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

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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

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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

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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