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���������ֳ�-Hong Kong-20 December 2018: ���������ֳ� has affirmed Angola's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook.

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

KEY RATING DRIVERS
The 'B' rating reflects Angola's diminished level of fiscal and external reserves, high public debt burden, and frequent downward revisions to GDP, all of which is balanced against its substantial FX revenue from hydrocarbon production, the government's demonstrated ability to make significant fiscal adjustments, and Angola's recently-negotiated IMF programme.

The combination of stagnating oil production and lower oil prices have brought Angola's external and fiscal buffers to their lowest point in seven years. Angola's gross international reserves declined to USD16.2 billion as of end-October 2018, down from USD27 billion as of end-October 2014. Reserves continued to fall in 2018, despite a current account (CA) surplus, as the National Bank of Angola (BNA) deployed reserves to manage an orderly depreciation of the kwanza over the year and to increase foreign-currency liquidity within the economy. In January 2018, the BNA moved from a de facto peg to a weekly FX auction system that allowed for the FX rate versus the US dollar to move by as much as 2% from the previous week's auction. Subsequently the kwanza depreciated by 46% over 2018.

In December, the IMF approved a USD3.7 billion three-year Extended Fund Facility (EFF). Under the programme, USD990 million will disburse before the end of the year, which will bolster Angola's reserves and support the ongoing adjustments to the FX market. The EFF should also make it easier for Angola to access other sources of external financing, allowing the government to meet its expected external financing needs of approximately 6% of GDP in 2019 and to begin rebuilding reserves. ���������ֳ� expects that combined with continued depreciation of the kwanza and tighter fiscal policy reserves growth will turn positive in 2019.

The IMF programme's main focus is fiscal consolidation and Angola has already demonstrated its ability to lower the fiscal deficit. The government reports that the 2018 fiscal balance is on track for a surplus of 0.6% of GDP, widening to 1.5% of GDP in 2019. ���������ֳ� believes that unaccounted for spending and/or arrears clearance may take the 2018 balance into a small deficit, but notes that the final outturn will still mark a substantial narrowing compared with the fiscal deficit of 6.3% of GDP in 2017. The narrowing deficit is partly the result of higher oil revenues from higher prices and from the FX adjustment, but also reflects deep expenditure cuts, both to the current and capital budgets.

���������ֳ� expects additional fiscal consolidation in 2019 and 2020, as the government implements a planned VAT in June 2019. Additional consolidation will help to reduce Angola's large stock of government and government-guaranteed debt. ���������ֳ� forecasts Angola's total public sector debt burden to reach 81% of GDP as of end-2018, up from 65% at end-2017. Of that amount, 77% of GDP is general government debt, with the rest composed of state-owned enterprise debt, most of it from Sonangol, the state-owned oil company.

Angola's economy has performed below expectations in 2018, as oil production has fallen and the government slashed spending. ���������ֳ� forecasts GDP to contract marginally by 0.1%, with growth improving to 2.5% in 2019, as total oil and gas production experiences a small increase from 2018. ���������ֳ�'s baseline scenario envisages non-oil growth increasing as the effects of greater foreign-currency liquidity are felt and the government's reform programme is implemented. We expect that overall GDP growth will average approximately 3% over the medium term. However, ���������ֳ� believes that Angola's economy will continue to be driven by hydrocarbon production and government spending for the foreseeable future, which leaves the country vulnerable to the risks of negative oil price shocks and/or long-run decreases in production levels.

���������ֳ� forecasts a current account surplus of 1.8% of GDP in 2018, compared with a deficit of 10% of GDP in 2015. ���������ֳ� forecasts the current account to remain in surplus, but expects it to narrow as oil export receipts fall on lower prices and imports increase with higher economic growth. The fall in official reserves and private sector foreign assets has taken Angola from a net external creditor to a net external debt position of 7% of GDP.

Economic headwinds have contributed to deteriorated asset quality at Angola's banks, and weak balance sheets raise the prospect of contingent liabilities materialising for the sovereign. NPLs reached 28.8% at end-2017, but an ongoing clean-up of public banks should bring the ratio down. Nominal credit growth turned positive in 2018, but at approximately 30%, it is inflated by kwanza depreciation. A quarter of loans are foreign currency-denominated. Loan growth is likely to continue in 2019 as lending activity is correlated with the oil sector. The end of directed currency sales and the expected greater foreign currency liquidity will also support growth in lending.

Angola's ratings are constrained by structural weaknesses, most notably poor performance on governance and human development indicators and the highest level of commodity dependence among ���������ֳ�-rated sovereigns. GDP per capita is above the 'B' median, but this reflects the size of the oil sector and not of broad-based economic growth potential.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
���������ֳ�'s proprietary SRM assigns Angola a score equivalent to a rating of 'CCC+' on the Long-Term Foreign-Currency (LT 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:
- Macro: +1 notch, to reflect improvement in the economic policy framework, including FX regime adjustments and fiscal tightening.
- External Finances: +1 notch, to reflect the expected external support from the IMF EFF and the additional sources of external financing available to Angola.

���������ֳ�'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 Stable Outlook reflects ���������ֳ�'s assessment that upside and downside risks to the ratings are currently well balanced. Consequently, ���������ֳ�'s sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.

The main factors that, individually or collectively, could lead to negative rating action are:
- Further deterioration of fiscal buffers and/or external international reserves.
- Failure to stabilise public sector debt/GDP.
- Failure to implement a reform agenda that supports non-oil GDP growth and maintains access to external financing flows.

The main factors that could lead to positive rating action are:
- A steady rise in oil revenue supporting an improved sovereign balance sheet and the rebuilding of external reserves.
- Sustained implementation of economic reforms that support growth in the non-oil sectors of the economy.
- An improvement in the business environment as well as income per capita, and rising governance standards.

KEY ASSUMPTIONS
- ���������ֳ� forecasts Brent oil to average USD65/bl in 2019 and USD62.5/bl in 2020.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable
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'

Contact:
Primary Analyst
Jermaine Leonard
Director
+852 2263 9830
���������ֳ� (Hong Kong) Limited
68 Des Voeux Road Central
Hong Kong

Secondary Analyst
Jan Friederich
Senior Director
+852 2263 9910

Committee Chairperson
James McCormack
Managing Director
+852 2263 9625

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com

Additional information is available on
Applicable Criteria
Country Ceilings Criteria - Effective from 19 July 2018 to 5 July 2019 (pub. 19 Jul 2018)
Sovereign Rating Criteria - Effective from 19 July 2018 to 27 May 2019 (pub. 19 Jul 2018)

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