Artigos

Analysis of the General Budget Proposal of the State of Angola for 2023

/in /by

1-Official presentation of the SGB

The proposal of the State General Budget (SGB) from Angola to 2023 has already been delivered to the National Assembly, including its essential elements of an affordable and pedagogical digital page of the Ministry of Finance[1].

The Ministry of Finance in its official note highlighted the following main aspects about SGB[2].

Objectives

The two main objectives of budget policy are the “continuation of national economic growth and the continuation of prudent budgetary management.”

Budget balance and public debt

The budget balance will be surplus in the value of 0.9% of GDP, consolidating the evolution of 2021 and 2022. The public debt ratio in relation to Gross Domestic Product (GDP) is decreasing, and projections for 2022 point a ratio of 56.1% of GDP, manifestly less than 128.7% already registered. The government expects the conjugated tendency to decrease public debt and inflation (which estimates 11% at the end of 2023), finally, to decrease interest rates, promoting economic growth.

Some tax aligners will be maintained such as reducing the VAT rate of basic basket products, which fell from 14 to 5%, and in hotel and tourism (14 to 7%).

Oil price

SGB’s proposal has as reference the oil barrel to USD 75.00.

Sectors expense

In terms of expenditure affectation, 23.9 % for the social sector are budgeted, 10 % for the economic sector, 8.6 % for defense, security and public order while general public services have 12.5 %.

According to the government, social expense represents the largest share of expense in SGB absorbing 43.5% of primary tax expense and 23.9% of total budget expense, with an increase of 33.4% compared to SGB 2022.

Growth

In terms of predictions that substantiate the proposal, the SGB assumes that by 2022, the real GDP should have a positive real growth rate of 2.7%, above the 2.4% initially provided for in SGB 2022, and for the year of 2023, a real growth of 3.3% is expected[3].

Inflation

The government expects to 2022 an inflation of 14.4%, well below the 18%goal. For 2023, it anticipates an inflation rate of 11.1%, as mentioned above.

2-The Question of Oil

It is evident that the price of oil still occupies a wide space in the Angolan economy. According to the Ministry of Finance data, in the SGB of 2022, the oil sector represented approximately 25% of the nominal SGB, and it is expected to be 22%[4].

Set the determining role of oil in the economy and in Angolan public accounts, it is repeated that the indicative price calculated for SGB 2023 was 75.00 USD/BBL as an average for the year, with an average production of 1 180.0 MIL BBL/DAY.

At this moment (December 13 2022) the price of the barrel is in USD 79, 03[5] and the trend in markets in recent times has been falling. Last month came from a level higher than USD 90.00 to a limit less than USD 80.00. Obviously, the volatility of oil price is large and no one can make predictions about the predictable evolution of the price. The current fall is attributed to the slowdown of the Chinese economy and the effect of rising US interest rates on commodoties. It may be like this or not, the price may climb or go down. If there is perhaps an expectation of climbing, as it is anticipated that China begins to recover and US interest rates no longer increase, besides OPEC production cuts, the truth is that the budget margin is not too big in Terms of oil price. Quickly, price oscillations can call into question SGB calculations.

In addition, the accuracy of daily production is 1180 thousand barrels, when the average of 2022 was 1 147 in 2022 and 1 124 in what refers to 2021. Given a recognized obsolescence in some sectors of oil production in Angola It may happen that this barrel value is not achieved.

This means that, in our opinion, there will be some optimism in the oil projections in SGB 2023 both at the price level and at the production level. It cannot be said that projections will not be verified, only that some emergency reserve is required for projections not to be consummated.

  There is still a very thin line between success and budgetary failure, so a renewed reform of the economy is critical.

3-The Social Expenditure

The government announces as a great success of its proposal the increase in social expense by 33.4% compared to 2022, occupying the largest slice by sector. Realizing, the reasoning report states that social expenditure will correspond to 43.5% of primary tax expense (without debt service), which is 23.9% of total expenditure and an increase of 33.4% compared to SGB 2022, as already mentioned. “In this sector, we highlight education, health, housing and community services and social protection, with weights of 14.1%, 12.1%, 10.1% and 6.2% in primary tax expense, respectively[6].” The truth is that comparing education, health, and housing with 2022, in all these rubrics there is an increase in expense higher than inflation.

Notably is the exponential climb of health and housing over the next year, with increases of 45.1% and 57.6% respectively.

If we notice the 2022 SGB, the social sector represented 38.8% of primary tax expense, corresponding to 19.02% of total expense and an increase of 27.1% compared to SGB 2021[7]. This means that it is manifest that the government is paying special attention and promotion to the social sector that increases year after year. The numbers prove this social attention of budget policy.

