Revealed: the missing 25% of Angola's GDP

The IMF has uncovered that a $32 billion accounting discrepancy in Angola's budget is linked to state oil firm Sonangol. A massive shift in Luanda's institutional framework and political culture is needed to weed out fiscal slippage

  • By Sid Verma
  • 25 Jan 2012
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No surprises here but it’s still a shot in the heart for fiscal transparency aficionados. 

Via Reuters on Wednesday:

The IMF said on Tuesday a $32 billion accounting discrepancy in Angola's state funds was linked to "quasi-fiscal operations" by state oil firm Sonangol done on the government's behalf, but not recorded in official budget accounts.

The International Monetary Fund first highlighted the missing funds in Angola's fiscal accounts for 2007-10 in an October 27 report on the country's economic performance.

But during a recent IMF mission to Luanda, IMF officials were able to track most of the unaccounted $32 billion, which is equivalent to 25 percent of Angola's gross domestic product. 

Getting disheartened by a lack of fiscal disclosure in Angola is a bit like lamenting the fact that Wayne Rooney probably doesn’t read Nietzsche. That is to say it’s not been in the state’s nature since the 1975-2002 civil war entrenched Sonangol’s role as a provider of goods and services in the economy, a fact that remains to this day. Or as AP put it:

Sonangol, sometimes described as a parallel structure of government, holds the concessions for Angola's vast oil blocks, is in charge of downstream distribution and has extensive overseas and domestic investment portfolios.

..through joint ventures with Chinese companies [it] is involved in negotiating oil-backed loans for the government.. it also runs its own airline, manages government housing and industrial programmes.

The IMF said it would launch a comprehensive analysis on the matter for release later on the year. No matter. Angola has already said it does not need a new stand-by arrangement. But, perhaps heeding fiscal transparency calls, on January 20th, Macauhub  reported that the company will no longer be allowed to act as “financial agent” for the state. The Angolan newswire also added that Sonangol has been granted “temporary” exceptions to help pay government debt and fuel- price subsidies. In all, the meaning of this edict is not quite clear, as one political risk analyst pointed out to us.

As a result, there are more questions than answers, right now. In particular, here’s a point made by Human Rights Watch in December, which has been valiantly prosecuting the cause for months:

The IMF report goes on to state that the Angolan authorities have traced a portion of the missing government funds. It cites evidence that $7.1 billion was transferred into special foreign bank accounts set up to help guarantee external loans (“escrow accounts”). This amount, however, is greater than the total value of the payments owed by the government of Angola, suggesting that the funds transfers (“outflows”) into those foreign accounts may have been carried out for a different purpose. 

We will leave others to discuss what this “different purpose” might refer to.

More generally, the IMF findings come at an ominous time. To wit, infrastructure projects are overseen and largely financed by Sonangol's subsidiaries. But asking the administration to reduce the pace of infrastructure investment in an election year might prove wishful thinking. In other words, a big shift in political culture and the country's institutional framework would be needed to redress off-balance sheet vehicles and opaque spending decisions – channeled via Sonangol.

Oh, and while we are on the subject of Angolan risk... Negative feedback loops between the Portuguese sovereign and banking sector are big risks to watch for Angola given the depth of financial links in the Lusophone region. On Wednesday, the yield on three-year Portuguese sovereign bonds jumped to 19%, no doubt imperilling the credit and market trading exposures of Banco BPI and Banco Espirito Santo (BES), in particular, which derive a large part of their business from Angolan operations. 

Still, addressing the issue in June last year, Citigroup analysts made the following bullish call in the context of BPI and BES' cheap valuations at the time:

Whilst the African businesses of BES and BPI have provided significant earnings support throughout their domestic downturn, we believe that the current increase in the system’s cost of capital (14.4%) will encourage the Portuguese to export more capital to Africa, where they can deliver returns significantly higher than their domestic businesses.

...the historic business model for Africa has been characterised by low capital commitment. Whilst this has been historically justified by the high cost of capital in Africa, the current divergence of Portuguese risk premiums from core Europe has significantly reduced the opportunity costs of allocating capital to Africa and Angola in particular. This should encourage the Portuguese banks to export more capital to Africa and thereby significantly increase the earnings contributions of these businesses. By 2013, we expect Africa to represent 47% and 65% of group earnings at BES and BPI, respectively.

We are not so sure about this. As we have pointed out previously, in practice banks downsize their EM exposures during banking crises in order shore up their capital base, as this week’s IIF figures lay bare. More generally, although the Angolan economy is badly under-levered so a reduction in bank lending probably won’t affect the headline fiscal and GDP figures too much – which are driven overwhelmingly by the oil price – it will no doubt inflict an opportunity cost.

In sum, economic risks are rising in Angola at time when the spotlight is on government’s woeful lack of fiscal transparency. The ball is now in your court, Luanda.
  • By Sid Verma
  • 25 Jan 2012

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