To offset the decline in its foreign currency reserves, OPEC member Angola—which relies on oil for 90 percent of government revenues—is ditching its currency peg to the U.S. dollar and will allow a more flexible exchange rate regime with the currency trading within a band.
Since the oil price crash of 2014, Angola’s economy has suffered badly, and its foreign reserves have dwindled.
Now Angola is trying to protect foreign reserves and is joining other oil producing nations that have devalued or floated their currencies to protect FX reserves, such as Russia, Kazakhstan, and Nigeria.
Since the oil prices tumbled in 2014, Angola’s currency—the kwanza—has already lost 40 percent of its value and is 166/$1.00, but according to analysts, the kwanza is still overvalued.
On the black market, the kwanza is 430/$1.00, and dollars are scarce, making companies struggle to pay foreign employees and international suppliers.
Even with oil prices rising in recent months, there has been “little evidence of the pressure on reserves subsiding,” Cobus de Hart, senior economist at South Africa-based research firm NKC African Economics, told CNBC.
The new ‘trading band’ exchange regime could lead to the kwanza devaluing by 30 percent, Kaan Nazli, senior economist at investment management firm Neuberger Berman, told Reuters.
The lower-for-longer oil prices have not only battered Angola’s oil revenues and foreign reserves, but they have also led to a standstill in upstream investment, because reserves and developments are in deepwater and ultra-deep waters, which require higher oil prices for breakevens. No new projects have been sanctioned since 2014 and exploration is at a standstill, Wood Mackenzie says.
Big Oil and major oilfield service companies have started to reshuffle operations and renegotiate service contracts in Angola, due to the higher production costs, bureaucracy, and slow decision-making by state oil firm Sonangol, The Wall Street Journal reported in December 2017.
By Tsvetana Paraskova for Oilprice.com