Outlook for 2011-15

• The ruling party, Movimento Popular de Libertação de Angola (MPLA), is set to continue its dominance of the political system, by virtue of its control of government resources and overwhelming majority in the National Assembly.
• The long-serving president, José Eduardo dos Santos, is expected to remain in charge at least until the 2012 legislative election.
• The main opposition party, the União Nacional para a Independência Total de Angola, has little chance of winning legislative elections and will focus on proposed municipal elections, which have been delayed.
• With oil revenue and foreign investment set to rise in 2011, real GDP is forecast to rise to a peak of 8.1% in 2012, before moderating to an average of 6.6% in 2013-15 in line with weakening oil output growth.
• Average inflation will remain relatively high throughout the forecast period, although, assuming that price-control adjustments start to address underlying distortions, it is forecast to start falling moderately in 2013-15.
• The current-account deficit will narrow to 1.2% of GDP in 2011, before rising gradually over the remainder of the forecast period in line with the narrowing of the trade surplus, reaching 3.5% of GDP by 2015.

Monthly review

• Angola's main opposition party, União Nacional para a Indepêndencia Total de Angola (UNITA), has revealed that it is unlikely to hold a party congress until after the next legislative elections, owing to lack of funds.
• In late January there were reports in the local press that the Angolan police force was threatening to go on strike over poor pay and working conditions.
• The government has announced that it will repay its remaining US$2.6bn of domestic debt arrears by the end of the first quarter of 2011, although doubts remain over the precise level of government debt.
• The IMF has published its full report of the fourth review of Angola's 27-month stand-by arrangement, noting better macroeconomic stability but urging the government to restrain spending as oil revenues rise sharply.
• Angola's oil output is set to rise strongly in March, to 1.73m barrels/day (b/d), after falling as low as 1.57m b/d in December owing to technical difficulties in several deepwater fields.
• Seven foreign oil companies have been awarded licences in 11 blocks in Angola's pre-salt offshore area, with the national oil company, Sonangol, holding stakes in all of them.

The president, José Eduardo dos Santos, and his ruling party, Movimento Popular de Libertação de Angola (MPLA), which holds 191 out of the 220 seats in the National Assembly, enjoy complete hegemony over the political system. Mr dos Santos sits at the centre of a vast patronage network, skilfully appeasing conflicting interests both nationally and within the party while strengthening his own position. The adoption of a new constitution in 2010 consolidated his grip on power, establishing a presidential-parliamentary system under which the Angolan president will no longer be elected by popular vote but will instead be the head of the party with the most seats in parliament. Although a limit of two five-year presidential terms has been set, this does not take into account the 30 years already spent in office by Mr dos Santos, enabling him to remain as president until 2022, should he so wish.

Although Mr dos Santos has remained ambiguous over how long he plans to remain as president, the Economist Intelligence Unit expects him to stay in power at least until the next legislative election, in late 2012. Mr dos Santos has made a point of not grooming a clear successor, giving himself plenty of room for manoeuvre and leaving his rivals in the dark as to his true intentions. However, following a series of government reshuffles in 2010, his civilian chief-of-staff, Carlos Feijó, has emerged as the key figure in the revamped administration, acting as the government's chief enforcer and spokesman. The status of the long-standing chief of military affairs, General Hélder Vieira Dias "Kopelipa", is unclear, but he is likely to remain close to the centre of power after overseeing the president's economic interests for years.

The outcome of the constitutional revision was a huge disappointment for the opposition, confirming Mr dos Santos as the supreme arbiter of political affairs and underlining its inability to block or influence substantially government policy. Since its drubbing in the 2008 parliamentary election the main opposition party, União Nacional para a Independência Total de Angola (UNITA), has struggled to make an impact at national level, and its leader, Isaias Samakuva, plans to stand down in 2011. The party will seek to capitalise on popular discontent with the lack of employment opportunities and rising living costs to build support, although its reach is weak beyond its core areas. The government is wary of the potential of popular unrest following the uprisings in North Africa, but it has so far proved adept at containing social pressures through a mixture of repression and subsidies to the general population.

