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Macroeconomic consolidation, foreign investment, and support for SMEs to stimulate greater diversity

Article - May 6, 2015

Economic development is being driven by structured public capital investment programs, widespread investment, easier access to capital and a united push for diversification

The U.S.-Africa Summit, held in Washington in 2014, sought to shift dialogue onto aspects about Africa that are often overlooked. The event aimed to shine a light on the continent’s new class of businesspeople and consumers, on the important role the U.S. can play to boost jobs and mobilize capital, and on Africa’s potential as a driver of global economic growth in particular. Angola is in a good position to play a key role in this scenario, as the fifth-largest economy in Africa (according to The Economist) and one of the fastest-growing economies in the world.

Finance Minister Armando Manuel recently highlighted Angola’s “economic viability” in the Angolan press, but surely that is an understatement. The country is committed to consolidating its macroeconomic situation, and projections are promising. GDP expanded by 4.4% in 2014, according to World Bank estimates, and is expected to grow by 5.3% in 2015, while inflation continues to decline to single digits.

Economic diversification

To remain on the path toward growth, it is imperative that Angola continues to diversify its economy. At present it is the second-largest oil producer in Africa, after Nigeria, and oil production and related activities account for 45% of GDP and 80% of government revenues. Moreover, mineral product exports account for 95% of the total. This situation has negative implications for the general population, offering few job opportunities and leading to higher inequality. In fact, the oil industry employs just 1% of Angolan workers, and unemployment stands at 26%, according to UN magazine Africa Renewal.

As João Júlio Fernandes, CEO of the Fundo de Garantia de Crédito (FGC), points out, “We all know about the volatility of oil prices, and we can no longer depend on this type of asset.”

In view of this panorama, Angola has developed other contributors to GDP, including energy, construction, and agriculture. The latter, for example, contributes 11% but accounts for 70% of total jobs, plus it is a sector that is “growing impressively” and is the “fastest-growing on the continent”, according to Africa Renewal.

Economic development is being driven in large part by public capital investment programs focused on a wide range of objectives, including building new irrigation systems, improving roads, adding energy distribution and generation capacity, and achieving goals related to growth and additional poverty reduction.

Public investment spending is also being used to upgrade infrastructure and shore-up employment. And as the government works to make the public capital investment process more efficient, it comes closer to realizing its longer-term development goals.

Hugo Teles, Manager of Banco BIC, believes there is still a lot to do and many areas in which to invest, “but the government is trying to propel the economy so we can develop the manufacturing sector, the productive sector, fisheries, etc, as well as energy and water.”

Angola is in a good position to diversify. It has very fertile soils where almost anything can be grown, abundant water, other “enviable resources few countries in the world have”, and others that have yet to be explored, according to Mr. Fernandes, who also believes that diversification will “make Angola a regional, and perhaps a continental, power”.

Moreover, “The country has solid macroeconomic foundations, sound institutions and a banking sector that is small but well capitalized,” says Rick Angiuoni, Regional Director for Africa and Global Business Development with the Export-Import Bank of the United States (Ex-Im Bank).

That financial institution is working closely with Angola to help provide funding for key sectors such as infrastructure, transportation and industry. “We plan on financing many other sectors, such as aviation, telecoms, etc.,” adds Mr. Angiuoni. “Financing these key industries will make Angola more competitive and will attract FDI to other areas.”

According to Fred Hochberg, Ex-Im Bank’s Chairman and President, the bank is “working closely with Angola’s expansion plan to diversify the economy in oil and gas, but also in transportation, infrastructure, power, mining and agriculture.”

U.S. companies are already showing interest in Angola’s assets beyond oil and gas. In fact, “interest has increased significantly, given the current landscape,” says Mr. Angiuoni, and the fact that it is a politically stable country. Large non-oil companies, such as Cummins and Kentucky Fried Chicken, among others, are already investing in the country. Amílcar dos Santos Azevedo da Silva, President of the Angolan bank association ABANC, highlights: “There are great opportunities here for American companies.”

Infrastructure is attracting the bulk of FDI at the moment – specifically roads, bridges, ports, railways, and factories. There is also private and public investment in hospitals and healthcare, along with universities and schools, and the government is offering tax exemptions to further develop Angola’s hospitality sector. To attract additional FDI, the government has been working to enhance transparency and efficiency, while also offering incentives to foreign companies.

Angola is particularly attractive for U.S. investment because it is a middle-income economy with good prospects for growth and the possibility of becoming a regional hub for trade and exports from southwestern Africa.

Working with the Ex-Im Bank has certainly improved Angola’s credibility, as has its leadership of the Executive Council of the World Bank and its relations with the African Development Bank (AfDB). As regards the latter, its President Donald Kaberuka recently underscored “the bank’s interest in strengthening its ‘strategic relationship’ with Angola given the growing role and importance of the country on the African continent.” AfDB has also congratulated Angola on its achievements in reducing poverty levels from 60% to 38%, and on its efforts to develop transport and energy infrastructure.

The financial sector

For its part, Banco BIC is definitely going all out to support diversification, firstly in terms of its geographic reach. The financial institution operates in all 18 provinces of Angola, and even has a presence in areas where it is the only bank. Moreover, Mr. Teles says that BIC “supports the productive sector, cattle breeding and fisheries. In fact, we support all business sectors, from construction to industry, as long as they are credible, well-structured projects for which growth is feasible. We have so far supported all business directions in which we think the country will advance.”

Another financial sector player that is doing its part to drive employment and development is BANC, Banco Angolano de Negócios e Comércio, a small financial institution with 23 branches nationwide, but which is dedicated to reaching all segments of the population, even opening offices in towns with no electricity.

