U/S JEFFERY VISIT SETS THE STAGE FOR DEEPER

UNCLAS SECTION 01 OF 04 LUANDA 000574 SENSITIVE SIPDIS E FOR U/S JEFFERY E.O. 12958: N/A TAGS: PGOV PREL ECIN ECON EFIN EINV EPET ETRD EAID OVIP (JEFFERY REUBEN),AO SUBJECT: U/S JEFFERY VISIT SETS THE STAGE FOR DEEPER BILATERAL RELATIONS REF: LUANDA 00532 ¶1. (SBU) SUMMARY: Angola rolled out the red carpet to receive Under Secretary of State for Economic, Energy and Agriculture Affairs Reuben Jeffery III during his July 21-22 visit to Luanda. In meetings with key players in Angola's economic equation (government, international oil companies, banks, and other private sector entities),Jeffery received a strong, consistent message: -- Angola is booming as it uses massive oil and diamond revenues to rebuild an infrastructure (physical and human) devastated by a 27 year civil war that ended just six years ago; -- At the same time, Angola is beset by enormous challenges, including corruption fueled by the huge inflow of revenues and abetted by poor accountability structures, acute shortages of skilled personnel, woefully inadequate financial institutions, deficient investment in the non-oil/gas sectors that are best suited to creating millions of badly-needed jobs, and social indicators that rank among the world's worst; and, -- Angola needs and wants both USG assistance in modernizing and strengthening its financial institutions and U.S. private sector investment to kick start the non-oil/gas sectors, especially agriculture, agriculture processing, mining (iron, copper, gold),forestry, among others. ¶2. (SBU) SUMMARY continued. High level engagement, such as U/S Jeffery's visit, is key to deepening our relationship with Angola, a country of strategic importance to the United States for numerous reasons, including its role in promoting peace and stability in central and southern Africa, the potential for its relatively large and effective military to support peacekeeping operations, as a major non-Middle Eastern source of oil, and as an investment and trading partner. U/S Jeffery's message of recognizing Angola's strategic importance and the progress it has made during six years of peace, acknowledging the many problems and challenges that remain, and exploring the possible role the U.S. might play in addressing those challenges was right on target. The challenge now is to build on the success of the Under Secretary's visit. END SUMMARY. THE VIEW FROM THE TOP -------------- ¶3. (SBU) Meeting with U/S Jeffery at the behest of President Dos Santos (who was engaged in funeral arrangements for his sister) Prime Minister Dos Santos (Nando) underscored the progress Angola has made in consolidating peace during the six years following the February 2002 end of the nation's 27 year civil war. Nando gave high marks to the opposition UNITA as a "good partner" in consolidating peace. He said the September legislative elections, the nation's first since the 1992 elections precipitated another decade of war, would be peaceful. He declared that both the ruling MPLA and UNITA want peace, stability and development more than either wants to win an election. Jeffery replied that high-quality elections would send a powerful message to the international community that Angola is a strong, emerging democratic state. ¶4. (SBU) Turning to the nation's economic revival, Nando said the government's priorities were first to rebuild the road and railway networks and the water and electrical systems, all of which were devastated during the civil war. The nation now is working to strengthen the health, education, and agriculture sectors, he added. Recognizing that the oil sector cannot boom forever, the Prime Minister was especially proud that the non-oil sector had experienced double-digit growth last year. Declaring that Americans are famous for their pragmatism and efficiency, Nando called on American business to invest in the non-oil sector, just as it has in the oil sector. He acknowledged that some American business is "afraid" of investing in the non-oil sector, but appealed to them to come, telling U/S Jeffery to "be our spokesman, let American business know about Angola, tell them that we are ready to receive them." ¶5. (SBU) In a separate meeting with U/S Jeffery, Manuel Vicente, President of Sonangol, Angola's national oil company and, perhaps, President Dos Santos's top economic advisor, acknowledged Angola's many challenges (congested ports, lack of economic diversification beyond oil, deficient electrical supply, lack of skilled manpower) and detailed how Sonangol was working to address each of these challenges. Vicente LUANDA 00000574 002 OF 