Economic Growth to slow in Wake of falling Oil Prices

Angola’s oil-dependent economy is set to slow this year, key infrastructure projects will be shelved and swathes of social spending are facing the chop as a global crude price slump takes its toll on Africa’s second-biggest producer. Angola’s cabinet last week sent a revised 2015 budget to parliament, cutting the assumed oil price to $40 a barrel, from $81 previously projected, and slashing US$ 14bn off planned spending, the finance ministry said. The government’s failure to shield sub-Saharan Africa’s third largest economy from tumbling oil prices is likely to intensify public anger towards President Jose Eduardo dos Santos, who has been accused of enriching a political elite and leaving the poor behind during his 35 years in power.

Dos Santos told Angolans last month that 2015 would be “difficult economically” and some public spending would have to be cut, including on fuel subsidies and infrastructure. The austerity drive is a result of a halving of global oil prices in the last six months. Oil accounts for around half of Angola’s GDP, 80% of tax revenues and 90% of export earnings. “The impact of low oil revenues will be reflected in growth,” said Samantha Singh, analyst at Standard Bank, which expects Angola’s GDP to grow around 3.1% this year, down from 4% last year and a peak of 12% in 2012. Angola’s finance ministry had predicted growth of around 9% this year but that was before the budget cuts.

Singh said she expected Angola to post a budget deficit of around 8.1% of GDP, while the kwanza was likely to weaken to new record lows against the US dollar and there was further upside to inflation, currently at 7.5%. It is also likely Angola’s current account balance could slip into deficit this year, for the first time since 2009, if oil prices remain depressed, economists say.

Much-needed efforts to diversify Angola’s economy are also set to be undermined as public spending is slashed.

Huge impact

“Many projects will not happen and that will have a huge impact on the companies and Angola’s economy,” said Ricardo Gomes, president of the Portuguese construction lobby group AECOPS, which represents companies like Mota-Engil, Soares da Costa and Teixeira Duarte. Gomes said projects that were underway should be concluded but major future developments would be delayed or cancelled, including a $5bn plan to expand electricity coverage and billions more in road construction. China may look to fill the infrastructure gap by capitalising on lower oil prices to facilitate the expansion of its construction firms, who have played a dominant role in Angola’s economic development.

A drop in oil prices during the global financial crisis in 2008 left Angola with a nearly $7bn in delayed payments to building companies. Since then, however, Angola’s banking system has become more sophisticated and it has a better relationship with international institutions like the IMF and World Bank.

“In spite of the situation, Angola is in a better position to finance itself in the external markets,” Gomes said. The treasury is also saving cash by trimming 20% off fuel subsidies, estimated to cost 4.5% of GDP in 2014. Cutting subsidies will please the IMF and many investors but half of Angolans living on less than $2 a day are likely to be angered at paying more for petrol, while infrastructure deteriorates and public services are cut back. The full details of the amended budget have not emerged but the public will be eyeing security spending, usually the biggest portion of the budget, prompting accusations by rights groups that Dos Santos uses the military to maintain his grip on power.

“They will not cut the military and security expenditure. They will cut development and social services that help the real people,” said Elias Isaac, country director at the Open Society Initiative for Southern Africa. After emerging from a 27 year civil war in 2003, Angola’s oil boom aided growth and development but the public often accuse Dos Santos’ government of using the spoils of peace to enrich the ruling elite at the expense of the poor. “If they couldn’t help the poor when oil was high, how will they do it now? This is going to cause a lot of public tension,” Elias said.

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