survey department, “excess liquidity,” in both US dollars and Angolan kuanzas, “could lead to a return to increased inflation in the long term, but particularly to a worsening of the country’s current economic imbalance, which is manifested in the almost total lack of productive structures.”

Thanks mainly to oil revenues and the sale of diamonds, currently “foreign currency entries are greater than the economy can absorb, and there is a lack of alternatives investments for existing funds.”

BPI, which has a majority stake in Angolan bank, Fomento, said that the government “is aware,” of the problem and suggests amortization of foreign debt, an increase in foreign currency reserves and boosting the use of oil revenues in non-Angolan asset investment funds.

Another suggestion is the creation of the money market, for which it is, “crucial for the monetary authorities to be available to absorb the excess of kuanzas, “of which all the banks have an excess, “through a significant operation for absorbing excess funds,” such as state bonds with long maturities.

BPI also said that the Angolan Treasury should serve as an example, by using the internal market, because, “if, when there is internal saving and low interest rates, the authorities do not use the local market, and prefer to finance themselves using external sources, implicitly they are questioning the credibility of the economic policy underway.”

Despite these risks, the bank considers that Angola’s external position is currently, “comfortable,” thanks to an increase in the price and production of oil, more favorable foreign financing conditions, and several credit lines that have been provided, including one from China in the amount of US$2 billion.

Use of this credit line, which is limited to the end of this year, “has been slower than predicted, due to the novelty of investment projects being presented to the authorities for approval,” which has forced most local promoters, “to get training for putting forward proposals.”

According to BPI, Angola is currently, “one of the economies with most potential for economic expansion this decade,” and should expand by over 20 percent this year and next year.

BPI’s report was drawn up after a visit to Angola by the people responsible for economic reports at the Portuguese bank. (macauhub)