Despite efforts at fiscal restraint, the International Monetary Fund (IMF) predicts the African country's debt-to-GDP ratio will reach 123% in FY20 (up from 109% in FY19), amid a depreciating currency and weaker output. Both Fitch and Moody’s downgraded Angola last month on worsening debt metrics.

But after negotiating as much as USD 6.2bn in debt service savings over the next three years and upsizing its Extended Fund Facility (EFF) with the IMF to USD 4.5bn from USD 3.7bn, the country should be in a comfortable position with oil prices at the current levels, said Walter Pacheco, general director at the debt management unit (DMU) of Angola’s Ministry of Finance.

The bulk of the debt reprofiling, signed in June 2020 with one of Angola’s largest creditors, is NPV-neutral, though the cash-flow benefits are significant, and the new loan is highly beneficial to the Angolan side, Pacheco said.

Principal will not be paid in the next three years, after which Angola will extend the loan with no adjustment to the interest rate, he added.

Angola is also finalising an agreement to reprofile principal payments with a second large creditor, although interest payments on this loan are expected to be paid normally, the IMF said in its latest report.

Reprofiling discussions with a third large official creditor are also in the works, and combined with the G20 debt service  suspension initiative (DSSI) relief, the cash-flow benefit from these reprofilings is set to reach USD 6.2bn over the next three years, with an incremental benefit in subsequent years as some of the facilities have a gradual repayment profile as amortisations resume.

“This reduction in the debt service will help the country cope with the peak of debt service that we have in the next couple of years,” said Pacheco.

Source:  IMF third review under Angola’s EFF (21 September)

Importantly, the finance ministry official noted there were no assets being pledged on this reprofiling process.

Angola has been reluctant to provide details on the nature of the creditors involved in the three reprofiling transactions, but it said earlier this year that it was in negotiations with oil importing partners to reschedule financing facilities.

The creditors are likely to be Chinese entities such as China Development Bank and the Export-Import Bank of China, to whom Angola reportedly owes USD 14.5bn and USD 5bn respectively.

FX-linked  debt

Angola is also dealing with another substantial debt-servicing burden, in the form of domestic US dollar-indexed bonds. Primarily held by local banks and vendors, Angola had USD 4.8bn-equivalent of these securities maturing in 2020, according to the International Monetary Fund.

But since the bonds are settled in kwanza, not in US dollars, these maturities are manageable, Pacheco said. As long as there is liquidity in the domestic market, the government thinks it will be able to roll over a significant portion of those bonds.

“The central bank has adopted a series of measures designed to boost domestic liquidity, while trying not to affect the exchange rate too much,” Pacheco said. “We are running at around 55%-56% rollover ratio for FX-linked debt, including the interest as well. Everything above 33%-40% rollover ratio means the government stays in a very comfortable situation.”

Oil  risk continues

All in all, with the push to reprofile and roll over debt, in addition to the newly adopted budget based on a lower break-even oil price (USD 33 per barrel), Angola is in a much better position than it was two months ago, Pacheco said. The IMF has lauded the government’s “decisive” fiscal and monetary responses to the pandemic.

Still, Angola faces a set of risk factors that it does not control, the DMU’s general director noted. The COVID-19 pandemic has created shocks on both the demand-side of the oil market, but also on the supply-side, given that the oil-exporter needs to adhere to the OPEC-mandated production cuts, Pacheco said.

After reaching record lows in April, the Brent crude oil price has hovered around USD 40 per barrel in recent weeks. But Angolan authorities told the IMF that if prices fall below USD 25 a barrel in a prolonged manner, more contingency measures will need to be implemented.

Expenditure cuts have already been quite sizeable, so Angola has little space to cut further, Pacheco noted. “Some non-core expenditure we can definitely freeze, and see that there is no more expansion, but most of our expenditures now are basically debt service and salaries,” Pacheco added.

Another measure Angola told the IMF it would consider, should downside risks materialise, is seeking debt relief from a wider group of creditors. This statement caused a sharp sell-off in Angolan bonds, but the government has insisted that such measures are not currently on the table and that it remains committed to servicing its  Eurobonds.

“The IMF programme has already worked in a decent cushion and as part of the next review, we will be looking at a set of contingencies, and unless the oil price sees a significant further drop or we face further deterioration elsewhere, the government should not need to implement further emergency measures,” said Pacheco. “That said, if there is another shock, the Angolan government will need to do more.”

The government will start technical discussions with the Fund ahead of the fourth EFF review today (5 October). Going forward, the focus for the IMF will be to push more on the reforms to promote the private sector, in particular to expedite the process of diversification away from oil, Pacheco noted.

Angola’s Debt Management Unit is advised by frontier market specialist Lion’s Head Global Partners. Norton Rose Fulbright is Angola’s long-term legal counsel and has advised the country on several Eurobond issuances and other international debt transactions.

The government’s USD 1.5bn 9.5% 2025 bond is quoted at 86.68-mid for a 13.16% yield on IHS Markit.

Angola is rated CCC+ by S&P Global Ratings, Caa1 by Moody’s and CCC by Fitch.

CLICK HERE for Debtwire's shareholder profile of Isabel Dos Santos, the Angolan businesswoman and daughter of former president Jose Eduardo Dos Santos.

Laura Gardner Cuesta Senior Reporter Debtwire CEEMEA

Laura is a sovereign debt senior reporter for Debtwire CEEMEA. She holds an MSc in Conflict Studies from the London School of Economics and a BA in Philosophy, Politics and Economics from the University of Exeter.