The government's key domestic security threat-the long-running separatist conflict in the northern enclave of Cabinda-appears to be coming to an end, despite isolated incidences of violence, after the remaining factions of the Frente de Libertação do Enclave de Cabinda (FLEC) sought peace talks with the government. The signing of a peace treaty has tentatively been agreed, although given the fractured nature of FLEC's leadership it will be some time before all factions are brought on board.

Angola is poised to enter a lengthy pre-election period ahead of what will be the country's second legislative vote, scheduled for September 2012. These polls could take place simultaneously with Angola's first municipal elections, which have been repeatedly postponed in recent years. Enjoying complete dominance of the national media and government apparatus, the ruling MPLA has a huge advantage going into the polls, and it will use its tested tactics of co-opting and intimidating its opponents to secure another absolute majority in the National Assembly. However, the party's sweeping victory is far from certain, given rising popular discontent over the lack of economic opportunities, the poor provision of basic services and austerity measures such as the reduction in fuel subsidies. Severely weakened since losing the civil war in 2002, UNITA will draw on its traditional power base in the central highlands, but its reach beyond there is expected to be weak. Other parties remain marginal, with support only in their home constituencies, and it will require a cross-party alliance to make any dent in the MPLA's dominance. Under the new constitution approved in February 2010 the presidential election has been abolished; instead, the leader of the party with the most seats in parliament automatically becomes president. Our central forecast is that Mr dos Santos will successfully contain any potential challenges, allowing him to remain in power throughout the forecast period.

The key foreign-policy aims over the forecast period will be to diversify Angola's access to international finance, to manage successfully the revived relationship with the IMF and to expand the country's international role, notably as an unofficial mediator in the political stand-off in Côte d'Ivoire. The IMF stand-by financing arrangement will bring government macroeconomic management under close scrutiny, which will generate periodic tensions with the Fund, although it seems to be more flexible than in the past. Angola's relations with South Africa should improve, given the warm relationship between the South African president, Jacob Zuma, and Mr dos Santos, who made his first official visit to the country in December. However, relations with Angola's northern neighbour, the Democratic Republic of Congo, will remain tense owing to the expulsion of illegal immigrants by both countries and negotiations to delineate the maritime border in oil-rich waters. Angola's relationship with China, which is based on oil-backed Chinese loans and credit lines, continues to deepen despite concerns over the quality of some Chinese contractors' work. Warm relations with Brazil and Portugal are set to continue, underpinned by credit lines. The government is also implementing new credit lines from members of the Paris Club of international creditors.

The government's aim over the forecast period is to guide Angola's transition from post-conflict reconstruction to sustained economic growth. Policy will focus on implementing the poverty-reduction programme and the "second wave" of infrastructure rehabilitation without jeopardising macroeconomic stability as rising oil output and high global prices boost government revenue. The government is committed to progressively phasing out fuel subsidies-which cost an estimated 6% of GDP per year-over the next five years and using these resources for poverty-alleviation expenditure. However, the government's ability to implement reforms will be hampered by uncertainty over its key economic team, which was reshuffled in October 2010, and the redistribution of responsibility for economic policy between the economy, finance and planning ministries. As a result, progress on the implementation of IMF-style reforms will be uneven as the economic and political elite seek to block or undermine reforms that threaten their interests-most notably the new Probity Law, which in theory forbids conflicts of interest for government officials.

The government will seek to expand existing financing and credit lines from its partners, notably China, Brazil and Portugal, while also seeking new financing from members of the Paris Club. Having obtained a B+ sovereign rating from the main ratings agencies, Angola is keen to raise financing on the international bond markets. However, given damaging revelations over the dramatic rise in domestic debt arrears during 2008-09, which could result in the lowering of its rating, the government is likely to delay its first bond issue until late 2011 at the earliest. Despite rising capital inflows, the level of foreign-exchange reserves and the depreciation of the kwanza remain concerns for the government, which was forced to loosen the currency's unofficial peg to the US dollar in late 2009. Although the reserve position should improve over the forecast period, the risk remains of a further sharp devaluation.