However, as is well known it is in the social sector that the complaints of the population often appear. There is a problem that is not budgetary, but related to management and rationality. It has to effectively execute the SGB and make the money reach people. The issue is increasingly good management and good governance, competence and deliverance, not the lack of resources.

4- The financial expense related to debt

The debt financial expense is 45.1% of SGB expense, decreasing by 2.6% compared to 2022[8]. In practice, we have a little less than half of the SGB designed to pay debts. We will not wave with the “ghost” of debt failure, which we have referred to over the long analyzes we have made, it does not exist. What worries us is the content of the debt and the fact that the state is supporting and paying a debt that is not his.

As an Angolan press agency specialized in economics and confirms official data, “China remains the country that Angola should most, holding about 40% of the total. Most of the debt to China has as its main creditor the China Development Bank (CDB), as a result of a USD 15 billion financing, as part of an agreement signed in December 2015.”[9]

This 2015/2016 Chinese loan is one of the most issues one must pay attention to and has a specific approach.

Our argument is that part of Angolan public debt is what is doctrinally called “odious debt.” The legal doctrine of “hateful debt” argues that sovereign debt contracted without the consent of the people and that it does not benefit it is “hateful” and should not be transferable to a successor government, especially if creditors are aware of these facts in advance[10]. We do not fight for non-full payment of this debt or others to China or another country (also offers us many doubts the debt enrolled in favor of the UK, but we will leave this theme for another occasion) or entity, but a bi-volunteer renegotiation with the respective Haircut of capital and interest that manifestly relieves the weight of the debt.

Consequently, there should be a profound forensic audit to this 2015/2016 Chinese loan whose destination has never been very clear, except in vacancies that would be applied at Sonangol, at a time coincident with the assumption of the company’s management mandate by Isabel dos Santos. After this forensic audit and according to the results obtained there should be a very serious renegotiation of debt with China. In 2015, China already had more than enough elements to know that part of its borrowed money was being poorly applied. In fact, this is the year when its supposed representative, Sam Pa, was apparently detained. The country, as a great power it is, cannot be hidden behind legal formalism and has to face together with Angola the problem of its debt that was diverted by corruption.

5-Conclusions

It is evident that there is an economic policy effort to exist financial rigor and budgetary control according to the injunctions of the International Monetary Fund, externally credible the country in economic terms. Alongside this financial rigor that cost João Lourenço quite electorally in August 2022, there is attention to the social sector, trying to mitigate the financier.

This budgetary policy is correctly formulated, the question to be aware is within the scope of the realization and execution. It is essential that social expense comes to those who need it and in the frontline structures: doctors, nurses, hospitals, schools, teachers, etc., and do not stay in intermediate consumption and corruption shortcuts that act as funds siphon. In other words, it is imperative that budget public money is not diverted. And then it becomes imperative to control the affectation and application of the funds. The task of good management and governance is the most important in the SGB of 2023.

At the level of resources it is relevant to emphasize that the oil activity (price and quantity produced) optimistic is relevant to us, to this extent, it is important to have a contingency reserve for low price and production.

And in relation to public debt in the face of China (and other entities) we argue that certain forensic audits are required and if something similar to a “hateful debt” is glimpsed, mechanisms of profound renegotiation are activated. Ultimately, it would have to bring the matter (“debt hatred”) to the United Nations pursuant to articles 1 (3) and 14, among others from the United Nations Charter to create a consensus on international law on the subject.

[1] Ministério das Finanças de Angola: https://www.minfin.gov.ao/PortalMinfin/#!/materias-de-realce/orcamento-geral-do-estado/oge2023

[2] Ministério das Finanças de Angola: https://www.minfin.gov.ao/PortalMinfin/#!/sala-de-imprensa/noticias/11811/proposta-de-oge-2023-entregue-a-assembleia-nacional

[3] Relatório Fundamentação OGE 2023 https://www.ucm.minfin.gov.ao/cs/groups/public/documents/document/aw4z/mzg4/~edisp/minfin3388777.pdf

[4] Relatório Fundamentação OGE 2023, p.17

[5] Cotações Brent Crude, 10:33 H, 13-12-22 https://oilprice.com/

[6] See note above, p. 52.

[7] Relatório Fundamentação OGE 2022, https://www.ucm.minfin.gov.ao/cs/groups/public/documents/document/aw4z/mjk2/~edisp/minfin3296952.pdf ,p.5.

[8] Relatório Fundamentação OGE 2023, cit., p. 53.