According to Chairman of the Board of Directors José Aires, financial inclusion is important for BANC, and there has been “considerable investment in the consumer credit portfolio”, mainly among people with relatively stable incomes, which will in turn provide the funding the bank needs to create products to further develop the banking industry. 

He adds that BANC has been playing an important role in supporting SMEs and companies in construction and commerce. Despite its small size, efforts are motivated by lofty aspirations. Mr. Aires wants just one thing: “To be able to help significantly reduce poverty in Angola” and, to that end, it “will continue to support credible initiatives that can truly help create a better country.”

Meanwhile, the banking sector continues to expand, in terms of the number of employees, which exceeded 18,000 in 2013, and branches, which grew by 14.2% in 2013, with 164 new branches opening in the year. Assets under management also increased, and positive developments were seen in payment means and electronic channels. The government is dedicated to transparency in banking, and has set up IT systems that detect any actions that aim to undermine the proper functioning of commercial banks.

According to João Fernando Quiúma, Director for Information Technology of the National Bank of Angola (BNA), “No issues related to security and computing crimes have been recorded to date, and we have installed mechanisms to respond as necessary.”

Moreover, the Central Bank is focused on avoiding the risk of fraud by keeping its technology up-to-date and in line with other countries’ systems. ABANC’s Mr. dos Santos Azevedo also confirms that “the National Bank of Angola has implemented a large number of new regulatory rules for the system that have helped to balance overall activity of the economy.”

As for lending practices, he notes the large number of companies with potential that request loans, but whose needs are not met because they are unable to comply with bank requirements – a situation which must be remedied.

The scenario is similar for individuals. Loans are the most profitable assets for banks and the largest component of their business, as banks are interested in improving the financial conditions of their customers, adds Mr. dos Santo Azevedo. Lending must be more inclusive, and especially include small businesses, which are a very important part of the economy.

Overall, the financial sector is getting a major makeover, working hard to implement world-class operating and governance standards with a view to driving progress, expanding capital markets, and modernizing the economy. Developments on this front include the establishment of financial market regulations and a new stock exchange (expected to be operational in 2016), as well as efforts to approve a securities code and financial futures regulations.

The government is also focused on attracting new investors to diverse sectors of the economy, implementing solid regulatory systems, and promoting best practices in corporate governance. According to the National Bank of Angola and the Capital Markets Commission, “Within the context of Africa’s buoyant economic prospects, Angola’s rapidly changing financial system constitutes a critical component in the continent’s economic narrative.” There is no denying that Angola is becoming a powerhouse in Africa.

The country is looking to issue a Eurobond this year, “a milestone achievement,” according Ex-Im Bank’s Mr. Angiuoni. This will enhance credibility and confidence in the African nation and reflects its efforts to diversify sources of capital. Analysts expect the bond to be well received, “given Angola’s positive economic growth and geopolitical situation”, says Anthony Lopes Pinto, CEO of local brokerage firm Imara Securities.

“Angola Investe”

Support for microenterprises, SMEs and the entrepreneurial spirit of Angolans through lending and other measures is a top priority for the government, as visible in the federal “Angola Investe” program. The project aims to facilitate lending to new businesses and provide support for future business owners.

However, says Carlos Rosado de Carvalho, Editorial Director at financial daily Expansão, “After two years, the plan has not yielded very positive results, despite low interest rates and government guarantees. The truth is that Angolan entrepreneurs are not taking advantage of the credit available, and the banks say that projects are not well presented. We must analyze the plan, identify its shortfalls, and make appropriate changes.” Of the total funding available, just 10% was allocated to projects. Halfway through the program, just 362 projects had been approved and fewer than 55,000 jobs created, representing less than 20% of the established target, according to Portal de Angola. Moreover, the program sought – and failed – to rank Angola among the top 10 most competitive economies in sub-Saharan Africa.

Nevertheless, Mr. Rosado de Carvalho believes the program is a step in the right direction, as it addressed concerns by entrepreneurs and responded with initiatives and detailed actions. “The objectives are clearly defined and implementation can be monitored. Now we must be patient. Rome wasn’t built in a day. The results will eventually appear,” he says.

Another proponent of “Angola Investe” is the country’s Minister of Economy, Abraão Gourgel, who expects the program to bear fruit in 2015, with a notable impact on direct and indirect job creation. “With everyone’s support, we can strengthen this program and foster economic activity, which will lead to more employment and wealth for the country,” he says.

In addition to low-interest funding, “Angola Investe” also offers training and consulting, capacity building, and tax benefits. It aims to ease the administrative burden that comes with starting a business. As an additional plus for future business owners, the Guarantee Fund was created to provide companies with guarantees vis-à-vis banks and, in the case of default by the entrepreneur, the fund repays the loan.

In this regard, the FGC – Credit Guarantee Fund – plays an important role, “uniting two parties interested in working together but which couldn’t, due to a lack of guarantees,” says Mr. Fernandes. “We offer banks more security and we facilitate access to loans for companies. We make business happen.”

Although the program has fallen somewhat short of expectations at the moment, it appears to be on the right track, and there is every indication that if the government, banks and entrepreneurs are able to coordinate and work together, Angola and its citizens will reap the rewards in the future.

These great strides and aspirations aside, it is important to note that Angola is a relatively new democracy, and that the country has grown considerably in a short period of time. “It is normal that we still have weaknesses, but it is important to allow the country time to grow,” says Mr. dos Santos Azevedo. And grow it does.

Moreover, the economic diversification Angola needs will slowly take shape if it is able to maintain its macroeconomic stability, further improve the business environment, and make additional strides with its infrastructure plan. In the words of Carlos Alberto Masseca, Angola’s State Secretary for Health: “Angola is on the verge of a new dawn.”