As the world flirts with renewable energy, oil-rich Angola wants to attract greater investment in oil and gas, while concurrently privatising its state enterprises in broad economic reforms designed to diversify the economy. 

With just 46% of its population having access to electricity and one-third of its gross domestic product generated by oil, Angola exemplifies the dilemma faced by many countries across sub-Saharan Africa in having to improve living standards while meeting international climate obligations. 

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Participating in the Financial Times’s Africa Summit in October, president João Lourenço made clear that Angola’s hydrocarbons sector will not disappear in the short term. “We are working to attract greater investment in oil and gas production, [and] especially in the production of non-associated gas,” he said. “But at the same time working on the transition that will take some time to happen from polluting energies … to environmentally-friendly energies. The two projects have to go in parallel.”

Since oil prices collapsed in 2015, Angola’s crude oil production has fallen and fDi Markets data shows that foreign investment in its fossil fuels has failed to recover to pre-financial crisis levels. But the sector still attracts the lion’s share of foreign investment into the country.

In November 2020, UK-based Gemcorp took a 90% stake in a $920m joint venture with state oil company Sonangol to build a refinery in the country’s northern Cabinda region. In April 2021, Italian energy major Eni, alongside its joint venture partners, pledged to invest $7bn in exploration, refining and production — plus solar power — over the next four years. 

One investor in the country’s energy sector that prefers to remain anonymous confirms he sees no slowdown in the government’s desire for investment in the oil sector. “As much as the world wants this drive towards green energy, unfortunately Africa can’t switch that overnight like you might see in Europe or elsewhere,” he tells fDi.

To address the country’s chronic energy poverty, the government plans to increase electricity capacity from today’s circa 5 gigawatts (GW) to 9.9GW by 2025. This plan involves lifting gas’s share of the power mix from 11% to 19%.  

Reforms in motion

While keeping a steady focus on oil and gas, the government has triggered a reform process seeking to lay the groundwork for economic diversification. 

Since replacing long-time president Eduardo Santos in 2017, Mr Lourenço — whose administration's flagship policy is combatting corruption — has set Angola on the path to economic recovery. This has won the country some positive feedback from the likes of credit rating agency Moody’s Investor Services and the IMF. 

In September, in a move that has widely been interpreted as recognition of the reform process, Moody’s raised Angola’s credit rating from Caa1 to B3 for the first time since 2015, citing higher oil prices, stronger governance and an improved fiscal position.  

Angola’s reform trajectory has been anchored on strengthening the rule of law and engendering a free market economy, and Mr Lourenço believes the reforms have succeeded through working with partners such as the IMF, which extended $3.7bn in 2018 to support the country's reforms.   

Privatisation of state enterprises is the government’s way of creating revenue away from oil. “This is a process already underway,” Mr Lourenço said at the FT summit. “Of the more than 100 companies [that were] to be privatised, at least a third have already been privatised.

“In terms of timing, due to their sizes, we have to take [privatising the rest] slowly. The objective is to find greater efficiency in assets held by the state so that we can provide better services,” he said. 

“Diversification of our economy should happen in all sectors, but I would like to highlight agriculture and tourism as sectors we pay particular attention to. We want to develop these with speed, strengthening them faster than other sectors,” said Mr Lourenço. 

Limited gains

Angola is Africa’s second-biggest oil producer and relies on the sector for about one-third of its gross domestic product and more than 90% of its exports. But due to declining oil prices and oil production, the economy has been vulnerable to shocks, causing contraction during the past five years. 

Mr Lourenço said Angola recently asked for debt relief from China within the framework of an initiative taken by the G20, but the country would not make the request again. Angola is one of several African countries that is heavily indebted to China after it borrowed around $43bn between 2000 and 2019.

He is, however, convinced that an improvement in the business environment, assisted by Moody’s favourable rating and the success of the IMF programme, will open new doors for Angola to source finance from other international creditors.  

Daniel van Dalen, the Angola analyst for Signal Risk, a South African risk management firm, says Mr Lourenço’s wider reform agenda is sound and has technically worked, but its gains have been limited due to slow execution.

“Adjustments to value-added tax [which is now again being changed], a fiscal responsibility law, a liberalisation of the exchange rate regime, and a private investment and privatisation law have marginally bolstered investor confidence and laid the foundation for real economic reforms,” he tells fDi. “However, a lack of political will, amid internal power struggles, led to the failure to privatise state entities earlier — which remains key to the wider reform agenda. This, as well as rampant corruption [that is only now being addressed], have stunted the reform process.”

Mr Lourenço will need to aggressively further his ongoing anti-corruption drive in a transparent manner to not only bolster investor confidence for new ventures or public-private partnerships, but to expedite his reform agenda, he says.

Mr van Dalen said Mr Lourenço’s administration has neglected social investment, and that will remain an impediment to Angola’s economic development — particularly as the country seeks to move from a state-led oil economy to a private-sector-led growth model. 

Zainab Usman, a senior fellow and director of the Africa Program at the Carnegie Endowment for International Peace in Washington DC, says the urgency of Mr Lourenço’s economic reforms with his democratic mandate is strong. 

“These reforms entail anti-corruption initiatives to try to stem the leakages of revenues that the country badly needs, although there is inevitably some political slant to the anti-corruption drive — perceptions that the government is targeting members of the predecessor’s administration,” she tells fDi.

She posits that Angola’s recently joining the International Centre for Settlement of Investment Disputes — a World Bank entity that allows for international arbitration of cross-border disputes between foreign investors and host governments — will make the country even more attractive to foreign investment and help strengthen the private sector and achieve  economic diversification. 

Ms Usman believes oil will continue to drive modern economic activities for another two to three decades before a permanent decline sets in due to global decarbonisation efforts. Angola, like other oil exporters, therefore has a small and narrowing window to optimise its oil revenues to make important investments to grow its non-oil economy.

This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine. Read the online edition here.