A key challenge for the government will be the successful management of the stand-by arrangement (SBA) with the IMF, worth an estimated US$1.4bn and running until February 2012. If successful, this could pave the way for a full IMF-monitored programme-something that Angola has never had. However, in the light of the administration's hostility to external criticism, the relationship will go through periodic strains, especially given damaging revelations about the build-up of domestic debt arrears in 2008-09. A further challenge will be to regain the confidence of investors in the government's ability and willingness to meet its payment obligations, which has been severely shaken, and allow the free movement of capital, which is subject to great constraints.

Although oil prices are expected to be relatively high over the forecast period (at US$86/barrel), fiscal management will remain opaque. The government is struggling to restore confidence in its fiscal management after the admission last year that domestic payment arrears had risen as high as US$9bn in 2008-09. This has undermined the credibility of efforts to improve public expenditure management under the SBA, which in 2011 will include the introduction of quarterly financing plans for each ministry aimed at aligning spending commitments with available resources. The government revised the 2010 budget, increasing spending by 28% to Kz3.96trn (US$43bn), to reflect the higher oil reference price and the reduction in fuel subsidies, which resulted in a projected budget surplus of 1.2% of GDP. The draft 2011 budget, approved by the National Assembly in November, envisions total revenue rising by 6.4% to Kz3.4trn (US$36.2bn), while spending will decrease by 0.3%, producing a forecast surplus equivalent to 2% of GDP. Social-sector spending is projected to reach 31.5% of total expenditure, in line with recent years.

The IMF estimates that there was a healthy budget surplus of 7.5%% of GDP in 2010, reflecting the recovery in government oil revenue and tight spending restraint in the first half of the year. We expect that strong oil and mining revenue will ensure a surplus over the forecast period, although given the government's commitment to repaying its domestic debt arrear stock by the end of March 2011, coupled with ambitious public investment plans, we forecast that it will be restrained to 4.5% of GDP in 2011 and to 4.1% of GDP in 2012. After peaking in 2013, we forecast that the budget surplus will fall steadily in 2014-15 as spending growth outpaces oil-generated revenue growth.

The Banco Nacional de Angola (BNA, the central bank) is undergoing major reform and restructuring. A new department has been created to support and mitigate the management of liquidity, exchange-rate and operational risk in the banking sector. Efforts are also being made to reduce the sector's dependence on foreign exchange, with the amended Foreign Exchange Law, which requires domestic banks to hold a minimum of 80% of their capital in kwanzas by the end of 2012. In addition, foreign oil companies will be required to use Angolan bank accounts to pay their sub-contractors in Angola, which has the potential to inject billions of dollars into the banking system. With the level of foreign-exchange reserves continuing to recover, the BNA is likely to continue with its policy of intervening in the foreign-exchange markets to keep the kwanza stable (which has kept down the cost of imports). However, the central bank governor, José Massano, has promised to implement extensive monetary and exchange-rate reforms, following on from his decision in November to cut the BNA's rediscount and overnight rates from 30% to 25% and from 21.9% to 18% respectively-the first such cut in years.

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A steady increase in oil output will drive real GDP growth prospects over the forecast period. We forecast that crude output will rise from an estimated average of 1.78m barrels/day (b/d) in 2010 to 2.1m b/d by 2015. However, given the history of technical delays in the oil sector and the possibility that OPEC may try to enforce Angola's quota more strictly, there is a risk that production will rise at a slower rate. We estimate that real GDP growth recovered weakly in 2010, to an average of 1.7%, owing to faltering oil output in the final quarter, restrained public investment and sluggish activity in the construction and services sectors, owing to the build-up of substantial domestic debt arrears. With oil production and public investment recovering strongly, along with the expected paying-down of most of the arrears, we forecast that real GDP growth will accelerate to 6.7% in 2011. The expected start-up of the US$8bn Angolan liquefied natural gas (LNG) project in 2012 should boost real GDP growth to 8.1% that year, moderating to an average of 6.6% in 2013-15.

