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���������ֳ�-London-01 September 2017: ���������ֳ� has affirmed Angola's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Negative Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Angola's 'B' IDRs reflect the following key rating drivers:

The challenging adjustment of the heavily commodity dependent Angolan economy is continuing as oil prices have stabilised in the USD45-55/b range over the past 12 months. The authorities have resisted pressures for the currency to weaken further since April 2016 after previous devaluations and the tight fiscal stance has prevailed, but foreign currency is in short supply, inflation is high and growth prospects subdued.

The general election on 23 August 2017 was a notable political event for Angola. President dos Santos, who had ruled the country since 1979, was not running and a new president, Joao Lourenco, the defence minister and, like dos Santos, a member of the ruling People's Movement for the Liberation of Angola (MPLA), will soon take over. The MPLA won the elections confidently with 61% of the votes, although this is down from 72% in 2012. ���������ֳ� expects the new government to maintain policy continuity in the near term, not least because dos Santos will remain president of the MPLA.

���������ֳ� estimates the economy contracted by 1% in 2016 and believes it will grow by just 1% in 2017, as a result of FX shortages and fiscal tightening. The medium-term growth potential is weak relative to rating peers. The 2% recovery forecast for 2018 and 2019 compares with the average 3.8% GDP growth over 2011-2016, which was in line with the 'B' median of 4% GDP growth.

���������ֳ� expects the Angolan economy to remain dependent on commodity exports over the longer term as the government's economic policy strategy of diversification is constrained by the weak business environment, low human and physical capital and recent erosion of price competitiveness.

High inflation is a key rating weakness. The surge in inflation to a peak of 42% in December 2016 was one of the main adverse consequences of the oil price shock. ���������ֳ� forecasts 29% annual average inflation in 2017 and 21% in 2018. This compares with the 'B' rating median of 5% and the sub-Saharan Africa average of 10.4%.

The central bank has maintained the USD peg at around AOA163 since April 2016. It has implemented extensive administrative measures that have constrained access to foreign exchange and substantially tightened domestic liquidity conditions. As a result of these controls, the parallel exchange rate is about 100% weaker than the official rate in late August, although the differential has narrowed in recent months. In a statement in May the minister of finance noted that the exchange rate would have to be devalued "sooner or later".

The government responded to the oil price shock by a cumulative fiscal tightening of 18pp of GDP in 2015 and 2016, measured by the non-oil primary balance - an exceptionally large adjustment. There has been a further squeeze on real wages in the public sector this year, despite the run-up to the elections in August. At the same time, the risk of public sector arrears building up has increased and could also lead to banking sector strains.

���������ֳ� believes that the fiscal deficit will rise to 5.5% in 2017, from 3.9% in 2016 on the back of election related spending, but the deficit will fall to around 4.5% in 2018 and 2019 supported by higher oil prices. However, due to the political transition there is larger than usual uncertainty around the fiscal strategy.

���������ֳ� estimates that the general government debt has peaked at 54% of GDP at end-2016 compared with 23.5% in 2013 and in line with the 'B' median of 56%. Our baseline debt dynamics show a gradual decline in the debt to GDP ratio in the next years, driven primarily by the combination of high domestic inflation (denominator effect) and modest FX depreciation. However, a lack of transparency in regards to SOE financing, contingent liabilities and potential FX devaluation pose a risk of a further rise in the debt burden. The debt of the state oil company Sonangol, which has taken on significant para-fiscal activities, was 17% of GDP at end-2016. At the same time, government deposits at 12% of GDP and USD5 billion of the sovereign wealth fund lower the net sovereign debt.

The current account deficit narrowed substantially to 4% of GDP in 2016 from 9.5% in 2015, as a result of a sharp import compression due to the FX shortage and a moderation in the services and income deficits. The current account deficit should widen to close to 5% of GDP in 2017 as imports start to pick up and outweigh a rise in revenues from oil exports. ���������ֳ� expects international reserve coverage to fall below 6 months of CXP in 2018, although this is still above the 'B' median of 3.9 months.

Amid a weak macro-environment, the health of the banking system has deteriorated. This is most evident in rising levels of NPLs, which reached close to 17.6% in 2016 according to the central bank. Corporates struggled to pay their loans and the rise in NPLs could also be a sign of increasing government arrears. The system's official capital position was 18.7% in September 2016, but a number of individual banks are struggling. This includes state-owned BPC, which is being recapitalised with state funds of around 1.5% of GDP. The loss of Corresponding Banking Relations (CBRs) in USD is an additional challenge that has the potential to limit economic recovery.

���������ֳ�'s proprietary SRM assigns Angola a score equivalent to a rating of 'B-' on the Long-Term FC IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- External: +1 notch, to reflect strong foreign reserve levels (21% of GDP at May 2017) and the fact Angola is a net external creditor.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES
The main factors that could lead to a downgrade are:
-Depletion of fiscal and external reserves.
-Sharp increase in public sector debt/GDP, for example, owing to materialisation of contingent liabilities.
- Failure to attract significant financing sources, precipitating a more abrupt macroeconomic adjustment.

The Outlook is Negative. Consequently, ���������ֳ� does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to positive rating action:
- Easing financing constraints for the economy, for example due to a recovery in oil prices.
- Narrowing of the budget deficit consistent with the stabilisation of public sector debt/GDP.
- Policy adjustments, resulting in reduced external and macroeconomic vulnerabilities.

KEY ASSUMPTIONS
- ���������ֳ� forecasts Brent oil to average, USD52.5/bl in 2017, 55/bl in 2018 and USD60/bl in 2019.
- ���������ֳ� assumes that Angola will continue to have access to multilateral and bilateral funding, including from China, as well as from commercial creditors.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Negative
Long-Term Local-Currency IDR affirmed at 'B'; Outlook Negative
Short-Term Foreign-Currency IDR affirmed at 'B'
Short-Term Local-Currency IDR affirmed at 'B'
Country Ceiling affirmed at 'B'
Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'B'
Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'B'

Contact:
Primary Analyst
Gergely Kiss
Director
+44 20 3530 1425
���������ֳ� Limited
30 North Colonnade
London E14 5GN

Secondary Analyst
Jermaine Leonard
Director
+852 2263 9830

Committee Chairperson
Ed Parker
Managing Director
+44 20 3530 1176

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on

Applicable Criteria
Sovereign Rating Criteria (pub. 21 Jul 2017)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy