C O N F I D E N T I A L LUANDA 000159


DEPT FOR EEB/IFD/OMA ALEX WHITTINGTON
DEPT FOR EEB/IFD/ODF CHERRY ORDONEZ
DEPT FOR EEB/EPPD/PA STEPHAN THURMAN

E.O. 12958: DECL: 03/04/2019
TAGS: AO ECON EFIN ENIV EPET PGOV
SUBJECT: GRA SLASHES BUDGET AS MACRO OUTLOOK DETERIORATES

REF: 08 LUANDA 1019

Classified By: Ambassador Mozena for reasons 1.4 (b) and (d).


1. (U) SUMMARY: Following steep declines in the oil revenues
that generate much of Angola's income, the GRA will cut
spending on goods and services across all ministries by 36
percent and subsidies and social transfers by 40 percent from
Angola's previously approved 2009 budget. Our contacts tell
us the GRA does not want to run a fiscal deficit in 2009,
despite the country's considerable foreign reserves and
(allegedly) robust stabilization fund. While the long term
investments in infrastructure and development projects have
not been cut (many, in fact, are funded by off-budget loans
from China), the substantial drop in government outlays will
adversely affect the many Angolans dependent upon subsidies
and social transfers, as well as the non-petroleum sector.
As pressure mounts on policy makers to devalue the Kwanza, a
recent speculative run against the currency could indicate
the GRA is close to making a decision to devalue in order to
save its reserves. End Summary.

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GRA Slashes Budget 35 Percent
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2. (C) After much internal debate over whether to re-adjust
the 2009 budget or finance it with Angola's reported USD 20
billion in reserves, the GRA now plans to cut the 2009 budget
by 35 percent across the board. The GRA formally passed its
"Anti-Crisis Plan" on February 26, which called for an
undisclosed cut in government purchases of goods and
services, halting new public investments, restructuring
"strategic public enterprises," and competitive substitution
of imports aided by "temporary protectionist measures." In
discussions with Armando Manuel, Director of the National
Treasury at the Ministry of Finance, EconOff learned that the
GRA would cut the expenditures on goods and services by 35
percent across all ministries and cut subsidies and social
transfers by 40 percent. He confirmed the government would
continue to fu

nd existing development projects due to their
long-term importance to the economy and their importance to
Angola's hosting of the Africa Cup in early 2010, but will
not start any new ones during 2009.

3.(C) Manuel said the primary goal of the GRA was to prevent
a fiscal deficit (the first since 2004), which under the
original 2009 budget was projected to reach 9 percent of GDP,
down from a 2008 surplus of 10 percent. When asked about
using Angola's reported USD 20 billion in reserves held by
the Angolan Central Bank (BNA) or the undisclosed billions in
its off-shore sovereign wealth fund, he replied that the GRA
viewed the global economic downturn as a "short-term shock"
and felt it wiser to tighten up spending (i.e. keep long-term
investment and debt service spending, but cut current
expenditures).

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Reserves Decline Significantly
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4. (C) Although Angola is not spending its reserves to
sustain budget expenditures, it is drawing down those
reserves nevertheless. The February 27 edition of "Novo
Journal" (a paper owned by Banco Espirito Santo,) reported
that Angola spent one-quarter of its USD 20 billion foreign
reserves over the past three months, leaving USD 15 billion
in the treasury. The February 28 edition of "Economia" also
ran a story on the reserves and put the recent drop at about
17 percent. GRA officials have not publicly confirmed such a
large drop; however, Vice Governor of the Central Bank (BNA)
Rui Minguens would not deny the report in a private
conversation with the Embassy. While Angola reportedly also
has a sovereign wealth fund alleged to contain at least USD
20 billion, there is no clear indication of where it is
invested or what loses, if any, it has suffered during the
crisis.


5. (C) The Angolan press also reports that the state oil
company, Sonangol, which has invested billions of the
nation's oil wealth abroad, suffered notable losses,
including USD 3 billion in European investments alone. One
investment identified was a nine percent stake in Millennium
Banco Commercial Portuguese, a bank that saw its share price
plummet 75 percent in the last year. (NOTE: Sonangol
typically invests 50 percent of its profits in self-managed
investment funds with which it has acquired assets around the
world. For 2008, Post estimates that the amount could have
been as much as USD 13 billion, all significantly exposed to
the effects of the global financial crisis. END NOTE). Oil
industry contacts recently told Emboffs that Sonangol has yet
to come up with its 23 percent share of the estimated USD 6
billion for the Angola LNG terminal now under construction in
Soyo, and that the parastatal is exploring the possibility
with a U.K firm of raising USD 2.5 billion through a bond
issuance to cover its share of the LNG terminal.

