Angola’s Economy: Past, Present and Future Ricardo Gazel, World Bank Senior Economist and Acting Country Manager Viking Club August 27, 2009

Angola’s Economy: Past, Present and Future I.Recent Past: High Rates of Growth II.Present: The Mother of all Crisis and the Impacts on Angola’s Economy III.Future: Medium and Long Runs

I. Recent Past: High Rates of Growth 1.1 Economic Growth 1.2 Inflation 1.3External Sector 1.4Public Sector 1.5Social Gains

Nominal and Real Economic Growth

I. Recent Past: High Rates of Growth 1.1 Economic Growth 1.2 Inflation 1.3External Sector 1.4Public Sector 1.5Social Gains

Inflation

I. Recent Past: High Rates of Growth 1.1 Economic Growth 1.2 Inflation 1.3External Sector 1.4Public Sector 1.5Social Gains

Trade Balance – US$ billions

Oil Exports (Volume and Price)

Net International Reserves (US$ Millions)

External Debt including Arrears

External Debt / GDP

I. Recent Past: High Rates of Growth 1.1 Economic Growth 1.2 Inflation 1.3External Sector 1.4Public Sector 1.5Social Gains

Fiscal Revenues (Billions of Kwanzas)

Fiscal Results (Billions of Kwanzas)

Composition of Public Expenditures

I. Recent Past: High Rates of Growth 1.1 Economic Growth 1.2 Inflation 1.3External Sector 1.4Public Sector 1.5Social Gains

Social Gains in the Last Years Reduction of Poverty Improved Human Development Indicators Gains in the fight agains HIV/AIDS, malaria, etc.

Angola’s Economy: Past, Present and Future I.Recent Past: High Rates of Growth II.Present: The Mother of all Crisis and the Impacts on Angola’s Economy III.Future: Medium and Long Runs

The Mother of all Crisis Financial Crisis: –Stock Markets Collapsed in many Advanced and Developing Countries –Nacionalization of Fannie Mae and Freddie Mac –Bancrupcy of Banks and Insurance Companies –Liquidity Crisis –Others

The Mother of all Crisis Growth Rates Estimates (IMF – April 2009) World 3,2-1,31,9 Advanced Economies 0,9-3,80,0 USA 1,1-2,80,0 EURO Area 0,9-4,2-0,4 Emergency Markets and Developing Economies 6,11,64,0 Africa 5,22,03,9 Sub-Saharian Africa 5,51,73,8

Impacts in Angola Financial Market and Foreign Investment Remitances and Foreign Aid Real Economy – Prices of Primary Products

Financial Market and Foreign Investment Likely small as: –No stock market –No strong connection of domestic bank system with international financial markets (except via Portuguese banks) –Small interbaking credit market –Low loans to deposit ratios

Impacts in Angola Financial Market and Foreign Investment Remitances and Foreign Aid Real Economy – Prices of Primary Products

Remessas e Ajuda Extrangeira Low Level os Remitances compared to other African Countries Outflow Remitances Larger than Inflow Remitances Foreign Aid share of Budget is Marginal

Impacts in Angola Financial Market and Foreign Investment Remitances and Foreign Aid Real Economy – Prices of Primary Products

Real Economy Economic Growth Inflation External Sector Public Sector Risks

Different Estimates of GDP Real Growth Rate for 2009

Oil Production Million Barrels per Day OPEC Monthly Oil Market Report

Oil Production Million Barrels Day OPEC Monthly Oil Market Report

Others Sectors SectorPositiveNegative Agriculture and FishingHigh Extractive Industries Low –Oil and Gas Low –Diamants e other extractives High ManufacturingLow Construction Low Services Medium

Real Economy Economic Growth Inflation External Sector Public Sector Risks

Yearly Inflation

Inflation In favor of a decline: –Decline in International Prices –Domestic Economic Slowdown In favor of an increase: –Devaluation of the Kwanza –Supply Constraints

Real Economy Economic Growth Inflation External Sector Public Sector Risks

External Sector Dramatic Decline of Export Revenues Limited Decline of Imports (Less elastic in the short run) Current Account Deficit Sharp Decline in International Reserves Cash Flow Problems with Balance of Payments Financing Needs

Net International Reserves (US$ millions)

