Angola’s public debt at the present

In its December 2019 report on Angola, the International Monetary Fund (IMF) stated that: “Angola’s public debt is sustainable, but the risks have increased and the vulnerabilities remain. [1]”While forecasting a peak of 111% public debt/ GDP by the end of 2019, the IMF’s view was optimistic for several reasons, namely the mobilization of new non-oil revenues in the 2020-2021 budgets, the rapid implementation of structural reforms and the continuation of the privatization program.[2]

The percentage increase in public debt/ GDP forecasting was due to three factors: the depreciation of the kwanza in the fourth quarter of 2019 (about four fifths of the increase), the fall in prices and oil production, and the slow economic recovery. Therefore, the first point to be emphasized is the fact that 80% of the increase in the percentage of public debt/GDP derives from the depreciation of the kwanza.

Consequently, a policy favoured by the IMF (currency depreciation) would negatively influence another aspect considered important by the same organization (public debt / GDP ratio). This means that it was not too important to look at this relationship to calculate the possible fragility of the Angolan public debt, as it essentially reflected nominal and not real fluctuations. In December 2019, Angolan public debt was sustainable.

However, after four months, the state of affairs has become more difficult. Now, the real aspects of the economy may hinder debt service. However, Angola is not in that situation yet, and proper action can avoid any problem. The Covid-19 economic shock has consequences for Angola, adding  pressure on the two material elements that are important for the sustainability of debt payments: the price of oil and the economic recovery. As we already know, oil has seen its price drop sharply, and the prospects for the recovery of the Angolan economy are weak.

Consequently, in April 2020, the same IMF predicted a 1.4% recession for the Angolan economy and a debt value equal to 132% /GDP. The IMF’s forecast is just that, and it does not yet correspond, in terms of public debt, to any new reality. In fact, 2019 closed with a public debt of 109.8%/ GDP and not 111%, slightly better than expected.[3]

It should also be noted that the share corresponding to the external public debt will be 85.4% of GDP, which is what we are interested in analyzing.

The several elements considered so far, leads us to two conclusions: the first: the Angolan public debt was evolving in a sustainable manner, and the nominal degradation of the country’s public debt as a percentage of GDP reflected, above all, the nominal depreciation of the currency and not some absurd lack of control that would have occurred in recent times ath the  public finances. Between 2017 and 2019, in an epoch  of recession, the stock of external debt increased only 14%, whereas it was previously, between 2012 and 2016, that it increased 100%. This means, politically, that the government of José Eduardo dos Santos doubled the external public debt in four years, while João Lourenço has tried to stop this exponential increase. [4]A detailed analysis of the figure below shows the great boost in the Angolan external debt ocurred between 2012 and 2016. There was an attempt to stabilize in 2017 and only a modest increase in 2018 and 2019.

Figure 1 – Angolan external public debt stock (2012-2019) [amounts in millions of dollars; BNA source]

However, and this is the second conclusion, if in the past there was confidence in Angola’s capacity to pay the debt, and its control by the current government, the truth is that the Covid-19 global crisis has launched a cloud of uncertainty over the public debts in global terms, obviously affecting perception in relation to Angola. Naturally, this post-Covid-19 perception requires governments to anticipate and take steps to avoid future problems.

 It is in this context that the possible adjustment of the Angolan external debt to the current reality brought by Covid-19 deserves attention, as well as the need to lighten its weight to guarantee the sustainability of the economic recovery.

The importance of debt to China

The current global situation brought about by Covid-19 implied the need that Angola has to ensure that its public debt is sustainable and do not to disturb the economic kick-start that is urgently necessary to mobilize.

Regarding the essential features of the Angolan public debt, the Cartesian method must be followed. This means that one should not look at the debt as a whole, but divide it into sections, addressing each one independently. It is wrong from a methodological point of view to perceive the Angolan external public debt as a whole due to the huge weight that China has in it.

Total Angolan public external debt (stock) was worth US $ 49,461 million at the end of 2019, according to data from the National Bank of Angola. [5]It turns out that $ 22.424 million is owed to China. [6]This means that China accounted for almost half of Angola’s external responsibilities, more precisely, 45.3%.

Figure 2-Weight of the Angolan external debt to China (in percentage; source: BNA)

It seems clear that the Angolan debt to China represents an enormous magnitude and obviously has the most important weight in Luanda’s public finances.

Given the historical features of Angola’s relationship with China, as well as its global positioning, especially with regard to the relationship with Africa, this is the time to propose a thorough negotiation of the Angolan debt to China, promoting its reduction and time-based rescheduling.

