The decline in world commodity prices has taken with it African economic growth rates. Being so wholly dependent on its oil sector for economic growth, countries such as Angola have recently hit a stumbling block. Since the 50% fall in oil prices in June 2014, Angola’s GDP growth dropped to 4.5 percent from the impressive 6.8 percent rate it achieved in the previous year, and is estimated to have fallen further to 3.8 percent in 2015. With little Foreign Direct Investment (FDI) since 2014 from China (one of the main investors), the road to recovery for Angola will require dedication and commitment from José Dos Santos’ government. This study will examine the aftermath of the oil price crisis in Angola and review the issues the country has faced since the beginning of the crisis. The study will also focus on the business ventures that the Angolan government has started to invest in or can develop in an effort to encourage domestic and foreign investment. Moreover, the road to recovery should come with strategies focused on the repayment of loans and finance projects to assist with the promotion of investor confidence.
Brief history of Angola
The Republic of Angola experienced a long and devastating civil war shortly after its independence in November 1975. At the end of the war in 2002, millions lost their lives and more than a third Angolans were displaced (Polgreen, 2003). But, since then, it has become one of the fastest growing economies in Africa with reported annual average GDP growth of 11.1 percent from 2001 to 2010 will oil accounting for almost half of the GDP.
However, with the oil price crisis that began in 2014, Angola has hit a stumbling block and it is facing an economic crisis. The country GDP growth dropped to 3.8 percent in 2015 from the impressive 6.8 percent rate it achieved in 2013. Government then, needs to find solutions in order to see its economy being bankrupt. This paper will examine the aftermath of the oil price crisis in Angola by focusing on the economic sector. Also, the reasons behind the oil price crisis, in relation to China, will be evoked and Angola economic diversification as a solution to the crisis as well as its relationship with other investors will be discussed.
Angola and the commodity boom
When the war was over, Angola was in desperate need of new partners and a new source of FDI (Foreign Direct investment) to rebuild the country. Thus, China provided a new model of cooperation called the ‘Angola Model’ which is different from the one proposed by western institutions (Campos & Vines 2008, p. 12). The Angola Model is whereby funds, usually for infrastructural development, are secured using natural resources as collateral (Corkin 2011, p.170).
In 2004, the relations between China and Angola reached a high level when the Export- Import Bank of China (Exim-Bank) pledged the first $2-billion oil-backed loan to Angola to fund the reconstruction of several infrastructures throughout the country (Campos & Vines 2008, p. 3). Also, China’s growth into an economic powerhouse has pushed global commodity prices to unprecedented highs, which has contributed to Angola’s rapid economic growth (Ibid, p. 16).
Since then, Angola has experienced exceptionally high growth rates fuelled by record-high international oil prices and robust growth (Campos & Vines 2008, p. 1). The country had a 20 percent average GDP growth between 2005 and 2007 and inflation has fallen from over 300 percent in 1999 to 12 percent in 2006 (Ibid, p. 16). Moreover China has become Angola’s second largest trade partner (35.6%), after the United States (40%) with a total bilateral trade that increased between 2002 and 2005, from US$ 1 billion to almost US$ 7 billion, and doubled to US$14 billion in 2007 (Schiere, Ndikumana & Walkenhorst eds. 2011, p.81).
In 2009, Angola was the leader in oil production among African nations and ranked seventh among OPEC (Organization of the Petroleum Exporting Countries) members which it joined in 2007 (Sutton 2010 p.19). The same year, oil comprised 85 percent of GDP, 95 percent of exports, and 85 percent of government revenue (Zhao, 2011).
The aftermath of the oil price crisis in Angola
Since the beginning of the crisis, Angola has faced several financial challenges. In February 2015, Parliament voted to cut the national budget by 25% (Engebretsen 2015). The cut was felt throughout the economy since the government is the major financer and employer (Ibid.). The oil price crisis has led to a rapid fall in the flow of US dollars and in the rising inflation with a consequence in the depreciation of the currency: the Kwanza (Engebretsen 2015). The situation caused the cost of living to rise. In the capital Luanda, price levels rose by 1.4% from September to October 2015 which around 13% compared to 2014, making the situation more difficult for the 68 percent of the population that live under the poverty line.
Reasons behind the drop of the oil price
China’s annual gross domestic product (GDP) has slowed to 6.9 percent in 2015 after expanding at an average annual rate of 10 percent through the early 2010s (Pigato & Tang 2015, p.2). This has affected commodity prices, with particularly strong impacts on global mineral markets (Pigato & Tang 2015, p.2). In China, the slow growth caused an excess in the production capacity and a decline on the rate of return on capital (Ibid.). The Chinese government then, decided to initiate a gradual process of economic rebalancing in order to solve the issue. The idea is to shift the economy toward a more sustainable model, one in which growth will be driven less by investment and exports and more by domestic consumption (Pigato & Tang 2015, p.2).
The Chinese new economic policy will then decrease more in demand for oil, minerals, and other natural resources since they have been accountable for almost the entire increase in global demand for minerals and metals over the past 20 years (Pigato & Tang 2015, p.20), and further reduce international commodities prices, forcing countries such as Angola to define strategies to develop and diversify other sectors in order to survive.
