Africa Debt Capital Markets Third Summit

1. Africa Debt Capital Markets Third Summit 27June, 2013

2. Contents Angola: recent developments and outlook Financial sector overview Angolan debt capital market

3. Contents 1. Angola: recent developments and outlook

4. Angola is the 5th African biggest economy and one of the world’s fastest-growing Top 10 world real GDP growth – CAGR00/10e (%) Africa major economies in 2012 (GDP – k Mn USD) Top 10 fastest-growing economies 2000/11 (GDP – k Mn USD) 6th 5th Area: 1.246.700 Km2 Population: 19,1 Mn # 2010E Capital: Luanda Currency: Angolan Kwanza (AKZ/AOA) Language: Portuguese Source: International Monetary Fund – World Economic Outlook ,April 11 (IMF – WEO Apr.11)

5. GDP growth supported by oil-sector but efforts for economy diversification are in place GDP composition (%) Real GDP evolution (%) • Despite being a closed and sheltered economy with low exposure to the international markets, Angolan economy was badly wounded in the 2008-09 global financial crisis by the sharp drop in oil prices. • Oil is critical to Angolan economy (40% of its GDP, 75% of fiscal revenue and 98% of total exports) and the rapid drop on its revenue curbed the GDP growth, destabilized both the public and the external accounts, placed the exchange rate under pressure and sharply rose domestic interest rates. Source: IMF – WEO Apr.11 and Angolan Government

6. In 2009 the Government started a restructuring program with the assistance of the IMF Net International Reserves (Mn USD) EOY foreign exchange rate (AKZ/USD) IMF SBA key measures The quick recovery on international oil prices and the authorities’ adjustment program supported by IMF’s US$1.4bn stand-by arrangement (SBA) helped the Angolan economy to recover and to reestablish its major fiscal and external account imbalances • Sharp fiscal adjustment focused on public expenditure reduction; • Reform of the foreign exchange auction system which led to significant depreciation of the AKZ (around 15%) • Tight monetary control (high discount and refinance rates together with high mandatory deposits near the central bank) to curb inflation and to support the AKZ exchange rate; • Close monitoring and surveillance of commercial banks to guarantee the financial sector stability and, not least, • A package of reforms focused on improving public financial management and the central bank internal governance. Source: Angola Central Bank (BNA) and IMF - WEO Apr.11

7. After its own debt crisis Angola is turning out some impressive numbers • Under the auspicious of the IMF, Angolan leaders have been forging ahead with reforms helping to recover from its own debt crisis in 2009, improving macroeconomic stability, rebuilding foreign exchange reserves and paying off a substantial pile of overdue debt. • The Government has also revamped the country’s investment incentive scheme to make it more selective and effective and established a new public-private partnership system (PPP) to encourage private investment into the infrastructures development. • In a world where sustained economic growth of any level is a relative rarity, the country is turning out some impressive numbers: • In 2012, Angola attained robust economic growth (7,4% according to the Government), a stronger fiscal position (6% of GDP), single digit inflation (9% at year-end), a stable exchange rate (0,6% depreciation) and further build-up of its international reserves (USD 30.6 bn) which exceeded the amount of external public debt (USD 20 bn) and covered 7.3 months of imports. • Economic activity has been driven by non-oil sectors (+9,1%) but oil sector also expanded (+4,3%). According to the International Energy Agency (IEA), oil production in Angola increased to 1.7 mbd in 2012 (+5,6% compared to 2011), still below the Government’s target of 1.84 mbd. • But hazards remain: • The country’s economy is heavily reliant on oil (40% of GDP, 75% of fiscal revenues, 95% of exports) and efforts to diversify are hampered by the fact that much of the country’s infrastructure has still not been rebuilt since the end of the civil war. • A long-standing complaint of foreign investors was the challenging business environment: Angola was, in the past (and still is) one of the worldwide most difficult countries to do business.

8. Outlook for 2013 is positive, • Macroeconomic prospects for 2013 are favorable despite a still uncertain global environment: • For 2013, the Government is optimistic and expects real GDP to expand at 7.1% rate (in line with OECD forecast). According to IMF growth should present a slight deceleration (+6.2%). • Oil prices may keep tracking at high levels (budget estimates were made at USD 96/barrel) and oil production should grow by 4% (to 1.845 mbd), supporting further foreign reserves accumulation (in March, international reserves reached a record high of USD 32.2 bn) strengthen Angola’s ability to react to a possible external shock. • Greater dynamism will be recorded by non-oil activities (+6%) as the Government intends to accelerate economic diversification through a massive program of public investments (9.4% of GDP in 2012), addressing key infrastructure gaps and reducing constrains to private initiatives. On the backlog of the National Development Plan 2013-2017, public expenditure is expected to rise by 27% in 2013 and capital expenditure will increase 58% (USD17 bn compared to USD10.7 bn in 2012). • This sizeable increase in public spending – that will test the technical capacity of Angolan authorities in executing this ambitious investment plan) will shift to a moderate overall deficit of USD 4.2 bn (equivalent to 3,4% of GDP) • The inflation will remain in one-digit (+9%), below the 10% target established by the Government, due to a persistent combination of favorable factors: a stable exchange rate, a prudent management of public finances and a vulnerable external environment, which reduced the pressure on imported inflation. • The good behavior of inflation will keep contributing to lower interest rates: BNA recently cut its reference rates (the basic rate, to 10% and the lending facility, to 11.25%) and is expected that will maintain a more accommodative stance on its monetary policy to decrease credit costs, which remain relatively high due to the lack of instruments in enforcing contracts

