MONEY MATTERS: Angola: Naive and arrogant

During the past five years, the economy of Angola showed strong growth with the nation's wealth (nominal GDP) growing from US$ 20 billion in 2004 to US$ 80 billion in 2008. During this period, real growth averaged 18% per annum making the country the fastest growing economy in the world.

This growth was driven by huge investments in the oil and gas sector such that oil production increased from 0.9 million barrels per day (mbpd) in 2004 to 2.0 mbpd last year. Currently, Angola produces more oil than Nigeria and her population is only 18 million.

Angola exports oil and gas and imports virtually every other thing therefore imports and exports amounted to 125% of GDP in 2008 making it one of the most open economies in the world. Because of the dependence on oil revenue, this openness makes the economy very vulnerable to adverse changes in oil prices. Now that oil prices have dropped sharply and the import bill has not reduced materially, the country has a large current account deficit and is losing reserves rapidly. The outlook is that the Angolan Kwanza will continue to depreciate relative to the major international currencies to reflect this weakness in their current account.

On the fiscal side, oil revenue has averaged over 80% of central government revenues during the past five years. These revenues have grown from US$ 5 billion in 2004 to US$ 35 billion in 2008! Government expenditure soared from US$ 7 billion to US$ 34 billion during the same period.

To put this into context all the three tiers of government in Nigeria, a country of 150 million people, spent US$ 45 billion in 2008. This year, the government's revenues have dropped sharply because of lower oil prices and a reduction in the country's OPEC quota. A large fiscal deficit looms and the country has not saved as much as Nigeria.

Inflation is rising and this, an increase in the legal reserve of banks plus a large public sector borrowing requirement for 2009 are driving up nominal interest rates.

The key sectors of the Angolan economy are oil & gas (58%), trading (15%), agriculture (8%), manufacturing (7%) and construction (5%). These sectors constitute over 90% of the country's output and all with the exception of agriculture are likely to contract in 2009. This means that the fastest growing economy in the world might have slipped into recession in 2009! How is the government of Angola responding to these economic challenges? Angola is governed by the Popular Movement for the Liberation of Angola (MPLA).

This party has Marxist origins therefore politics and economics are still tightly controlled by the government. The last Presidential election was held in 1992 and the one scheduled for last year was postponed. Parliamentary elections were held last year and MPLA increased its share of seats in the National Assembly from 59% to 82%.

The economy is still dominated by large state-owned enterprises. Although the banking sector has been opened up, government still insists on large Angolan equity stakes. The friends of Angola are Portugal, Brazil and China and these countries have reaped the most from Angola's economic boom. During this period of economic crisis, most observers expect Angola to look for assistance from these friends. However, there is also talk about seeking help from the IMF.

Businesses from the Western world, South Africa and Nigeria have shown great interest in investing in Angola but most of them remain shut out. The process for getting a visa to Angola was very cumbersome and recently this has been made even more difficult! Visitors to Luanda need to book their flights and hotel rooms months in advance and a two star hotel room costs USD 300 per night! Immigration formalities at the airport routinely take a couple of hours.

The environment does not welcome foreign investors except her few friends. This makes those who are not members of the inner caucus envious and one of these people recently described the leadership of the country as "naive and arrogant".

The World Bank's 2008 World Development Indicators make Angola the third largest economy in sub-Saharan Africa and 9% of the wealth of the sub-region. As this economy struggles because of weak oil prices, will her friends come to her aid or will the leadership of this country have to embrace new friends?