Despite strong real GDP growth, economic expansion will remain capital-intensive and import-dependent, with few linkages to areas of the economy other than government-dominated sectors like construction and finance. Moreover, the development of a dynamic private sector will be hindered by weak human capital, a flawed judicial system, poor regulation, corruption and the crowding-out of private-sector investment by the public sector.

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Inflation averaged 14.5% in 2010, driven by rising fuel prices following the reduction in subsidies, supply bottlenecks caused by delays in importing goods-the source of around 90% of consumer goods-and further depreciation of the currency. Although the BNA's capacity to support the kwanza has improved with the recovery in the level of international reserves, its loss of independence in setting monetary and exchange-rate policy to the ministries of finance and planning is likely to result in the politicisation of interest-rate policy, which will constrain its efforts to control inflation. Moreover, further planned reductions in the fuel price subsidy in 2011-12 will add to inflationary pressures, as will currency depreciation (which will increase the cost of imports) and lower interest rates. Nonetheless, assuming that price control adjustments gradually start to address underlying distortions, we forecast that inflation will start to fall moderately from 2012.

Despite the recovery in both oil revenue and inflows of foreign direct investment, the BNA's ability to support the kwanza through market intervention will depend on the level of foreign-exchange reserves, which remain vulnerable if international oil prices start to fall again. Pressure on the reserves forced the BNA to loosen the kwanza's unofficial peg to the US dollar in October 2009, resulting in a rapid depreciation from Kz78:US$1 to around Kz92.5:US$1 in mid-2010-a level at which it has remained stable. With pressure on the currency continuing, we forecast that it will depreciate from an average of Kz91.9:US$1 in 2010 to Kz94.2:US$1 in 2011, before starting a modest appreciation, rising steadily to an average of Kz89.5:US$1 in 2014, buoyed by strong foreign-exchange inflows. However, should foreign-exchange reserves start to fall once more, the BNA could be forced to allow a more substantial depreciation.

Strong oil output and rising international prices increased exports to an estimated US$50.7bn in 2010, and they are forecast to rise further, to US$60.8bn in 2011, on the back of surging prices. However, they are forecast to fall back to US$58.6bn in 2012 as falling prices more than offset the start of LNG exports, and will remain broadly stable from then onwards, owing to slowing output growth and moderating prices. With government-led capital investment and domestic consumption set to increase sharply, imports are also forecast to rise strongly, from an estimated US$24.9bn in 2010 to US$32.5bn in 2015. Increased activity in the oil sector will widen the services and income deficits as oil companies increase both profit repatriation and their demand for services. Inflows of current transfers will rise sharply in 2011, supported by disbursements from the IMF's US$1.4bn emergency stand-by facility, pushing the current transfers account into surplus for the first time since the late 1990s. Overall, we estimate that the current-account deficit will narrow to 1.2% of GDP in 2011, driven by the higher trade surplus, before widening to an average of 3.5% of GDP in 2012-15 in line with the narrowing trade surplus.

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In February Angola's main opposition party, União Nacional para a Indepêndencia Total de Angola (UNITA), revealed that it was unlikely to hold a party congress until after the next legislative elections, scheduled to take place in 2012. Under UNITA's party rules a congress is supposed to be held every four years, and the next one had been due in July. However, after a meeting in January of the party's most powerful body, Comité Permanente da Comissão Política (CPCP), it was decided to postpone the congress indefinitely. The CPCP complained of a lack of funds for holding the congress-an estimated US$4m-and blamed the government for giving meagre funding to political parties. However, UNITA is partly responsible for its financial predicament given its poor showing in the September 2008 legislative elections, when it saw its share of parliamentary seats reduced from 70 to just 16, in the face of a landslide by the ruling party, the Movimento Popular de Libertação de Angola (MPLA). This has reduced the financial support that it receives from the government, while many senior UNITA figures have also lost their ministerial salaries and privileges.

