Angola is a country with its sights set on prosperity. That is the message investors are taking from September’s peaceful re-election of Angola’s president, José Eduardo dos Santos.

“The elections were calm and it was a strong message to the international community that Angola has become mature, and it aims to increase its capacity in dealing with sensitive issues,” says Luís Marques, Ernst & Young’s managing partner in Angola.

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Profit in peace

A decade of peace, arguably the most notable achievement of the ruling Popular Movement for the Liberation of Angola, has led to Angola’s rapid rise. In the space of just 10 years, the country has evolved from a war-torn economic backwater to one of the world’s fastest growing economies. Between 2001 and 2010, Angola grew at an average rate of 11% and the country is now the third largest economy south of the Sahara, behind South Africa and Nigeria, according to the International Monetary Fund (IMF).

The official end of Angola’s 27-year civil war in 2002 led to a surge in FDI, lured by the country’s vast offshore oil reserves. Foreign investment has poured in at an average rate of $10bn a year, according to the EIU, and the sharp rise in Angola’s daily oil production from 40,000 barrels in 2002 to 1.8 million in 2011, according to Absa Capital, reveals investor interest has focused on this sector.

“Investors are interested in Angola now as opposed to a few years ago for a number of reasons, the main one being oil,” says Dr Elizabeth Stephens, head of credit and political risk analysis at insurance brokers JLT Group. “Additionally, Angola is considered relatively stable. There are no terrorist threats, such as those you see with [jihadist militants] Boko Haram in Nigeria, for example. When we look at Ghana, the oil sector has not come on stream as quickly as anticipated and in Uganda there have been issues related to the expropriation of assets. When compared with that, Angola is considered quite safe.” 

Oil dependency

Although the oil boom may have added $150bn to the government’s coffers over the past 10 years, according to The Banker magazine, there have been concerns about Angola’s ability to attract investment to sectors other than energy. Between 2003 and 2012, the coal, oil and natural gas sector received the largest share of capital investments worth $1.7m, according to greenfield investment monitor fDi Markets. Oil dominates the country’s economic activity, providing 97% of export revenue and three-quarters of government income, according to the African Development Bank (AfDB).

The global economic downturn of 2008 was a powerful reminder of the country’s economic vulnerability. The sharp fall in oil prices slashed Angola’s GDP growth from 13% in 2008 to 2.4% in 2009, according to the AfDB. In addition, fDi Markets reveals Angola’s coal, oil and natural gas sector declined from a peak of 589 greenfield FDI projects in 2008 worth $344bn to a low of 325 projects in 2010 worth $144bn.

“Angola is heavily dependent on exports and when the financial crisis hit, the economy was severely knocked, as the country’s foreign exchange reserves fell from $17bn to about $5bn,” says Ms Stephens. “Oil production accounts for about 97% of export revenue and this leaves the country very vulnerable to price fluctuations.” 

Furthermore, commentators maintain that foreign investors are reluctant to invest in Angola’s non-commodity-based sectors because the business environment is unsupportive. Pointing to the country’s considerable infrastructure gaps and the absence of skilled labour, Pedro Coelho, chief executive of Standard Bank Angola, says of the challenges of doing business in Angola: “The major weakness is human capital. The lack of skilled labour does not enable companies to grow as fast they would like because they have to train people. This is a legacy of the war, as a number of Angolans had their studies interrupted.” 

“The second [issue] is infrastructure. Right now there are big strains on the availability of electricity and the reliance on [electricity] generators is a bottleneck that increases the cost of setting up an operation in Angola. [Additionally], there is a need to increase the ports, roads and railway infrastructure.” 

Long way to go

While frank in admitting Angola’s shortcomings, Ernst & Young's Mr Marques maintains that the global recession provided the country's government with an added impetus to diversify its economic base. “One of the government’s strategies has been to reduce the country’s dependence on oil, and even if it will continue to be important, the main goal is to try to minimise that contribution," he says. "There are some indications that this is beginning to take place. The IMF reported in its recent economical outlook an expected increase of about 10% in the non-oil industry for the coming years. We expect to see increases in electricity, telecommunications, agricultural and infrastructure.”

Standard Bank's Mr Coelho says: “The National Private Investment Agency has been created to approve FDI and give companies a number of tax benefits when they invest in certain industries. We have already seen interest from construction and cement companies, as well as food distribution companies, and some agribusiness is starting up. However, it is still early days.”

With government expenditure in Angola’s non-oil sector expected to expand by 7% annually, according to the AfDB, fDi Markets found that the government is experiencing some success in attracting FDI to other sectors. In terms of project numbers, FDI into the software and information and communications technology services sector has been on the rise; its share of total greenfield FDI projects grew from 9.3% in 2003 to 13.4% in 2012. Moreover, between 2003 and 2012, this sector attracted the most FDI projects, with a total of 13,560 projects. The financial services sector ranks second and its share of FDI projects rose from 6.8% of all FDI projects in 2003 to 9% in 2012. It is notable that in terms of project numbers alone, the coal, oil and natural gas sector ranks a distant 15th place, as it attracted 3609 projects, representing 2.8% of all greenfield FDI projects during this period.

“The available data shows that the oil sector has decreased in 2011 by about 3%,” says Mr Marques. “There is a strong move to invest in the non-oil sector, and although the reliance on oil will continue to be a reality, the question is whether the oil industry will represent less or more than 50% of the Angolan GDP. That is a challenge the government will have to face.”