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���������ֳ�-Hong Kong-25 April 2018: ���������ֳ� has revised the Outlook on Angola's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B'.

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

KEY RATING DRIVERS
The revision of the Outlook on Angola's IDRs reflect improvements in the management of the foreign exchange regime and the government's adoption of an ambitious reform agenda, which includes monetary, fiscal and structural adjustments that will lessen external vulnerability and improve public finances. The materialisation of a non-disbursing IMF programme would serve as an additional positive rating driver.

Angola's prospects for economic recovery have improved significantly as a result of higher oil prices and the monetary and fiscal adjustments currently being undertaken by the government of President Joao Lourenco, the country's first new president since 1979. In ���������ֳ�'s view, the most important development following the transfer of power after the 2017 elections is the exchange rate adjustment begun by the National Bank of Angola (BNA) in January 2018. The BNA moved to an auction system in which the exchange rate is set by bids from commercial banks, which can submit bids within a +/-2% band of the previous auction's price. The exchange rate immediately depreciated to AOA205/USD from AOA165 and has continued to fall to AOA219, for a total depreciation of 32% as of the week beginning 22 April (relative to the start of the year).

The exchange rate adjustment has eased tight foreign-currency liquidity, which will support growth in the non-oil sectors. The spread between parallel market exchange rates and the official rate, which had been as high as 150% in 2017, narrowed to around 90% as of April 2018. This still significant spread along with the remaining backlog of unfilled foreign currency demand suggests that the kwanza has farther to fall. ���������ֳ� expects the kwanza to continue along a path of steady depreciation through 2018, ending the year at around AOA230/USD.

Higher oil prices and fiscal expansion helped to bring GDP growth to 1.4% in 2017, following 0.1% growth in 2016. Growing oil receipts and an improving operating environment in the non-oil sectors will bring slightly higher growth in the medium term, but Angola will continue to underperform compared with the 10 years prior to 2015 when growth averaged 10.2%. ���������ֳ� forecasts GDP growth to accelerate to 2.3% in 2018 and 2.5% in 2019. New oil production will offset the expected decline from aging fields, keeping output at 1.65 million and 1.67 million barrels per day in 2018 and 2019, respectively. Production is kept down by weak investment in the hydrocarbon sector.

The high inflation that followed the oil price shock is continuing as a result of earlier devaluations and currency shortages as well as higher food price inflation, but has recently moderated. CPI inflation fell to 22.3% yoy in March 2018 after reaching a peak of 42% at the end of 2016 and averaging 32.3% in 2017. ���������ֳ� forecasts inflation to increase slightly and average 25% in 2018, reflecting upward pressure from currency devaluation and administrative price increases that are part of the government's fiscal adjustments.

Angola's 'B' IDRs reflect the country's high commodity dependence, high public debt burden, and its diminished level of fiscal and external reserves. This is balanced against its position as a net external creditor, its substantial hydrocarbon reserves, and the authorities' track record of making significant fiscal adjustments.

���������ֳ� expects that Angola's fiscal policy will return towards consolidation following a widening in the deficit to an estimated 6.8% of GDP in 2017 from 3.2% in 2016 as a result of election-related spending. The 2018 budget contains a deficit target of 3.4% of GDP, based on an expected increase in oil revenue and on bringing expenditure levels back down to 2016 levels. In ���������ֳ�'s view, this level of expenditure cut is optimistic. We forecast the 2018 fiscal deficit to narrow to 5.4% of GDP. The fiscal deficit will narrow further in 2019 with the planned implementation of VAT, which the authorities estimate could add 1.6% of GDP to government revenue.

General government debt increased to 66.6% of GDP at end-2017, up from 50.7% at end-2015. The increase includes a total of USD10 billion (9.2% of 2017 GDP) in additional borrowing in 2016 and 2107, which was then deployed as an equity injection to the state-owned oil company Sonangol. ���������ֳ� does not include Sonangol debt in its general government debt figures but considers it a significant contingent liability for the sovereign. The increase in the government's debt stock in part reflects a materialisation of this risk. ���������ֳ� 75% of Angola's government debt stock is in foreign currency or foreign-currency linked securities, so kwanza depreciation will put upward pressure on debt levels. However, the depreciation risk is partially offset by the fact that more than half of government revenues are in US dollars, from oil-related income.

���������ֳ�'s baseline debt dynamics scenario forecasts the general government debt stock peaking at 67.3% of GDP in 2018 and then beginning to fall from 2019. The fall in debt reflects expected fiscal adjustments but will also be aided by high domestic inflation. As part of its Macroeconomic Stabilisation Plan, the government announced its intention to re-profile existing debt, which involves negotiating the rollover of existing maturities with domestic debt holders and some bilateral commercial creditors.

Angola is a net external creditor, but an increasing stock of short-term external public debt and decreasing sovereign foreign assets highlights external financing pressures. The liquidity ratio will fall to 110% in 2018, down from 228% in 2015. The government of Angola holds approximately USD5.4 billion in foreign currency deposits, which is held as part of the BNA's international reserves. The de facto peg that had been in place since April 2016 caused a steep drawdown in gross international reserves, which fell to USD18.0billion at end-2017, or six months current external payments, from USD28.1 billion at end-2014. However, the adjustment to the exchange rate regime and higher oil export will aid reserves accumulation. ���������ֳ� forecasts gross international reserves to rise to USD20.5 billion by end-2018.

The Angolan banking sector remains both a weakness to the overall economy and a source of contingent liabilities to the sovereign. Capital adequacy ratios are high, at 23.2% at end-2017, but a high proportion of capital is held in domestic government securities. Asset quality is a weakness, with loans that were 60 or more days overdue representing 28.5% of gross sector loans at end-2017, a sharp rise from 13.1% at end-2016.

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 is reflective of 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 an improvement in the economic policy framework including adjustments to the FX regime and an expected fiscal tightening.
- External Finances: +1 notch, to reflect Angola's position as a net external creditor, with gross international reserves equalling seven months of current external payments.

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:
- Signs of stress in attracting sufficient funding sources to cover high gross external public financing needs.
- Further deterioration of fiscal buffers and/or external international reserves.
-A failure to narrow the budget deficit consistent with the stabilisation of public sector debt/GDP.

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.
- An improvement in the business environment as well as income per capita, and rising governance standards.
- Sustained implementation of economic reforms that support growth in the non-oil sectors of the economy.

KEY ASSUMPTIONS
- ���������ֳ� forecasts Brent oil to average USD57.5/bl in both 2018 and 2019.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook revised to Stable from Negative
Long-Term Local-Currency IDR affirmed at 'B'; Outlook revised to Stable from 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'

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
Arnaud Louis
Senior Director
+33 144 299 142

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 21 July 2017 to 19 July 2018 (pub. 21 Jul 2017)
Sovereign Rating Criteria - Effective from 23 March 2018 to 19 July 2018 (pub. 23 Mar 2018)

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