Investors were left confused and facing uncertainty after two pieces of perceived bad news at the end of June from Angola. First, the IMF announced on 30 June in one of its regular press briefings that the Angolan authorities had cancelled program talks. Second, speaking on local TV, as reported by Bloomberg on 1 July, the President said that revenues were “barely enough” to pay the debt. It seemed the country was running out of money.
We noted two concerns stemming from this news:
Bad Policy: The suggestion that the government was running out of money is by definition a big deal. And yet it seemed contradictory to close off one potential source of support and financing in the shape of an IMF program which could also catalyze other IFI financing and reinforce policy oversight. If the government had run out of money but was not going to pursue Fund assistance, what was its plan? It was unclear, and left investors guessing and fearing the worst. If the plan involved even more, expensive, short-term borrowing, this was not a comfortable solution.
Bad Communication: The communication with the market was poor. Absent any real official clarification, bondholders were left uncertain as to the government’s intentions and policy response. This was particularly surprising given how well the government communicated its intentions to talk to the Fund about a program in the first place, posting a statement on the ministry of finance website on 6 April, and which generated a positive market reaction. To cancel those talks, but to say nothing (providing no explanation) was a policy mistake. We think it was also at odds with the government’s strong and orthodox response so far. It seemed, despite the good work of the last 12-18 months in response to the lower oil price, the government had taken a step back.
We think the government, having seen the negative market reaction (prices on the 2025 sovereign bond fell 6% over the next few days, from 99 to 93, and the yield rose 100bp to 10.7%), and perhaps after being advised accordingly, has sought to reassure investors and clarify the situation. The government’s statement is a week late perhaps, but better than nothing at all, and it’s good to see such a response (and that they are listening and learning).
Indeed, despite the negative headlines, we felt there could have been a positive explanation behind both developments. First, we wondered whether the cancellation of the IMF programme talks may just have been because of the subsequent rebound in oil prices, rather than anything more untoward, such as a renouncement of market orthodoxy. It was after oil prices (WTI basis) fell below US$30/bbl in January and February that the government became interested in potential IMF assistance. Oil prices have since nearly doubled from their lows, thereby alleviating some of the pressure on financing and obviating the need for IMF support.
However, other explanations were possible and absent an official explanation, investors were left guessing and fearing the worst: (a) perhaps the government didn’t like the sort of policy measures the IMF would be calling for, although this doesn’t sound plausible given the authorities had already overseen an orthodox macro-adjustment during 2015 and into 2016. The government had already been overseeing the type of policies the IMF would require, so such a policy U-turn seems unlikely (unless the government felt it had reached the limit of what it could do); (b) perhaps the government was uncomfortable with the degree of transparency and oversight that a Fund programme would require, although the government had a programme in 2009, so this wouldn’t be a surprise to it; and (c) perhaps the Fund got cold feet ahead of the country’s elections next year, although the experience of Zambia suggests even when elections are on the horizon, that doesn’t preclude reaching an agreement with the Fund on a programme if the political will is there. So, the cancellation of IMF talks may have had an innocent explanation. The problem for investors was one of, well if no IMF, what are you going to do instead?
Second, the President’s statement that revenues were barely enough to pay the debt could also be read in another, more positive, way. Rather than suggesting the country was running out of money, perhaps it was aimed at a domestic audience and instead it was an attempt to moderate spending pressures and keep a lid on expectations. There are clearly pressures on the budget as the economy slows, inflation accelerates (inflation in May was 29% yoy) and policy is tightened. The exchange rate has fallen 20% YTD against the US dollar. Perhaps the President was trying to say other spending will have to be cut back and prioritized, as we have only enough to pay the debt? And if the government is trying to prioritize debt service, that should be positive for bondholders. Moreover, although revenues were low, it would also seem odd for default concerns to surface given the still comfortable level of reserves (about US$24bn).
The Government’s Response
First and foremost, we think the ministry of finance statement published on its website on 11 July tries to explain the decision to call off IMF program talks and reassure investors about its ability to pay. It stated “In the light of recent economic performance and efficient access to financing, Angola will not resort to financial assistance from the IMF” (Google translation). In short, it says oil prices have recovered and the government has been able to borrow elsewhere.The government will, however, maintain a dialogue with the IMF in the context of the Article IV discussions, with the next IMF visit due in October. The statement also noted that the authorities will hold investor meetings in coming weeks to provide updated additional information, which we think will be a welcome move.
The article is a summary from a recent Exotix Partners report. The author is Stuart Culverhouse, global head of research for Exotix.