P 131251Z MAR 09
FM AMEMBASSY LUANDA
TO SECSTATE WASHDC PRIORITY 5364
INFO OPEC COLLECTIVE
SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
NSC WASHDC
DEPT OF TREASURY WASHDC
DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L LUANDA 000159 
 
 
DEPT FOR EEB/IFD/OMA ALEX WHITTINGTON 
DEPT FOR EEB/IFD/ODF CHERRY ORDONEZ 
DEPT FOR EEB/EPPD/PA STEPHAN THURMAN 
 
E.O. 12958: DECL: 03/04/2019 
TAGS: AO ECON EFIN ENIV EPET PGOV
SUBJECT: GRA SLASHES BUDGET AS MACRO OUTLOOK DETERIORATES 
 
REF: 08 LUANDA 1019 
 
Classified By: Ambassador Mozena for reasons 1.4 (b) and (d). 
 
¶1. (U) SUMMARY:  Following steep declines in the oil revenues 
that generate much of Angola's income, the GRA will cut 
spending on goods and services across all ministries by 36 
percent and subsidies and social transfers by 40 percent from 
Angola's previously approved 2009 budget.  Our contacts tell 
us the GRA does not want to run a fiscal deficit in 2009, 
despite the country's considerable foreign reserves and 
(allegedly) robust stabilization fund.  While the long term 
investments in infrastructure and development projects have 
not been cut (many, in fact, are funded by off-budget loans 
from China), the substantial drop in government outlays will 
adversely affect the many Angolans dependent upon subsidies 
and social transfers, as well as the non-petroleum sector. 
As pressure mounts on policy makers to devalue the Kwanza, a 
recent speculative run against the currency could indicate 
the GRA is close to making a decision to devalue in order to 
save its reserves.  End Summary. 
 
----------------------------- 
GRA Slashes Budget 35 Percent 
----------------------------- 
 
¶2. (C) After much internal debate over whether to re-adjust 
the 2009 budget or finance it with Angola's reported USD 20 
billion in reserves, the GRA now plans to cut the 2009 budget 
by 35 percent across the board.  The GRA formally passed its 
"Anti-Crisis Plan" on February 26, which called for an 
undisclosed cut in government purchases of goods and 
services, halting new public investments, restructuring 
"strategic public enterprises," and competitive substitution 
of imports aided by "temporary protectionist measures."  In 
discussions with Armando Manuel, Director of the National 
Treasury at the Ministry of Finance, EconOff learned that the 
GRA would cut the expenditures on goods and services by 35 
percent across all ministries and cut subsidies and social 
transfers by 40 percent.  He confirmed the government would 
continue to fund existing development projects due to their 
long-term importance to the economy and their importance to 
Angola's hosting of the Africa Cup in early 2010, but will 
not start any new ones during 2009. 
 
3.(C) Manuel said the primary goal of the GRA was to prevent 
a fiscal deficit (the first since 2004), which under the 
original 2009 budget was projected to reach 9 percent of GDP, 
down from a 2008 surplus of 10 percent.  When asked about 
using Angola's reported USD 20 billion in reserves held by 
the Angolan Central Bank (BNA) or the undisclosed billions in 
its off-shore sovereign wealth fund, he replied that the GRA 
viewed the global economic downturn as a "short-term shock" 
and felt it wiser to tighten up spending (i.e. keep long-term 
investment and debt service spending, but cut current 
expenditures). 
 
------------------------------ 
Reserves Decline Significantly 
------------------------------ 
 
¶4. (C) Although Angola is not spending its reserves to 
sustain budget expenditures, it is drawing down those 
reserves nevertheless.  The February 27 edition of "Novo 
Journal" (a paper owned by Banco Espirito Santo,) reported 
that Angola spent one-quarter of its USD 20 billion foreign 
reserves over the past three months, leaving USD 15 billion 
in the treasury.  The February 28 edition of "Economia" also 
ran a story on the reserves and put the recent drop at about 
17 percent.  GRA officials have not publicly confirmed such a 
large drop; however, Vice Governor of the Central Bank (BNA) 
Rui Minguens would not deny the report in a private 
conversation with the Embassy.  While Angola reportedly also 
has a sovereign wealth fund alleged to contain at least USD 
20 billion, there is no clear indication of where it is 
invested or what loses, if any, it has suffered during the 
crisis. 
 
¶5. (C) The Angolan press also reports that the state oil 
company, Sonangol, which has invested billions of the 
nation's oil wealth abroad, suffered notable losses, 
including USD 3 billion in European investments alone.  One 
investment identified was a nine percent stake in Millennium 
Banco Commercial Portuguese, a bank that saw its share price 
plummet 75 percent in the last year.  (NOTE: Sonangol 
typically invests 50 percent of its profits in self-managed 
investment funds with which it has acquired assets around the 
world.  For 2008, Post estimates that the amount could have 
been as much as USD 13 billion, all significantly exposed to 
the effects of the global financial crisis. END NOTE). Oil 
industry contacts recently told Emboffs that Sonangol has yet 
to come up with its 23 percent share of the estimated USD 6 
billion for the Angola LNG terminal now under construction in 
Soyo, and that the parastatal is exploring the possibility 
with a U.K firm of raising USD 2.5 billion through a bond 
issuance to cover its share of the LNG terminal. 
 