Many hold the UNITA leader, Isaias Samakuva, responsible for the party's waning fortunes, and Mr Samakuva had indicated that he would stand down in 2011. However, some have interpreted the delay in holding the congress as an attempt by Mr Samakuva's supporters to shut out potential rivals from a leadership challenge. The most vocal remains Abel Chivukuvuku, a long-standing party stalwart and former head of a UNITA breakaway faction, who lost the party leadership to Mr Samakuva in July 2007 (September 2007, The political scene). Under Angolan electoral law the head of each party contesting the legislative elections is automatically the party's candidate in the presidential race, with the leader of the winning party taking the position of national president and head of state. Thus, if UNITA does not hold a congress, or call a leadership vote, its presidential candidate will remain Mr Samakuva. The delay in holding the congress has provoked anger from several sections of the party, as well as from potential contenders for the leadership, among them Domingos Malukas and Adalberto Costa Júnior. However, in the absence of fresh financial support there is little likelihood of a congress taking place in the near future.

The inability of UNITA to influence the domestic political agenda, coupled with its negative reputation earned during years of bloody civil war, has raised the hopes of Angola's other opposition parties that they can increase their influence. The fifth-largest parliamentary party, Nova Democracia-União Eleitoral (ND-UE), which has two seats in the National Assembly, is expanding its electoral alliances and seeking to absorb a host of smaller parties that were dissolved following a ruling in February 2009 by the Constitutional Court that dissolved all parties that polled less than 0.5% of the national vote in the 2008 elections. For its part, UNITA is continuing with its own opposition alliance-Bloco Democrático-which includes the Partido Democrático para o Progresso-Aliança Nacional Angolana (PDP-ANA). Given UNITA's weak prospects in the 2012 legislative elections, the party will need to focus on the first municipal elections, which could take place during the next two years, to rebuild its presence nationally.

In late January there were reports in the local press that the Angolan police force was threatening to strike over poor pay and working conditions. Police officers have been campaigning for salary increases and overdue promotions to compensate for what they complain are considerable discrepancies between their job descriptions and their actual activities. In May 2010 the Ministry of the Interior issued a decree to overhaul the pay scale in the police force, but there has been little progress in implementing it. Although the force's most senior officers were promoted en masse in late September, the rank and file of the force have still not seen their salaries or positions adjusted. The police chiefs have blamed the Ministry of Finance for failing to provide sufficient funding for the changes, a reflection of the domestic financing crisis that the government has been through over the past year. In the end, the strike-which had been due to take place on February 28th, the 35th anniversary of the police force's founding-does not appear to have gone ahead, but resentment remains.

Strike action by the police force, whether real or threatened, has come at an awkward time for the government, which, like other authoritarian regimes in Africa, is wary of public anger in the wake of the uprisings affecting North Africa. In early March there were calls by several local MPLA members to hold protests against the government and the continuing presidency of José Eduardo dos Santos, who has been Angolan president since 1979. However, it remains to be seen whether the notoriously fractured opposition forces can coalesce into a meaningful movement that can force radical political change in Angola.

In February the president's civilian chief-of-staff, Carlos Feijó, announced new figures on Angola's public debt, which reached critical levels in 2010. According to Mr Feijó, a total of US$1.216bn of arrears was incurred in the 2010 public investment programme (PIP), which included massive investments in the construction, transport, energy and water sectors. Of these arrears, only around US$200m were paid in the final quarter of 2010, which Mr Feijó put down to the government's strained finances at the time and various bureaucratic issues. However, Mr Feijó insisted that all arrears from the 2010 PIP would be repaid by the end of March. In total, the government intends to repay US$2.59bn of arrears during the first quarter of 2011, which includes some of the arrears accumulated in 2008-09, as outlined in the 2011 budget.

However, the precise level of the government's domestic debt arrears-which were mostly incurred in 2008-09-remains unclear, and has not been clarified by the series of damaging revelations throughout last year, which indicated that they could have climbed to between US$6.8bn and US$9bn. A special committee headed by Mr Feijó, Comité de Gestão da Dívida Pública, has been created to oversee the repayment of these arrears and to streamline the payment process for public projects. However, it has done little to clarify the level of debt held by the government, with ministers continuing to issue contradictory and ambiguous statements. The most recent debt assessment was made by a UK auditor, Ernst & Young, which was hired by the government to carry out an overhaul of public expenditure. Ernst & Young estimated total domestic debt at US$6.349bn at end-December 2009, which includes much (but not all) of the debt incurred during the financial crisis. For its part, the government has excluded from its estimates arrears incurred for projects in Angola's Special Economic Zone, comprising Luanda and some of neighbouring Bengo province, lowering the total to US$4.792bn.

