We expect GDP growth of -3.9% and -1.2% in 2020 and 2021 respectively. C/A balances of -4.2% of GDP and 7.9% of GDP are forecast for 2020 and 2021. By year end, the USD/AOA is likely to trade closer to 688.7.
GDP growth – pandemic uncertainty, and a cloudy oil sector
Our base case sees the economy contracting by 3.9% y/y this year and by 1.2% y/y in 2021. Improvements in net exports (Netex) next year won’t be robust enough to offset the negative impact of subdued General Domestic Expenditure (GDE) on low personal consumer spending, a tighter government budget, and subdued private investment. Angola’s FX liquidity pressures come from the combination of the collapse in oil prices and sovereign debt pressures, with a negative impact on the entire economy.
Balance of payments - mounting pressures
The balance of payments (BOP) current account (C/A) will likely swing into a deficit of 4.2% 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- real interest rates still negative
Given the multitude of economic pressures, indeed we don’t expect the BNA to hike policy rates. Our policy rate forecast still stands at 15.5%, which would push real interest rates further into negative territory due to rising inflation. Inflation will likely accelerate to 26.2% y/y by year-end before moderating to 21.1% y/y next year. The 12-m average is expected at 22.4% y/y this year and at 23.8% y/y next year. Clearly the upside risks for inflation prevent the MPC from policy rate cuts.
FX outlook – kwanza depreciation bias maintained
We now lift our USD/AOA year-end forecast to 688.7, which represents an annual increase of 42.8% y/y, from 56.3% y/y in 2019 and 86% y/y in 2018. We see a large amount of USD-linked bonds denominated in local currency, in excess of USD2.5bn maturing in Q4:20, which could aggravate FX liquidity pressures.