Angola: Devaluation of the kwanza dismissed by authorities, but analysts says its inevitable

2 March 2009

Luanda, Angola, 2 Mar – Angolan authorities have systematically rejected a devaluation of the kwanza, but some analysts consider the measure inevitable given the fall in foreign-exchange reserves used to strengthen the national currency.

According to data published last week by the Standard Bank, considered to be the continent’s biggest bank, over the next six months the Angolan kwanza should fall 11 percent, with the North American dollar worth 85 kwanzas.

“Given the fall in oil prices to well below the level necessary for Angola to fund its current deficit, we believe that the risk of devaluation increases by 50 percent over the next few months,” said Michael Hugman, emerging market currency strategist for the Standard Bank.

The “reluctance” of the Central Bank to accept the devaluation stems from the possible negative effects on the level of inflation, which has been increasing and currently stands at over 13 percent.

After news reports in Luanda and in the country’s media about a devaluation, the governor Amadeu Mauricio was quick to reject the idea last month.

He admitted, however, that due to the fall in oil revenue Angolan reserves had fallen from around US$19 billion (December 2008) to US$17 billion.

This reduction is essentially the result of the fall in Angolan oil production originating in the cuts stipulated by The Organization of the Petroleum Exporting Countries (OPEC), together with the reduction of the price per barrel on international markets.

Even so, data from the Banco Nacional indicates that the reserves are well above the external debt, which was estimated at US$13.6 billion dollars last November.

An Angolan banking source recently told Portuguese news agency, Lusa, that the BNA has been receiving daily requests of over US$300 million, when the usual demand for the North American dollar is between 50 and 60 million.

Last Friday, the dollar stood at 75.3 kwanzas in Luanda, close to where it stood at the start of 2008, a better result than for currencies of other oil producing countries like Russia, Nigeria or Kazakhstan.

According to the Standard Bank, the authorities have been using external reserves, accumulated during the oil boom, in order to prevent devaluation.

If oil prices drop below US$40 dollars per barrel, reserves should fall between US$850 million and US$950 million per month according to the South African bank’s predictions.

Once devaluation is confirmed, it should happen in an “orderly” fashion, given the “well administered existing capital control.”

The Standard Bank’s estimates indicate that the average oil price will have to be around US$46 in order for the current deficit to break even.

Should it fall below US$35, Angola could see a deficit of 6 percent of the GDP this year – compared to a surplus of 20 percent last year.

The 2009 State Budget is based on a price of US$55 per barrel, which the finance ministry has already admitted needs to be revised – expected to happen in May – while the Prime Minister has emphasized the need for greater investment “restraint” and “selectivity” compared to previous years.

Oil currently represents 80 percent of Angolan external income and, importantly, the same percentage of government revenue.

While in 2008 Angolan oil production stood at around 1.83 million barrels per day, it currently stands at 1.6 million, according to the Standard Bank’s statistics.

The Standard Bank’s forecast for Angola’s economic growth stands at between 3 and five percent of the GDP, compared to 20 percent in 2007 and 18 percent last year. (macauhub)