In February the IMF published its full report of the fourth review of its 27-month stand-by arrangement (SBA) with Angola, worth an estimated US$1.4bn, which was completed in January when a further SDR114.5m (US$178m) was disbursed (February 2011, Economic policy). As expected, the Fund agreed waivers for performance criteria on the accumulation of domestic arrears and the extension of credit by the Banco Nacional de Angola (BNA, the central bank) in recognition of the severe financing crisis that the country underwent in 2008-09. Overall, the Fund reported positive progress with macroeconomic stabilisation over the first 14 months of the SBA, with progress on key targets of reducing the non-oil deficit and rebuilding the level of foreign-exchange reserves. However, after such a sharp fiscal retrenchment in 2009-10, a major challenge will be reviving the ambitious PIP in a sustainable manner. The Fund called for spending restraint as oil revenues rise and for further cuts to fuel subsidies, but it came up against strong opposition from the government, which is keen to keep a lid on domestic fuel prices and boost spending in the provinces ahead of the legislative elections due in 2012.

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The following are among the main targets outlined for 2011.

• Sticking to the spending targets in the 2011 budget, which is based on a conservative oil price and includes commitments to rebuild foreign-exchange reserves by US$1.7bn and pay down remaining domestic debt arrears. Given the strong potential upside in oil revenues (owing to international prices well in excess of US$100/barrel), the IMF believes that there is a good chance of a larger fiscal surplus this year.
• Completing the repayment schedule for outstanding debt arrears by end-March using funds allocated in the 2011 budget, while putting in place a new public debt management strategy and measures to link future spending commitments to available financial resources.
• Reducing inflation to single digits, although this has proved to be something of a moving target for the government over the past nine years.
• Pressing ahead with structural reforms, notably the development of a medium-term fiscal strategy (with specific targets for the non-oil deficit), the comprehensive overhaul of the tax system (for which a detailed plan is to be presented to the IMF by the end of June) and the regular publication of budget execution reports and external audits of strategic public enterprises.

The government's progress under the SBA has been encouraging, although much of the improving economic picture has been down to a recovery in oil production and a surge in international oil prices. The danger remains that, with oil revenues set to return to record levels and legislative elections approaching, the government's commitments to fiscal restraint, transparency and economic diversification could come unstuck by political necessity.

Angola's output is rising once more, after falling as low as 1.57m barrels/day (b/d) in December (December 2010, Economic performance). According to oil traders canvassed in late January, Angolan exports are set to rebound strongly, rising from 1.61m b/d in January to 1.63m b/d in February and 1.73m b/d in March. This reflects the rise in the number of cargoes from 48 in January to a forecast 56 in March, which includes additional cargoes from some of Angola's most prolific fields, notably Girassol, Palanca, Dália, Plutónio, Mondo and Saxi. The expected recovery in production follows the resolution of technical difficulties in ultra-deepwater blocks 18 and 15, as well as some new production coming on stream. According to a statement in mid-January by the minister, José Maria Botelho de Vasconcelos, Angola produced 590m barrels of oil during the first 11 months of 2010, which at an annualised rate was the equivalent of 1.76m b/d. This is similar to the IMF's recent estimate in its review of the SBA of 1.79m b/d and the Economist Intelligence Unit's of 1.78m b/d. With output recovering and new production expected to come on stream over the forecast period, we forecast that output will rise steadily to an average of 1.88m b/d in 2011 and 1.95m b/d in 2012. However, the goal of producing 2m b/d, which was almost achieved for short periods during 2008, is likely to be a moving target, given persistent delays in bringing new deepwater fields on stream and the maturing of existing fields.

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