Thus, even though the oil price increased in 2016, the reason was attributed to supply factors and not demand factors (Hamilton 2016) with OPEC striking an agreement to rescue oil prices. In November 2016, OPEC pledged to stop producing 1.2 million barrels a day (b/d), if non-OPEC countries such as Russia chip in with a further 600,000 b/d, that would amount to almost 2% of global production (The Economist 2016). It is not the first time OPEC stepped in to stabilise prices by cutting production, they have done it in the past (Essandoh- Yeddu & Yalamova 2015, p.37). this reprieve should then be welcomed by Angola and they need it to restructure and focus their economy on other sectors that will help them in the future to not be affected as much by the swing of the oil price.
Angola moves to a more diversified economy
It is quite impossible to reach modern levels prosperity without building a manufacturing base as the impacts of industrialisation are cumulative, leading to the ability of countries to achieve other hallmarks of development (Bailey 2016). On the African continent, diversification is poorly promoted, few are reinvested in other sectors such as manufacturing and agriculture and it is a challenge for resource producers to progress up the value chain by exporting more processed goods based on their primary commodity resources (Schiere, Ndikumana & Walkenhorst eds. 2011, p.65).
As this paper has shown earlier, Angola Economy relies heavily on the energy sector more precisely oil and gas. However, since 2003, the government has attempted to diversify the economy by supporting other sectors such as mining, retailing, agriculture, infrastructure development, and telecommunications (Manyuchi 2016, p.58). Chinese financial and technical assistance has kick-started over 100 projects in the areas of energy, water, health, education, telecommunications, fisheries, and public works (Campos & Vines 2008, p. 1).
The bulk of Chinese financial assistance in Angola is reserved for key public investment projects in infrastructure, telecommunications, and agro-businesses under the Angolan government’s National Reconstruction Program (Campos & Vines 2008, p. 3). Even though there are recently few FDI from China, the two countries still have ongoing projects in other sectors that need to be completed. Over half of Chinese FDI in Angola was directed to the construction sector, followed by light industry, retail and transport (Schiere, Ndikumana & Walkenhorst eds. 2011, p.81).
Also, in 2015, Angola, through the company Aceria de Angola (ADA Steel), opened a steel mill that can produce up to 500 tonnes of steel rebars per year (Bailey 2016). Thus, with more investment due in the near future, this volume is expected to grow to 1.2 million tonnes, thereby making the country completely self sufficient in steel by 2019 and saving $300 million in foreign currency annually (Matsangou 2016). The factory will then contribute to the state’s export revenue. It is vital, however, in order to foster a new industry to implement protectionism policy (Bailey 2016).
There is a need for the Angola government to support regional trade (Schiere, Ndikumana & Walkenhorst eds. 2011, p.68). It will help them increase their export rate. Moreover, to further encouraged the development of non-oil sectors, Luanda has taken measures to fight corruption which has been an ample hindrance to foreign investment in Angola in the past. The government established in 2013 the Principles of Ethical Business and the Ethics Centre of Angola in order to promote ethical business values in the country and legislation such as the Public Probity Law and the Law of Crimes against the Economy, is making a strong push towards greater transparency and accountability in the system (Matsangou 2016).
Angola towards other investors
At the end of the war in 2002, Angola decided to turn to China for funding due to the fact that the Word Bank and IMF (International Monetary Fund) conditions were unrealistic. The IMF and many Western donors wanted Angola to negotiate a Staff-Monitored program (SMP) and show good performance for three trimesters before being eligible to receive financial support (Campos & Vines 2008, p.11).
Moreover, credit lines that Angola secured in 2004 demanded higher guarantees of oil, with no grace period and with high interest rates while Chinese institutions offered better loan conditions, lower interest rates, and longer repayment time (Campos & Vines 2008, p.11). Such issues prevented any lasting accord between Angola and the IMF. Also, relations with the World Bank were also limited to emergency and humanitarian assistance projects in the absence of an agreed framework with the IMF (Ibid.).
Angola has not received FDI only from China. Countries such as Spain, Brazil, Portugal and Canada have funded several projects in the country even though the size of the loans is not as much as those of China (Corkin 2011, p.175). But putting the loans’ size aside, there is little difference between the Chinese credit lines and those of other countries such as Brazil and Portugal as they have extended oil-backed credit lines to facilitate the import of their companies’ products and services for years (Ibid, p.176). Also, Angola attracted the interest of the World Bank which extended loans to $1 billion from 2009 to 2013 to assist with economic diversification (Ibid., p.175).
Currently, with the oil price crisis, President José Eduardo dos Santos, has sought financial aid from the IMF (Upadhyay, 2016). The purpose is to design and implement policies and structural reforms aimed at improving macroeconomic and financial stability. This is essential as it will increase government revenues, favour payment loans schemes necessary in helping the government in moving away from using oil as collateral.
A country economy is more vulnerable to external shocks when it relies mostly on commodity exports. When the market takes a downturn and prices decline, the country is likely to face an economic crisis in which it will be difficult to recover from. It is the case of Angola which was affected by the oil price crisis. Being the fastest economy in Africa, it recorded a tremendous drop of its GDP growth due to the crisis. The main solution for the Angola government to solve the crisis will be economic diversification. It is vital to develop other sectors such as manufacturing and agriculture in other not to rely mostly on oil anymore. Studies and research needs to be conducted to determine the country’s strength and weaknesses. This will assist the government in knowing specifically about the different sectors where they should venture and develop excellent plans and strategies that will attract more investors. This will therefore create a more stable economic environment and with the input of FDI from other countries, make the country more prosperous.
By Sonia Piotie Yakap, Erasmus Mundus master student in Journalism, Media and Globalization
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