We expect GDP growth of -3.3% and -1.2% in 2020 and 2021 respectively. C/A balances of -13.3% of GDP and -8.9% of GDP are forecast for 2020 and 2021. By year end, the USD/AOA is likely to trade closer to 720.
GDP growth – clouded by COVID-19 and an oil market in flux
Maintaining the structural reform programme remains of critical importance so that Angola can reduce its dependency on oil. A sit stands, the oil sector accounts for 96% of exports, 65% of government revenues, and 33% of GD. Moreover, the pandemic is expected to disrupt the wider economy.
Balance of payments - C/A deficit looms
The balance of payments (BOP) current account (C/A) will likely swing into a deficit of USD9.2bn (or 13.3% of GDP) this year, as the plummet in oil prices will likely see the value of merchandise exports decline. That said, the BOP adjustment is likely to be painful as we expect BNA to continue to capitalise on substantial progress being already made through ongoing structural reforms towards a free-floating exchange rate regime which aims at eliminating the FX backlog and protecting FX reserves by moving away from an administrative setting, which ultimately could help encourage foreign direct investment, import substitution and economy diversification.
Monetary policy- limited space for easing
Given the magnitude of the BOP and fiscal pressures facing Angola, which can cause inflation to rise, we do not see the BNA cutting policy rates anytime soon, even if this was a measure taken by most central banks globally to help their economies deal with COVID-19. Moreover, given the weak interest rate transmission mechanism, we are likely to see the BNA focusing on liquidity management using open-market operations. s
FX outlook – USD/AOA further up
The USD/AOA is likely to continue to rise. We see the USD/AOA closing at 719.6 this year. The USD/AOA raise helps trim imports and stabilize FX liquidity in a more efficient and sustained manner than administrative measures. In combining this with local currency liquidity management, the BNA aims to manage the BOP shock.