--------------------------------------- 
Double Whammy Will Contract Economy... 
--------------------------------------- 
 
¶6. (U) The sharp drop in oil prices over the last eight 
months, coupled with OPEC-mandated production cuts has 
significantly worsened Angola's macro economic outlook for 
¶2009.  As late as December, the Ministry of Finance and other 
economists had projected that Angola, which relies on exports 
of petroleum for 60 percent of its GDP and 80 percent of its 
government revenues, would have real GDP growth of around 12 
percent in 2009; cooling somewhat, but yet continuing, a five 
year trend of strong double-digit GDP growth.  In fact, the 
GRA had confidently based, and passed, its 2009 budget on a 
reference price for Brent of $55 per barrel last fall (see 
reftel).  However, since then, and with the steep drop in 
petroleum prices, OPEC agreed to two production cuts 
including a 13 percent reduction (244 thousand barrels per 
day) for Angola. 
 
¶7. (U) As a result of these changes, the World Bank is now 
estimating that Angola could have a nominal GDP contraction 
of 17 percent (assuming an oil price of USD 50 per barrel), 
with 2009 inflation estimated at 10 percent.  One noted 
Angolan economist predicts an 11 percent negative nominal GDP 
growth rate driven by an estimated 30 percent growth in the 
agricultural sector.  For perspective, the much smaller size 
of the entire non-petroleum economy, relative to the oil 
sector, would have to grow by 22 percent in 2009 just to 
offset the 13 percent decrease in oil production (at $55 per 
barrel) in order to end up with a flat GDP at zero percent 
growth rate.  The GRA currently predicts a 16 percent growth 
rate for the non-petroleum sector.  In a worst case scenario 
where oil averages at $40 per barrel for 2009 and the OPEC 
cuts are maintained throughout, total revenues could decline 
by as much as 50 percent in 2009, bringing the nominal 
decline in GDP to almost 23 percent. 
 
------------------------------------- 
...Yet Provide No Relief on Inflation 
------------------------------------- 
 
¶8. (U) The large decrease in the in-flows of foreign exchange 
and the drop off in demand of goods and services by the GRA 
are not expected to bring relief for inflation, now at 13 
percent. The GRA will likely continue to spend hundreds of 
millions of dollars from off-budget Chinese lines of credit 
on development projects, including airport and stadium 
projects to host the 2010 Africa's Cup, effectively negating 
the spending cuts from the 2009 budget.  Additionally Angola 
still has formidable supply constraints and infrastructure 
bottlenecks that will not change significantly in 2009, which 
also contribute to inflation.  For 2009, the GRA has again 
set its target inflation rate at 10 percent.  (COMMENT: 
Although Angola has done an impressive job bringing its high 
inflation under control since the war ended in 2002, the 
reality here is that even a stable 10 percent inflation rate 
will be tough on the average Angolan in the face of a 
contracting economy. END COMMENT) 
 
------------------------- 
Is the Kwanza Overvalued? 
------------------------- 
 
¶9. (C) The Kwanza, which has been pegged to the dollar at 75 
to one since 2005, is overvalued and appears to have been 
under speculative attack.  In a February 14 "Journal de 
Angola" article, Vice Governor Minguens disclosed that the 
BNA had recently encountered a spike in the demand for 
dollars at USD 335 million in one day, where it had been 
averaging USD 50 to 60 million per day.  Angola is now 
experiencing a large decrease in the rate of forex flow into 
the country due to a large drop in the price and quantity of 
its principal export.  This phenomenon can dramatically 
affect the real exchange rate of a country.  This fact, 
coupled with the speculative attack alluded to by the Vice 
Governor of the BNA, and the dramatic drop in reserves over 
the last three months suggest that the Kwanza needs to be 
devalued.  A February 28 article in "Economia" chastises the 
BNA for refusing to devalue and puts the real value of the 
Kwanza at 85 to one USD, while noting that many petroleum 
economies already have devalued, citing Nigeria, Russia, and 
Kazakhstan.  On February 26, Bloomberg quoted Michael Hugman, 
emerging market analyst for Standard Bank, as putting the 
odds of a devaluation in the next six months at 50 percent. 
(COMMENT: The risk here is that Angola may commit its 
considerable reserves to defending the overvalued Kwanza and 
then face a forced devaluation after transferring its foreign 
reserves to speculators.  The GRA would then be in a weaker 
position than otherwise coming out of what is clearly going 
to be a recession in 2009. END COMMENT) 
 
------- 
COMMENT 
------- 
 
¶10. (C) While the sky is not falling in Angola, clearly it is 
in for a difficult year with a projected negative GDP growth 
of 17 percent, the first negative growth since 1995.  Angola 
officially has the reserves to weather the $100 dollar drop 
in oil prices and help maintain the standard of living for 
Angolans, but for unknown reasons it is disinclined to use 
them.  The GRA decision to cut the budget instead of spending 
some reserves for what it views as only a "short-term shock" 
is too fiscally conservative and exactly the opposite thing 
to do for a country with huge social spending needs.  The 
apparent loss of reserves to speculators nullifies the GRA's 
stated effort of saving its reserves by cutting government 
expenditures.  By devaluing, it could keep Kwanza 
expenditures up (and social spending up) while saving the 
reserves for necessary imports.  Whether the GRA is worried 
about the effects of a devaluation on inflation, or desires 
to keep much needed foreign inputs cheap, continuing to 
defend an overvalued Kwanza will effectively transfer the 
nation's wealth to a small slice of the population (the elite 
importers and would-be speculators) at the expense of social 
development.  Similarly, the GRA's economic diversification 
effort will be hampered by the cut in government spending. 
Angola has chosen to maintain spending on development 
projects, including the ones needed for the Africa Cup in 
2010, through the use of off-budget lines of credit from 
China.  However, this will not help ease inflation during 
this downturn, and it does little for employment since many 
of these Chinese-funded projects use Chinese labor. 
 
 
MOZENA