External Debt / GDP

Real Economy Economic Growth Inflation External Sector Public Sector Risks

Public Sector Lower Revenues Drastic Cuts in Spending How to Finance the Deficit? –High Cost, low demand for government bonds

Exports, Price and Oil Taxes

Real Economy Economic Growth Inflation External Sector Public Sector Risks

Global Recession Fiscal and Monetary Policies –Fiscal Policy: Budget Adjustments Payment Delays to Suppliers Financing the Fiscal Deficit (High Cost) –Monetary and Exchange Rate Policies: Required Reserves Exchange Rate policy Social Impacts

Increase in Poverty Worsening of Human Development Indicators Potential increase in hunger Infant Mortality Political and Social Stress

Angola’s Economy: Past, Present and Future I.Recent Past: High Rates of Growth II.Present: The Mother of all Crisis and the Impacts on Angola’s Economy III.Future: Medium and Long Runs

Prespectives for the Futuro: Medium Run At the Global Level: Bad News: Recession in 2009 and increased unemployment. Price of OIL? Good News: Some indicators show improvements and that the crisis may have hit bottom, but recovery will be slow In Angola: Prepare for the Future Diversification Reforms

Growth by Sector

Diversification Why? Where is Angola? How to Diversify? Challenges: How to surpass them

Why? High Dependency on Oil: –56% dof GDP in 2007 –97% of Exports in 2007 –83% of Government Revenues in 2008 Instability: Price is very volatile Oil Sector is technology intensive and does not creat many jobs

Diversification Why? Where is Angola? How to Diversify? Challenges: How to surpass them

Baixo Grau de Diversificação Composição (%) Agriculture and Fishing 7,3 7,7 8,2 Extractive Industries 58,0 57,6 59,4 –Oil and Gas 55,7 55,8 58,3 –Diamants and other extractives 2,3 1,8 1,2 Manufacturing 4,8 5,3 6,6 Electrical Energy 0,1 0,1 0,1 Construction 4,3 4,9 4,4 Services (Mercantil) 16,8 16,9 15,3 Others 8,3 7,2 6,1

Diversification Why? Where is Angola? How to Diversify? Challenges: How to surpass them

How to Deversify? Identification of Sector with Comparative Advantages Identification of Barriers Incentives and Reforms

Setores com Vantagens Comparativas Agriculture Construction: Infrastructure and housing Light Manufacturing: Plastic, agrobusiness Manufacturing: Cement, Construction materials, etc. Services in general

Diversification is a Process Exemple: Agriculture –Steps: Deminization Recuperation and construction of infrastructure –Roads and bridges –Water and electricity –Others Realocation of Displaced rural population during the war Distribution and preparation of land Seed distribution Logistic Support: Extention, Credit, distribution of production, etc.

How to Deversify? Identification of Sector with Comparative Advantages Identification of Barriers Incentives and Reforms

Barriers Infrastructure: Energy and Water Labor Force Transportation Ports Low Institucional Capacity Limited Credit Limited Domestic Comsumption Markets

How to Deversify? Identification of Sector with Comparative Advantages Identification of Barriers Incentives and Reforms

Incentives –Fiscal –Credit –Joinventures –PPPs

Reforms –Fiscal –Labor –Regulations –Public Sector: More Efficiency

Diversification Why? Where is Angola? How to Diversify? Challenges: How to surpass them

Challenges Short Run –Maintain Macro Stability in a scenario of global crisis Medium and Long Run –Increase Competitiveness: Lower Cost of Production (transportation, credit) Increase Factor Productivity

Angola’s Economy: Past, Present and Future I.Recent Past: High Rates of Growth II.Present: The Mother of all Crisis and the Impacts on Angola’s Economy III.Future: Medium and Long Runs

Angola 2020 Higher Participation of the Private Sector Labor Force with more skills Exports more diversified Agriculture: Domestic and External Markets More sofisticated Syestem of Credit Public Sector more efficient Public Investment more selective and criterious

Angola in C omposition of GDP

Angola 2020 How to get there Fiscal and Monetary Policies Consistent with Macro estability Investiment in Social Sectors: education and Health Modern and Comprehensive Infrastructure Reforms implemented (labor, public sector, contracts, justice, etc.) Flexible Exchange Rate Expanded Domestic Market