Reading the Fine Print of Angola’s Debt Restructuring

The International Monetary Fund (IMF)'s recently announced $1 billion disbursement to Angola is based partly on China indicating a willingness to defer 2020 debts. But Beijing's creditor role may be complicated by possible efforts to take an equity stake in some of the Southern African country's oil fields. And while the funds will help fill some of Angola's financing gaps, there is clearly a market view that the country may require more comprehensive debt restructuring, even if it doesn't happen until 2021 or later.

What Happened

On Sept. 16, the IMF announced the completion of a delayed review of its financial arrangement with Angola, which presumed major official bilateral creditors had agreed to grant the country a debt deferral under the Group of 20 (G-20) Debt Service Suspension Initiative (DSSI). The Paris Club of Western creditor countries agreed in August to defer debt service payments from Angola from May 1 to Dec. 31, and the DSSI is expected to be extended to cover at least 2021. Other creditors, including China, were expected to take similar action. But in its Sept. 21 report supporting the disbursement, the IMF said that debt relief negotiations with one of Angola's large creditors have "yielded a different result" from what it had previously assumed.

The IMF did not identify creditors, but the "large creditor" in question is undoubtedly China, which holds between 25-45 percent of Angola's outstanding debt, according to publicly available estimates. The IMF requires a country's debt to be sustainable before it provides new financing. And a possible Angola deal with China was apparently sufficient to release the delayed tranche and to add $765 billion to the $2.5 billion three-year deal.

There is a distinct lack of opacity in China's dealing with Angola and other debtor countries, and actual amounts owed are not known. But there are reports that Angola may owe $14.5 billion to the China Development Bank and $5 billion owed the China Eximbank (which are both government-owned policy banks), as well as $600 billion to the Industrial and Commercial Bank of China, a state-owned commercial lender.
Much, if not all, of China's debt holdings are collateralized by Angolan pledges of oil shipments to Chinese state-owned oil companies, with prices possibly linked to those prevailing at the time contracts were negotiated.
Terms are not publicly known, but debt collateralized by oil shipments accounted for one-third of foreign debt as of end-2019.
Increased oil volumes would offset falling international prices, making less Angolan oil available for sales in commercial markets.

Reports that China is seeking to convert pledged oil shipments to equity in some Angolan oil fields would also be consistent with Beijing's approach to debt problems in other countries where it is a major creditor. References in some press reports to China's predatory "debt trap diplomacy" may be overblown, but Beijing's 2017 takeover of Sri Lanka's Hambantota Port is the poster child for such action and is not the only such case. Nearly $2 billion in loans to Uganda apparently allow China to take over state assets in the event of a default, according to reports released by the Wall Street Journal. And Reuters said in early-September that China might be attempting to take over the power grid in Laos in lieu of a default.

Why It Matters

While the IMF's money will help Angola fill large financing gaps in 2020, the country's negative GDP growth and currency depreciation have cast significant doubt over the sustainability of its debt. Angola's estimated $68 billion in external debt as of end-2019 increased by one-third as a percentage of GDP in 2020. The country's debt may be unsustainable as global oil prices have plummeted amid the COVID-19 pandemic, and as Angola's current account balance moves into deficit in 2020. Angola is one of the most vulnerable emerging market countries and a wider debt restructuring may be needed. But the IMF nonetheless maintains Angola's debt is "sustainable, (but with) significant vulnerabilities."

The IMF expects Angola's current account deficit to reach -1.3 percent of GDP in 2020, compared with a July forecast from Fitch Solutions of -8.9%. But this IMF forecast is based on Angola scaling back nearly 30 percent of its imports of goods and services this year, which may prove impossible to maintain.
Oil accounted for 95 percent of the country's export receipts and 63 percent of its government revenue in 2019. Angola spent about 43 percent of its oil revenue to service external debt in 2019. China's control over its oil production also leaves Angola with less available exports to generate revenue for its own needs.
In addition, the IMF said in December that Angola's debt sustainability was dependent on favorable "debt dynamics," including positive GDP growth and currency stability. The country, however, is in its fifth year of recession and the Angolan kwanza has fallen by 270 percent against the U.S. dollar since it was floated in 2018, including a more than 28 percent depreciation in just this year alone.

Other conditions that would need to be met for Angola to avoid further debt restructuring include:

The average per-barrel price for Brent crude oil rising from $42.80 in 2020 to $47.50 in 2021. That's not out of the question, but compares with a current price of about $41 after a dip earlier this year to less than $20.
Angola decreasing its share of imports as a percent of GDP after 2021, which in theory is consistent with the usual lagged response to currency depreciation, but may be optimistic.
Declining external financing needs from current account surpluses starting in 2021, as well as reductions in the dollar amount of debt with net debt repayments starting in 2023, which may not be consistent with a growing, developing economy.
A declining debt-to-GDP ratio, which depends on a return to strong GDP growth of 3 percent and above in 2021 and after. Adding to this year's COVID-19 driven recession, oil output has declined since 2008 as fields matured, and there is also a dearth of new investment. Foreign direct investment (FDI) was a net negative $2.5 billion in 2020.

The IMF action, which required a waiver of performance criteria and modified targets and structural benchmarks, may also catalyze an additional $1 billion in lending from the World Bank and African Development Bank, along with budget support in the coming years averaging $700 million annually from 2021-2025. Still, Angola will need to draw down $3.2 billion in net international reserves this year to meet all its financing requirements after anticipated debt restructuring. In contrast to the IMF's somewhat rosy (albeit cautious) view, however, neither financial markets nor the major credit rating agencies are optimistic about Angola's economic outlook. Yields on Angola's Eurobonds rose to 13.25 percent after the release of the IMF report. And both Moody's Investor Service and Fitch Ratings downgraded Angola's sovereign rating in September.