High Oil Prices compensate for Tough Business Environment

Angola has come a long way since gaining independence from Portugal in 1975. The country has transformed from an agriculture-based economy to one of sub-Saharan Africa’s major oil and mineral producers, thanks to the onset of stability in 2002 after a 27-year civil war.
This, along with the commodity boom in recent years (mainly in oil) has attracted significant inward investment despite the country’s huge infrastructure deficit. The stock of inward FDI has risen sharply since the end of the war, reaching $15bn in 2009, up from $10bn in 2001, though 2010-11 saw FDI stock dip amid domestic and external shocks. Moreover, relative political stability alongside strong foreign investment and robust oil-backed government spending has transformed Angola’s market size to one of the largest in sub-Saharan Africa, providing businesses with opportunities for economies of scale.

In 2012, the country’s nominal GDP rose to $116bn in 2012 (from $11bn in 2002), which is equivalent to the combined market size of four key countries in the region, Cote d’Ivoire, Ghana, Mozambique and Kenya. FDI in Angola is predominantly focused on the oil sector, which accounts for around 45% of GDP, 75% of government revenue and over 90% of total exports. Oil investment is largely concentrated offshore in the Cabinda Enclave (accounting for one-third of total production) as FDI onshore has long been constrained by regulatory and infrastructure constraints. However, the government acknowledges the need to improve the country’s infrastructure, which was ravaged by the civil war, diversify the economy away from hydrocarbons and reduce the large income disparity.

The latter remains a major problem in Angola, despite the country’s strong recovery from the 2008-09 global crisis. The 2008-09 global oil price shock saw Angola’s real GDP growth slow to 2.4% in 2009 (Figure 1) from 13.8% in 2008, but real GDP has been on an upward trajectory since 2010, thanks to strong non-oil activity and high oil-backed government spending.

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