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Risk Advisory: Changing Sonangol – Can Angola Finish What it Started?

After a promising start, President João Lourenço’s ambitious plan to reform Angola’s state oil company Sonangol appears to have ground to a halt. His government has been forced to turn its attention away from the complex task of fundamentally reforming the Angolan economy to focus on a pressing currency and cost-of-living crisis that threatens to sap its weakening public support. This leaves foreign investors in Angola’s oil sector wondering about what might happen next and when. 

Tough choices: roadblocks stack up

Deteriorating economic conditions, combined with growing dissatisfaction with the ruling MPLA, are forcing Lourenço to make tough choices. He faces an unenviable trade-off between prioritising the necessary but politically-draining long-term reforms that Angola needs and the immediate demands of an increasingly disgruntled population struggling to make ends meet.

Angolans face considerable economic challenges from inflationary pressure stoked by the plunging value of the national currency, the kwanza, and a contracting economy. The general economic decline has spiked poverty-induced violent crime and led to almost daily demonstrations in Luanda and other major cities. That some of these have been met by a violent response from the Angolan security forces does little to boost Lourenço’s popularity. Neither did he endear himself much with his attempt – at the IMF’s instigation – to cut domestic fuel subsidies.

Growing disaffection with the status quo came to a head at the national elections last year. The president’s party, the MPLA, whose support has been waning for years, narrowly won. Lourenço was handed a second term, but his mandate was weakened by the fragility of the victory and a resurgent threat posed by a united opposition block. 

There has also been growing disquiet within the MPLA itself, amplified by recent whispers of a possible return to Angola of Isabel dos Santos, despite the arrest warrant against her. Some have suggested her first move, on touching down, would be to challenge Lourenço for the presidency. She can still mobilise MPLA members loyal to the dos Santos family – galvanising support by continuing to label the charges against her as politically motivated.

Seemingly surrounded on all sides by political and economic turmoil, Lourenço’s reform programme, at the heart of which is the overhaul of Sonangol, is at risk of stagnating.

Early promise

Before circumstances intervened Lourenço had appeared to be an ambitious reformer. After coming to power in 2017 he pledged to overhaul Sonangol. The move was part of a wider reform programme aimed at reducing the state’s dominant role in the economy and cracking down on corruption. This was widely hailed as the first step towards improving Angola’s image internationally and opening the floodgates of foreign direct investment, which – the government hoped – was going to drive the country’s economic diversification and reduce its critical dependency on oil.

Lourenço’s reforms were technocratic rather than populist – with short-term costs justified by the promise of future benefits. And by dismantling Sonangol they always risked alienating vested interests that have benefited from the status quo, in some cases for decades.

As the hand-picked successor of long-time leader José Eduardo dos Santos, many were surprised when Lourenço announced that he intended to restructure Sonangol. Historically managed by powerful and well-connected figures with close links to the political establishment, the behemoth had long been perceived as ‘untouchable’. As Angola’s cash cow, Sonangol’s revenues were personally overseen by dos Santos and his associates, providing a vital revenue stream for the government as well as the elites who controlled it.

The sacking of dos Santos’s daughter Isabel as head of Sonangol – along with the removal of several other board members loyal to her – showed the world Lourenço meant business. Isabel was subsequently charged with mismanagement and fraud related to her stewardship of the company – charges she denies.

The bigger problem for Lourenço is that these controversial reforms have yet to deliver dividends for ordinary Angolans – there has so far been no meaningful surge in inbound investment. This means that most of the population continues to work in the informal economy, nearly half living in extreme poverty, with wealth still concentrated in the hands of a narrow military and business elite, 20 years after the end of the country’s civil war.

How far has Lourenço got?

Lourenço’s Sonangol reform programme focused on three things (1) reducing its role in the country’s oil and gas sector; (2) decreasing its significance in the wider economy, and (3) professionalising its staff. While the first objective has for the most part been met, there is still much to do with the second and third.

The reduction of Sonangol’s control over Angola’s oil sector was mostly achieved by stroke-of-the-pen reforms. In 2019, the government stripped away the company’s functions as a regulator and concessionaire, and with it, its ability to grant oil and gas blocks and exploration licences. Separate regulators were created for the upstream and downstream sectors: the Agência Nacional do Petróleo, Gás (ANPG) and the Instituto Regulador dos Derivados do Petróleos (IRDP) respectively. The ANPG also acquired the concessionaire function.

Yet the new bodies have not exactly severed their ties to Sonangol – predictably, many of their personnel and key leadership figures are former employees of the national oil company. Moreover, Sonangol, in its continued role as the NOC, retains equity investments of typically 10% to 20% in new blocks, enough to enable it to make its presence felt across the sector.

Some progress has also been made on the second objective: reducing Sonangol’s influence in Angola’s non-oil economy with a sell-off of its massive portfolio of non-core assets. Those spun-off multiple sectors include aviation, transport, logistics, real estate and banking. Close to half of Sonangol’s non-oil and gas businesses have been privatised, and there are plans to float some 30% of either the production unit or the company itself. There is a consensus that these steps have enabled Sonangol to focus on its core activities of exploration and production, making it more efficient and transparent.

But momentum has been hampered by outside events. Both the COVID-19 pandemic and subsequent global macroeconomic conditions, especially rising interest rates, have cooled investor interest in Angola, and emerging markets more broadly. A number of privatisations have not gone to plan, as the government has struggled to find willing buyers, especially during the pandemic.

The process then took a back seat as the government focussed on elections and, more recently, currency instability and the cost-of-living crisis. The remaining sell-offs and the IPO could take some time (probably several years) to be concluded, with a listing pencilled in for 2027. Will Lourenço be around to see it?

Lourenço has also made some progress with his third objective – the professionalisation of Sonangol. Many of the executives most closely associated with the dos Santos era have been removed – not least Isabel and the coterie of senior executives appointed by her. Those departures send a strong message to the market that Lourenço is committed to change. 

In their place, Lourenço has appointed a more technocratic leadership team, including personnel with petroleum engineering backgrounds and experience in the private sector. For some, it is a return to Sonangol: they were let go under Isabel’s tenure.

Can Lourenço finish what he started?

While his near-term focus on financial stability is understandable given the potential for social and political instability, Lourenço needs – sooner rather than later – to press ahead with the remaining Sonangol reforms and wider privatisation efforts in order to tackle more deep-seated economic problems.

Without reform, Angola will continue to be hamstrung by a poorly diversified economy, budget-sapping external debt, and a ruinous brain drain. The country has seen an exodus of well-educated, homegrown talent and skilled expats, the latter of whom have been key to national development since the end of the civil war.

In many ways, the Sonangol reforms are a barometer of Lourenço’s willingness to open up the Angolan economy and chip away at the risks traditionally associated with investing in the country. While the early signs were encouraging, the severity of the challenges Lourenço faces domestically may mean he cannot survive in office for long enough to see the job through.

Source : BNE IntelliNews