9. … but internal reforms must continue • The Budget for 2013 represents an important step toward achieving more transparent fiscal policy as the Government concluded the process (begun in 2010) of incorporation of quasi-fiscal operations undertaken by the state-owned oil company (Sonangol) related with housing and other expenses), in the Angolan public accounts, with the result being highlighted by the IMF. • Angola is one of the sub-Saharan countries with a greater focus on fiscal policy, presenting moderate levels of public debt (20% of GDP) and having accumulated fiscal surpluses over the past years that can be used to fund future financing needs. However, on the long-run, oil revenues will progressively decline and may require preventive fiscal consolidation measures, such as, increasing revenue from the non-oil sector. The ongoing tax reform (PERT) is critical to support this crucial objective. • Public spending efficiency may also be improved: for example, fuel subsidies (representing 7.8% of GDP) seen by the IMF as an inefficient and regressive expenditure (benefiting more high income classes as they consume more) could be reduced, provided that some compensation measure can minimize the effect on vulnerable social groups. • Will be also important to count with a developed domestic financial market to absorb the State financing needs and to ensure a favorable dynamic of public debt. From its 2nd post-program mission after the SBA completion (Jan. 2013) IMF has concluded that: • The authorities’ strategic objective of economic diversification also requires diversifying financing sources and instruments, in particular through the development of a local currency bond market and the adoption of best practices for the first-time bond issuers in international markets in terms of transparency and disclosure of information to potential creditors; • The new foreign exchange law for oil companies is also being implemented and the volume and size of oil sector-related transactions going through the domestic banking system will increase significantly, providing an impetus for financial market development.

10. Low level of indebtedness coupled with high growth improved country’s risk perception Angola received its first credit rating in 2010 and in July 2011 S&P upgraded the country rating to BB- with a stable outlook (only 3 notches below investment grade classification) Source: IMF - WEO Apr.11and S&P

11. Angola also shows improvements on “business environment”

12. Contents 2. Financial sector overview

13. Growth in Angolan banking sector has been impressive

14. Angolan Banks proved to be sound and resilient to recent financial turmoil

15. Angolan banks present an healthy diversification of their balance sheet High liquidity (deposits with Central Bank as result of high reserve rate), a balanced portfolio of loans and securities, low weight of non-remunerated assets, strongly funded by customer deposits Angola: mixed model (balanced exposure to interbank market) South Africa: deposit driven model (low exposure to interbank market) Portugal: market driven model (high exposure to interbank market)

16. Banking concentration: top 5 Banks represents almost 80% of the sector Total loans: Top 5 represents 79% of the sector Total assets: Top 5 represents 77% of the sector Total net earnings: Top 5 represents 82% of the sector Total deposits: Top 5 represents 79% of the sector Source: Banks annual reports

17. Angola banking penetration has been impressive but mainly centred in Luanda • At the end of 2011, Angola had 1.050 Banks´ branches of which, 576 registered in Luanda province. Cabinda 34 Zaire 22 • Banking Indicators – Dec 2011 Uíge23 Bengo23 Luanda Norte18 Luanda 576 Malange34 Kwanza Norte15 Luanda Sul12 Kwanza Sul34 Huambo42 Bié16 Benguela82 Moxico12 Huíla58 Namibe20 Kwando-Kubango12 Cunene 26 Branches Issued Cards (milliards) Automatic Teller Machines (ATM) (milliards) Banking penetration (as of % of population) Source: BNA

18. Contents 3. Angolan debt capital market

19. Angolan debt capital market is supported by short & medium term securities issuance • Despite this primary market activity transactions in secondary market are still irrelevant as, • Banks keep public securities on a “hold-to-maturity” basis on their balance sheets, • Low appetite from domestic non-financial investors (as they prefer liquidity or time deposits), • Difficult access from international investors to domestic market due to several constrains: • External capital flows (in & out) require previous authorization from Central Bank (BNA) • Angolan debt securities not allowed to trade on international platforms (organized and OTC markets, Euroclear, etc.)

20. Recent and estimated securities issuance

21. Public funding sources

22. Key measures to develop Angolan capital markets • Government should debut on Eurobond market, taking advantage of current favorable market conditions and growing risk-appetite from international foreign investors towards emerging markets and Angolan assets and debt. • Angola has already fulfilled the main objective conditions to its Eurobond debut: • Sovereign Rating (S&P BB- with a positive outlook) and a positive IMF stance under a successful SBA • Improving macro fundamentals (strong fiscal position, low external indebtedness and solid foreign reserves accumulation. • Other entities (public and private companies) should also get Rating classification and follow the trend; • Government should promote a regular and sustained debt issuance program to build-up an “yield curve” extended to higher maturities (10 years) and increase liquidity; • Promote Euroclear listing and settlement for Angolan debt securities (existing ones and new issues); • Create an OTC market or a multilateral trading platform, accessed by banks and institutional investors (internal and external) to increase securities’ price transparency and liquidity, through specialized market-makers; • Facilitate market access to foreign investors, allowing quicker capital flows (in & out) and clearly define their fiscal framework; • Promote attractiveness of public debt securities to private clients and non-financial investors.

23. Thank Youjramos@esinvestment.co.ao 27June, 2013