004 saved his most powerful message until the conclusion of the meeting, when he faced Jeffery directly and declared that his "last message is that America must be more present in Angola, America must not be absent from Angola, America must not let the Chinese be alone in Angola." ...AND FROM ANGOLA'S ECONOMIC TEAM -------------- ¶6. (U) In separate meetings with Deputy Prime Minister Aguinaldo Jaime, head of the GRA economic team, Finance Minister Jose Pedro de Morais, Central Bank Governor Amadeu Mauricio, and Deputy Central Bank Governor Rui Miguens de Oliveira, U/S Jeffery received consistent messages about Angola's considerable progress during the past six years, the many problems that the nation continues to face today, and ways that the U.S. could help Angola overcome these problems. ¶7. (SBU) The various members of Angola's economic team described to U/S Jeffery the significant progress Angola has made since the February 2002 end of the civil war, including: -- Budget reform. Angola now has a fully operational on-line system to track the budget at both national and provincial levels. This system enables the Finance Ministry to rein in extra-budgetary expenditures. The system will be expanded soon to include Angola's overseas missions and to record the government's assets throughout the nation. -- Debt restructuring. Angola is fulfilling its agreement with Paris Club creditors, thus enabling them to open new lines of credit, as appropriate to Angola's new, post-war circumstances. -- GDP growth. According to the Finance Minister, the GDP is doubling every 3 years (other interlocutors posited 5 years), which, while positive, creates problems of sustainability over the medium to long term. -- Infrastructure development. As attested by the construction that U/S Jeffery witnessed during his visit, Angola is investing hugely in rebuilding its cities, roads, railroads and other physical infrastructure. -- Macro-economics. Effective macro-economic policies have resulted in a stable currency, lower inflation, better fiscal policies, and budget surpluses. -- Consolidating peace. All interlocutors expressed confidence in the country's emerging democratic structures, and believed that the September elections would be peaceful. ¶8. (SBU) U/S Jeffery's wide-ranging discussions with the key players of Angola's economic team revealed a multitude of challenges facing the nation's economy, including: -- Managing expectations. After six years of peace, Angolans want to start reaping a peace dividend now, not tomorrow, as Jaime put it. -- Lack of human capacity. The government has the financial resources to support a wide range of initiatives so more Angolans can benefit from the nation's oil wealth, but lacks the human infrastructure to implement such programs. The National Director of Energy noted that efforts to add 4000 MW to the power grid are constrained by the need to hire 1000 additional electrical engineers. Angola's tight immigration policies make hiring overseas expertise difficult. -- Constraining fiscal regime. Angola's current fiscal structure, a legacy from the Portuguese colonial bureaucracy, is extremely cumbersome and unresponsive. Among other things, the GRA has launched a complete review of the tax system in order to modernize the system and reduce bureaucracy. -- Corruption. The Deputy Governor of the Bank declared that the government controls too much of the economy and, therefore, corruption will continue as a problem as long as private enterprise needs government signatures to go about business. For example, the Cabinet (Council of Ministers) must approve any investment over USD 5 million, which would include building a moderately large house. "The GRA has to make more space for the private sector; as it is now, the private sector is dependent upon the government," the DepGov added. -- Lack of transparency. The Central Bank Governor acknowledged that transparency is essential for a modern financial system, and that Angola still needs to do more to improve transparency by providing more financial information publicly. He said the GRA is working on developing benchmarks toward this end. -- Sustaining macro-economic stability. The government is challenged to sustain macro stability without increasing LUANDA 00000574 003 OF 004 inflation in an economy in which the government is spending heavily ( a situation made more challenging by the GRA's inefficient monetary tools. -- Lack of jobs. The capital-intensive oil sector does not generate desperately needed jobs for Angola's young population. Agriculture and related agro-processing industries are seen as essential