In simple terms, the negotiation of the Angolan public debt to China should lower the debt amount and increase the payment times.

It is easy to see that debt to China may become the main obstacle to Angola’s development.

Nevertheless, China in Angola  must be a factor of development and not of economic recession. At the outset, it should be noted that since 2017, the year when João Lourenço took office, the date on which the debt peaked, Angola has been lowering the stock value (see Fig. No. 3 below) thus demonstrating its capacity and good faith towards China.

There are three very strong reasons for carrying out China to renegotiate its debt with a view to reducing and prolonging it over time.

1-China’s global positioning, especially in Africa.

China is currently one of the great world powers, intending to engage with the United States in terms of projected influence in the world.

In that sense, with a new power comes new responsibilities, as happened  in relation to the United States at the end of the Second World War (1939-1945), in which it took on is shoulders  the European economic reconstruction through the Marshall Plan and actively promoted the creation of which became the EEC (European Economic Community), today the European Union. It was the American commitment that made this reality possible and brought prosperity and peace to Europe.

China has been taking a similar position in relation to Africa, using a rhetoric of friendship and solidarity. President Xi Jinping’s words at the opening ceremony of the China-Africa Cooperation Forum (FOCAC) in 2018: “China seeks common interests and puts friendship first in the search for cooperation. China believes that the right way to boost China-Africa cooperation is for both sides to leverage their respective strength; it is up to China to complement Africa’s development through its own growth, and it is up to China and Africa to seek cooperation for mutual benefit and common development. In doing so, China follows the principle of giving more and receiving less, giving before receiving and giving without asking for a return ” [7](emphasis added).

What is certain is that the current situation caused by the Covid-19 disease presents itself as the ideal one for President Xi Jinping to turn his speech into reality and move on to concrete acts of friendship, giving more and receiving less, as well as giving without ask for return.

In this way, it will build positive China’s image in Africa as a great world power that bets on the effective development of a continent and will show, from the geostrategic point of view , that it is a real competitor  of the United States in the creation of a more prosperous and secure world.

It is at this moment that China’s place in the post-Covid-19 world will be seen.

2-Pragmatism

Deng Xiaoping is attributed with the slogan “It doesn’t matter if the cat is black or white, as long as it hunts mice”. It is precisely this pragmatism that has brought so much success to China that it will justify the remission of the Angolan debt.

Angola has always been presented as the model for investment in Africa. The scientific literature even refers to the “Angolan model” that served as a basis for China’s contemporary performance in Africa.

Thus, it will be worrying for China to see that its model fails and becomes a burden on the economy.

If we look at the numbers, during 2019 Angola spent almost 43% of public revenues to pay debt, where, as already mentioned, China occupies the largest share. Consequently, the continuation of this situation may prove to be justified by the allegations that the US Secretary of State, Mike Pompeo, made during his recent tour of Africa, that the Chinese debt is  becaming an unbearable burden for the development of the continent. In fact, to conclude that this is ocurring in Angola, will turn the whole of China’s African policy into a disaster, since its initial model failed badly.

In addition to this political pragmatism, there is an obvious economic factor. The most recent evaluations show that Chinese companies in Angola recorded a loss of 350 to 500 million dollars due to the COVID-19 pandemic[8]. And these losses can be widened if Angola’s economic situation does not improve. Therefore, it is of Chinese interest to create the conditions for a relaunch for the Angolan economy, as such a relaunch will  benefit in a massive scale Chinese companies. It is called the win-win situation.

Consequently, it is therefore of Chinese practical interest to reduce Angolan debt to show the world that its model of intervention in Africa works and is not predatory, and also help the countless Chinese companies established in Angola.

3-Combat corruption and odious debt

There is a fundamental and ultimate reason to reduce the Angolan debt to China. There is no doubt that part of this debt is what is doctrinally called “odious debt”, ie, debt whose purposes were not the public interest and the common good, but the private appropriation of sovereignty by members of the highest organs of the State . [9]More bluntly, it is a debt that was used in acts of corruption or served to finance the private interests of Angolan leaders and possibly of Chinese officials.

One can never forget the role that Chinese citizen Sam Pa, today, apparently imprisoned in China, played in several businesses in Angola. Names like the CIF-China International Fund, the Queensway Group, or China Sonangol, are paradigms of activities considered illegal that are or have been under close investigation. It is a fact that Chinese money was involved in diverse acts of corruption.