[9] Mercado, https://www.angonoticias.com/Artigos/item/72530/angola-deve-quase-52-mil-milhoes-usd-ao-exterior-jornal-mercado

[10] Michael Kremer & Seema Jayachandran, Odious Debt, Finance & Development, IMF, June 2002
Volume 39, Number 2

Sonangol: the need for a new strategic vision

/in /by

The Annual Accounts: 2019

On 22 September 2020, Sonangol presented its annual accounts with reference to 31 December 2019[1]. The net result was USD 125 million (one hundred and twenty-five million US dollars), equivalent to AOA 45 854 million (forty-five thousand, eight hundred and fifty-four million kwanzas), with EBITDA (Results before Interest, Taxes, Depreciation and Amortization) of USD 4,779 million, representing an increase of 10% in relation to the previous year.

Revenues were identical to 2018, while operating costs fell 11%.

Oil production was also similar to the previous year while gas production increased by 6% and LNG by 8%. The production of refined products grew 37%, after resuming operations at the Luanda Refinery.

This is the accounts’ summary as announced by the Company’s Board of Directors[2].

Fig. 1 – Summary of Sonangol 2019 Accounts according to the Board of Directors

ITEM  NET RESULTS
Net Profit  125 M USD
EBITDA  4,799M USD
Oil Revenue and Production  Similar 2018
Gas  +6%
LNG  +8%
Refined Products  +37%

The accounts make ample references to the ongoing Regeneration Plan, which has as essential goals to place the company’s focus on the activities of the oil industry value chain, that is: prospecting, research and production of crude oil and natural gas, refining, liquefaction natural gas, transportation, storage, distribution and marketing of derivative products[3].

Combating corruption at Sonangol and strengthening the role of Non-Executive Directors

The key issue of these accounts begins to be formal, as, finally, accounting reserves that lasted for 15 years were eliminated and the financial reporting is endowed with enhanced transparency.

An effort to eliminate Sonangol’s role as an “epicenter of corruption” is visible[4], that is, as the main public financier of the business and private pleasures of the Angolan ruling elite.

This can be seen in the attempt to improve the transparency of financial reporting and in the appointment of non-executive directors such as Marcolino Moco and Lopo do Nascimento, two individuals with recognized integrity. These are moves to ensure that Sonangol’s revenues are not used for these private businesses.

To these measures are added the termination of Sonangol’s functions as a National Concessionaire and the privatization of several expensive units of the group, which in many cases were only vehicles for withdrawing public money for private purposes.

However, within this framework it would be important that the Non-Executive Directors, in addition to publicly signing the report and accounts, issued a declaration of verification that there was no significant and visible appropriation of public funds by private entities. Transparency has to go further.

Fig. No. 2- Measures to combat corruption at Sonangol

Sonangol’s weaknesses:

If the first task of the Government and of the Sonangol’s governing bodies is to eliminate corruption[5] within the company, the second and no less important task is to make the company profitable and with prospects for the future.

And here despite the implementation of the so-called Regeneration Plan, this is not enough. A full qualitative leap is needed at Sonangol.

If we look at the company’s net profits, they dropped in 2019 to 46 billion kwanzas (about $ 125 million) compared to the 80 billion kwanzas ($ 316 million) in 2018. There are several reasons why this happened, from the low price of oil to the cessation of receiving supplies as a National Concessionaire. However, this number represents an additional weakness of the company.

In a study recently issued, Reuters[6] reported that Sonangol’s core activities in 2019 lost 351 billion kwanzas ($ 995 million), compared with a profit in 2018 of 69 billion kwanzas ($ 274 million) ). In 2019, debt payments were spent US $ 1.8 billion, while operating profits from oil production, sale and refining of US $ 1.570 million.

In addition, the total liabilities in 2019 were US $ 36 billion, referring to loans, risk provisions and accounts payable.

It should be noted, moreover, that the final net profit mentioned above is the result of unrepeatable extraordinary results such as cancellation of old debts and sales of some assets. They do not result from the central activity of the company.

KPGM points out that Sonangol’s liabilities or obligations exceed its assets, something that has not happened since 2016.

This means that the company’s core business is not competitive. Therefore, modeling the Regeneration Plan in a mere return to the core business isn’t the best solution.

This means that it is not enough for Sonangol to focus on its core business, as indicated by the Regeneration Plan. It is not enough and it cannot happen.

