After months of mulling over the possibility of a Eurobond sale, Angolan authorities confirmed last month that the issue would go ahead in the early 2010. The amount being sought is reported to be close US$4.0bn – quite a sum for country whose nominal GDP is only about US$100bn. To my mind, the decision to tap international markets was motivated by three inter-related factors:

• The need for budgetary support: although official figures are somewhat difficult to decipher, Angola is likely to have run a fiscal deficit of the order of 8% of GDP in 2009, and will face another shortfall in 2010. Accumulated reserves were sufficient to plug the funding gap in 2009, but this tactic cannot last forever. So precarious was the central bank’s position, in fact, that it needed to make amends with the IMF and ask for a US$1.4bn loan, which was finally approved in November.
• Conditions in international markets are favourable: improving credit conditions have emboldened a number of African countries to make a return to international capital markets, while the demand for dollar-denominated assets from Sub Saharan Africa is still thought to be well in excess of available supply. Furthermore, Angola has just completed a wide-ranging economic survey as part of its deal with the IMF, which many observers hope will improve the transparency of official statistics.
• Domestic debt markets are too shallow: the distribution of wealth in Angola is notoriously uneven – around two thirds of its population is said to live on less than US$1/day – meaning that the pool of domestic savings is simply too small to satisfy the government’s borrowing needs.

How is the bond likely to be rated?

Based on some of the standard metrics observed in the rating process, we would expect Angola achieve a similar rating to that of other Sub Saharan nations. Indeed, total external debt comes in at a very manageable 15.3% of GDP, while existing reserves – even currently depressed levels – are sufficient to cover the entire stock of foreign debt. As for Angola’s repayment capacity, I am encouraged by the ratio of external debt to exports, which is at 29.5 and rising thanks to the recovery of international oil prices. We this in mind, Angola may well be rated on par with Nigeria, which holds B+ from S&P.

Longer Term Obstacles

Despite what looks like an encouraging short-term picture, the outlook for Angola’s economy – and thus for its ability to tap international debt markets – is much less certain over the longer term. Here are three key points I think are worth considering:

• The decline of the oil sector: Angola is dependent on oil for the lion’s share of fiscal receipts, and as an earner of foreign exchange. As its main oil fields reach maturity, production is likely to peak sometime around 2015, at which point its current and fiscal account surpluses are all but certain to disappear.
• Rigid exchange rate management: while I can appreciate the need for oil producing states to peg their currencies to the greenback, the lack of flexibility will almost certainly be seen as a weakness on the part of foreign investors. The authorities have already needed to devalue the kwanza twice in 2009, and even then, they were unable to eliminate the premium on the parallel market. The latest reports suggest the currency’s market value is closer to AOA100.00/US$ than the official quote of AOA87.00/US$.
• Lack of transparency: the scarcity of official data has long been a problem for Angola, especially in the area of oil revenue management and accounting. In a recent sign of the country’s troubles, the Attorney General’s office accused officials from the central bank and finance ministry of illegally transferring money abroad – only days after the President called on his party to implement a ‘zero tolerance’ policy against corruption.