In addition to this, there is another one with undefined contours and that deserves a more careful investigation by researching journalists. The analysis of the disaggregated statistical series provided by the National Bank of Angola on the evolution of Chinese debt shows that in the second quadrimester of 2016 (May to August) this debt went from US $ 10,531 million to US $ 21,228 million. Debt to China doubled in 2016.[10]

Figure 3- Evolution of Angola’s external public debt (stock) to China-2012/2019 (Millions of dollars. Source: BNA)

This movement was relatively recent and it is, still,  badly explained. In terms of timing, this event coincides with an announced trip by José Eduardo dos Santos to China to negotiate a loan in July 2015, which was subsequently followed by several events such as the fall from grace of the Vice President of the Republic, Manuel Vicente, and the Sam Pa’s arrest in October 2015. After this, Isabel dos Santos assumed the presidency of Sonangol in June 2016, coinciding with the launch of the Chinese debt in the BNA’s accounts. Apparently, it was from this new Chinese debt that the Government attributed to Sonangol 10 billion USD. At the time the company was starting to be chaired  by Isabel dos Santos. Apparently from those 10 billion USD, Sonangol paid loans in the total amount of five billion dollars. This allowed the Sonangol`s debt to be reduced from 9.8 billion to 4.8 billion USD. The remaining five billion USD will have been channeled to investments in and from Sonangol.

In view of the judicial controversy that currently involves Isabel dos Santos’s appointment as President of Sonangol and the apparent simultaneity of her appointment with the doubling of the Angolan debt to China that may have served to finance Sonangol, perhaps there should be a suspension of payment of this debt until it becomes clear whether there was any illegality or not, namely in what refers to the 5 billion that were apparently allocated to investments in and from Sonangol.

It should be noted that this is what Chinese law, enforced by Xi Jinping, imposes. The Chinese President and his administration are taking a long and hard fight against corruption in their country. Current Chinese law on corruption is found in the Penal Code of the People’s Republic of China approved in 1981, revised in 1997 and enhanced  in 2015. According to this rule, all activities involving corruption related to foreign rulers are a crime for which Chinese courts have jurisdiction. In effect, since May 1, 2011, it is a crime to pay illegally to foreign officials. The truth is that, currently, the Chinese Penal Code acts beyond its borders, so corrupt payments, the “odious debt”, already has to be considered by the Chinese authorities when making their assessments of situations.

This means that for political reasons as well as for reasons of domestic law, China is obliged and must analyze the debt that may have been incurred for corrupt purposes or for illegitimate benefit. Angola’s debt must be thoroughly reviewed in this perspective.

Figure  4- Reasons for China to reduce Angolan debt

Conclusions

The reasons explained strongly advise China to proceed with a substantial unilateral reduction of the Angolan debt. It is an imperative of its current position in the world, its pragmatism and sinic law.

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[1] IMF- Angola, IMF Country Report No. 19/371, p. 54. Available in: https://www.imf.org/en/Publications/CR/Issues/2019/12/18/Angola-Second-Review-of-the-Extended-Arrangement-Under-the-Extended-Fund-Facility-Requests-48887

[2] Idem, p. 54.

[3] IMF- World Economic Outlook, April 2020: The Great Lockdown, p. 24. Available in  https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020 and also IMF-SUB-SAHARAN AFRICA.COVID-19: An Unprecedented Threat to Development, April 2020, p. 19. Available in https://www.imf.org/en/Publications/REO/SSA/Issues/2020/04/01/sreo0420

[4] BNA-National Bank of Angola, DÍVIDA EXTERNA PÚBLICA POR PAÍSES (STOCK): 2012 – 2019. Available in https://www.bna.ao/Conteudos/Artigos/lista_artigos_medias.aspx?idc=15419&idsc=16458&idl=1

[5] BNA-National Bank of Angola, idem.

[6] BNA-National Bank of Angola, idem.

[7] President Xi Jinping “Full text of Chinese President Xi Jinping’s speech at opening ceremony of 2018 FOCAC Beijing Summit”, XinhuaNet, 3^rd September 2018. Available in http://www.xinhuanet.com/english/2018-09/03/c_137441987.htm

[8] Francisco Shen (interviewed by Natacha Roberto), “Empresas chinesas em Angola com perdas de 500 milhões de dólares”, Jornal de Angola, 28 th April 2020. Available in http://jornaldeangola.sapo.ao/economia/empresas-chinesas-em-angola-com-perdas-de-500-milhoes-de-dolares

[9] Robert Howse, The Concept of Odious Debt in Public International Law, UNCTAD, 2007.

[10] BNA-National Bank of Angola, External data by Country, Quarterly Data. Available in https://www.bna.ao/Conteudos/Artigos/lista_artigos_medias.aspx?idc=15420&idsc=16460&idl=1