Fig. No. 3- Sonangol: Compared data between 2018 and 2019 (millions of dollars)

In addition, in 2019 Sonangol had sales of US $ 10 billion, 4% less than in 2018, which is understandable, as mentioned above, since in the middle of the year it stopped receiving earnings as a National Concessionaire. However, in addition to sales being stagnant, the production of barrels of oil is also stalled at 232 thousand barrels per day. In addition, it is feared that in the future oil will lose its importance in the world economy.

If we look at the amount of expenditure in the Angolan State Budget for 2020 in the revised version, it is US $ 23 billion. As only a part of Sonangol’s sales accrues to the State, we have a direct contribution from Sonangol to the national economy much lower than in the past. It should also be noted that the Angolan GDP is around US $ 105 billion. In this sense, Sonangol’s total sales do not reach 10% of GDP.

These elements lead us to two conclusions:

I) Sonangol’s oil activity is stagnant;

II) the company no longer has the magnitude to be the driving force of the Angolan economy.

These two conclusions have repercussions for the national economy and for Sonangol itself.

As far as the national economy is concerned, the solution is clear and is already beginning to be taken: broadening the national productive base, diversifying the sources of public income, promoting the creation of a strong agricultural and livestock support in the country, promoting the opening of companies, investment and competition in the market. It is a painful and difficult process, but a necessary one.

Harmonium Strategy. Going beyond the Regeneration Plan

Regarding Sonangol, it is understood that it is not enough and it is not the best idea to just focus on oil. The company’s reform has to be more ambitious and forward thinking.

On that matter we have already advocated in previous work[7] and it lays on the partial privatization of the company. The privatization of 100% of the company is not advocated, but the privatization of 33% of its capital in order to bring international investment, involvement of Angolan capital and motivation of its workers. These three objectives would be achieved through the following partial privatization model. Of the 33% of share capital to be privatized, 15% would be for foreign investors and would be the subject of an OFS (Public Offer for Sale) on an international reference exchange with abundant liquidity. The other 10% would be for national investors and would be subject to an OFS in Luanda. And finally, the remaining 8% would go to Sonangol workers, who would also become owners of the company for the ownership of their shares.

There would be new money, fresh ideas and people without connections to the past. This would allow a different approach to the problems and a renewed vision of the future.

However, in view of the negative evolution of the world and Angolan situation in recent months, partial privatization alone will not suffice, as the Regeneration Plan is not enough.

A new strategy for the company is vital.

The strategy no longer involves excessive attention to the oil focus. That which is not profitable and in which the company is not competitive must be sold. Free the company from its weaknesses. Decrease. But at the same time, increasing the company’s capacity and scale. Hence this option is designated as the Harmonium Strategy.

The remaining activities are expected to remain at Sonangol, while a renewal strategy is launched, based on developing a stronger downstream business, increased refining capacity, expansion for chemical products, and investing abundant renewable energy in Angola, such as sun and water, at the same time. time creating new technologies through its R&D efforts and developing new lines of business through investments and acquisitions. This means that there must be a transformational effort by Sonangol and not a mere reduction or dismantling.

It is necessary to follow what many large foreign oil companies, whether dominated by the state like Aramco (Saudi Arabia), or private like BP, are doing.

And this is turning the oil company into an integrated energy company driven by the production of resources focused on providing energy solutions to customers. Construction on a scale of investments in renewable energy and bioenergy, initial positions in hydrogen and creation of a global portfolio of gas customers; there are several options that Sonangol faces to become a modern and competitive company.

[1]https://www.sonangol.co.ao/Portugu%C3%AAs/ASonangolEP/Relat%C3%B3rio%20de%20Contas/Paginas/Relat%C3%B3rio-de-Contas.aspx

[2]https://www.sonangol.co.ao/Portugu%C3%AAs/Not%C3%ADcias/Paginas/Not%C3%ADciasHome.aspx?NewsID=472

[3]https://www.sonangol.co.ao/Portugu%C3%AAs/ASonangolEP/Estrat%C3%A9gias%20Corporativas/Paginas/Estrat%C3%A9gias-Corporativas.aspx

[4] See for example on the topic: https://www.makaangola.org/2020/09/sonangol-o-epicentro-da-pilhagem-de-sao-vicente-parte-1/

[5] We use the word corruption not in a technical sense, but in the current common sense in Angola, like all illicit private appropriation of public values, basically corresponding to what is criminally referred to as embezzlement, abuse of trust, economic participation in business, fraud, etc.

[6] https://www.reuters.com/article/angola-oil-sonangol/angolan-energy-giant-made-no-money-from-oil-in-2019-as-debt-bites-idUSL8N2GP4V2

[7] https://www.cedesa.pt/2020/01/29/um-modelo-de-privatizacao-da-sonangol/