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Double Whammy Will Contract Economy...
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6. (U) The sharp drop in oil prices over the last eight
months, coupled with OPEC-mandated production cuts has
significantly worsened Angola's macro economic outlook for

2009. As late as December, the Ministry of Finance and other
economists had projected that Angola, which relies on exports
of petroleum for 60 percent of its GDP and 80 percent of its
government revenues, would have real GDP growth of around 12
percent in 2009; cooling somewhat, but yet continuing, a five
year trend of strong double-digit GDP growth. In fact, the
GRA had confidently based, and passed, its 2009 budget on a
reference price for Brent of $55 per barrel last fall (see
reftel). However, since then, and with the steep drop in
petroleum prices, OPEC agreed to two production cuts
including a 13 percent reduction (244 thousand barrels per
day) for Angola.


7. (U) As a result of these changes, the World Bank is now
estimating that Angola could have a nominal GDP contraction
of 17 percent (assuming an oil price of USD 50 per barrel),
with 2009 inflation estimated at 10 percent. One noted
Angolan economist predicts an 11 percent negative nominal GDP
growth rate driven by an estimated 30 percent growth in the
agricultural sector. For perspective, the much smaller size
of the entire non-petroleum economy, relative to the oil
sector, would have to grow by 22 percent in 2009 just to
offset the 13 percent decrease in oil production (at $55 per
barrel) in order to end up with a flat GDP at zero percent
growth rate. The GRA currently predicts a 16 percent growth
rate for the non-petroleum sector. In a worst case scenario
where oil averages at $40 per barrel for 2009 and the OPEC
cuts are maintained throughout, total revenues could decline
by as much as 50 percent in 2009, bringing the nominal
decline in GDP to almost 23 percent.

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...Yet Provide No Relief on Inflation
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8. (U) The large decrease in the in-flows of foreign exchange
and the drop off in demand of goods and services by the GRA
are not expected to bring relief for inflation, now at 13
percent. The GRA will likely continue to spend hundreds of
millions of dollars from off-budget Chinese lines of credit
on development projects, including airport and stadium
projects to host the 2010 Africa's Cup, effectively negating
the spending cuts from the 2009 budget. Additionally Angola
still has formidable supply constraints and infrastructure
bottlenecks that will not change significantly in 2009, which
also contribute to inflation. For 2009, the GRA has again
set its target inflation rate at 10 percent. (COMMENT:
Although Angola has done an impressive job bringing its high
inflation under control since the war ended in 2002, the
reality here is that even a stable 10 percent inflation rate
will be tough on the average Angolan in the face of a
contracting economy. END COMMENT)

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Is the Kwanza Overvalued?
--------------


9. (C) The Kwanza, which has been pegged to the dollar at 75
to one since 2005, is overvalued and appears to have been
under speculative attack. In a February 14 "Journal de
Angola" article, Vice Governor Minguens disclosed that the
BNA had recently encountered a spike in the demand for
dollars at USD 335 million in one day, where it had been
averaging USD 50 to 60 million per day. Angola is now
experiencing a large decrease in the rate of forex flow into
the country due to a large drop in the price and quantity of
its principal export. This phenomenon can dramatically
affect the real exchange rate of a country. This fact,
coupled with the speculative attack alluded to by the Vice
Governor of the BNA, and the dramatic drop in reserves over
the last three months suggest that the Kwanza needs to be
devalued. A February 28 article in "Economia" chastises the
BNA for refusing to devalue and puts the real value of the
Kwanza at 85 to one USD, while noting that many petroleum
economies already have devalued, citing Nigeria, Russia, and
Kazakhstan. On February 26, Bloomberg quoted Michael Hugman,
emerging market analyst for Standard Bank, as putting the
odds of a devaluation in the next six months at 50 percent.
(COMMENT: The risk here is that Angola may commit its
considerable reserves to defending the overvalued Kwanza and
then face a forced devaluation after transferring its foreign
reserves to speculators. The GRA would then be in a weaker
position than otherwise coming out of what is clearly going
to be a recession in 2009. END COMMENT)

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COMMENT
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10. (C) While the sky is not falling in Angola, clearly it is
in for a difficult year with a projected negative GDP growth
of 17 percent, the first negative growth since 1995. Angola
officially has the reserves to weather the $100 dollar drop
in oil prices and help maintain the standard of living for
Angolans, but for unknown reasons it is disinclined to use
them. The GRA decision to cut the budget instead of spending
some reserves for what it views as only a "short-term shock"
is too fiscally conservative and exactly the opposite thing
to do for a country with huge social spending needs. The
apparent loss of reserves to speculators nullifies the GRA's
stated effort of saving its reserves by cutting government
expenditures. By devaluing, it could keep Kwanza
expenditures up (and social spending up) while saving the
reserves for necessary imports. Whether the GRA is worried
about the effects of a devaluation on inflation, or desires
to keep much needed foreign inputs cheap, continuing to
defend an overvalued Kwanza will effectively transfer the
nation's wealth to a small slice of the population (the elite
importers and would-be speculators) at the expense of social
development. Similarly, the GRA's economic diversification
effort will be hampered by the cut in government spending.
Angola has chosen to maintain spending on development
projects, including the ones needed for the Africa Cup in
2010, through the use of off-budget lines of credit from
China. However, this will not help ease inflation during
this downturn, and it does little for employment since many
of these Chinese-funded projects use Chinese labor.


MOZENA