to creating these jobs. -- Lack of housing. The government is not keeping up with ever increasing demand for housing. The disparity between supply and demand is creating a real estate bubble, which the Central Bank Governor asserted needs to be controlled. -- High cost of living. Angola's high costs discourage new investment and divert much of the economy into the non-tax paying informal sector. Interlocutors hoped that revival of the agriculture sector would expand food supplies and start to bring down the exorbitant cost of living in Angola. -- Difficulty in starting a business. Despite efforts to create a one-stop shop for investors, the reality is that it is still costly and time consuming to launch new investments. -- Deficient property rights. Lack of clear title to property undercuts access to credit. ¶9. (SBU) A common theme throughout U/S Jeffery's discussions with members of the GRA economic team was the key role that the USG and the U.S. private sector could play in helping Angola address these challenges, including: -- Technical assistance. Both the Finance Minister and the Bank Governor expressed appreciation for ongoing technical assistance from USAID and requested that such assistance be greatly expanded, including areas such as long-term financial forecasting, studies of monetary indicators, refining monetary policy, improving inflation control, effectively managing growing financial reserves, and improving the banking system. -- US banking presence. The Central Bank Governor invited U.S. banks to explore opportunities to be a part of Angola's growing financial sector. -- Early signing of a bilateral Trade and Investment Framework Agreement (TIFA). A representative of the Angolan Foreign Ministry told U/S Jeffery that the TIFA is undergoing final legal review and Angola's comments would be forwarded to the U.S. soon. (Note: Shortly after U/S Jeffery's departure, the Embassy received GRA comments on the TIFA text.) -- Angola's bad image in the U.S. Acknowledging that Angola needs to improve its public image, interlocutors urged trade missions and conferences/symposia to help American businesses understand better the realities of the new Angola. INTERNATIONAL OIL COMPANY EXECUTIVES -------------- ¶10. (SBU) During a breakfast meeting with the Under Secretary, American and French oil company executives said operating profitably in Angola is becoming increasingly challenging as the government becomes more aggressive in maximizing it share of oil revenues. According to the execs, the companies' most serious problem is the government's toughening interpretation of the tax code and unilateral decisions by the tax authorities to change production contract agreements. The executives thought that the international companies might be victims in a struggle between the Finance Ministry and Sonangol over which entity can generate the most revenues from the IOC's. ¶11. (SBU) The IOC executives called for more U.S. engagement with Angola, pointing out that Angolans are proud and that it is important to show them due respect. The execs added that deepened U.S. engagement would help keep the Angolans "out of the arms of the Chinese and Russians." The executives expressed appreciation to U/S Jeffery for his visit, noting that this was exactly the kind of respect that the Angolans seek. COMMENT -------------- ¶12. (SBU) Aside from the President, who was dealing with the recent death of his sister, the Under Secretary met the key actors in Angola's economic equation --- good evidence that the Angolans valued his 24 hour visit and meant what they have told us about their desires for deeper U.S.-Angolan relations. The challenge now is to build on the success of the Under Secretary's visit. On the diplomatic front, an early opportunity for senior level discussions with the GRA LUANDA 00000574 004 OF 004 might be on the margins of UNGA during the September opening sessions. On the technical assistance front, a possibility for expanding engagement would be posting in Luanda one or more Resident Advisors from the Office to Technical Assistance, Dept of the Treasury (reftel). On the commercial front, an early trade mission to Angola is a possibility, one we are currently exploring with the U.S.-Angola Chamber of Commerce. Such a mission could be combined with a USA Day workshop/symposium to explore avenues for expanding trade and investment. In addition, we are also exploring with the Dept of Commerce the possibility of creating a Commerce Locally-Engaged Staff position here. ¶13. (U) Under Secretary Jeffery did not have an opportunity to clear this reporting message. MOZENA