As Angola diversifies its economy, more countries – such as France – are reinforcing bilateral ties to exploit Luanda’s exceptional economic potential. But falling oil prices are undermining the Angolan economy, generating social tensions.
On July 2, French President François Hollande arrived in Luanda, Angola with about 50 business leaders, as part of his African mini-tour. This visit is the culmination of the reconciliation process started in 2008 by former President Nicolas Sarkozy. Bilateral relations deteriorated after the Angolagate scandal, which implicated French politicians in illegal arms sales to Angola in the 1990s. With this visit, France is trying to increase its presence in the highly coveted Angolan market. In recent years many countries have been courting Africa’s second largest oil producer, attracted by its rapid growth (average 6% between 2008 and 2013) and its huge economic potential.
Angola a popular FDI destination
The visit allowed for the signing of several business deals worth several hundred million dollars. Total (Angola constitutes 10% of its world oil extraction), is currently investing in a $16 billion offshore project. Total also signed two contracts with state oil company Sonangol to reinforce their partnership and supply solar lamps. Furthermore, the French construction group Eiffage has agreed to build 104 pedestrian footbridges for nearly $200 million. Thus, it is no surprise that Air France has recently announced the launch of its third weekly Paris-Luanda flight.
AccorHotels also sealed a partnership with the Angolan company AAA for the opening and management of 50 hotels (6200 rooms) all over the country by 2017, as well as the training of 3000 local employees. Accor thus makes a major breakthrough in the Portuguese-speaking world and reinforces its leadership status in the African continent (94 hotels in 17 countries). Hollande also announced the opening of a French Development Agency office to simplify visa procedures and encourage investments.
France’s growing interest in Angola has been stimulated by Luanda’s will to diversify its economy to reduce dependence on oil. France seems determined to contribute to the diversification by extending bilateral cooperation beyond oil, as this should open up new markets. France, with about 80 companies and 2000 expatriates in Angola, is the country’s third largest FDI provider. Despite this, France has been struggling to penetrate the non-oil sectors of the Angolan economy. France is hindered by systemic factors such as bureaucracy and endemic corruption, but is also failing to compete with Angola’s main partners:
- China granted Angola several oil-backed loans ($15 billion credit line since 2004) and buys half its oil;
- The US is Angola’s second largest economic partner, with Exxon and Chevron enjoying a longstanding presence in the country;
- Portugal has nearly 1000 companies and 150,000 expatriates in its former colony, including thousands of skilled young Portuguese workers who fled unemployment. Angola is a massive investor in Portugal;
- Brazil has roughly 100 companies in Angola.
European countries like France, Spain, Germany, and Italy have become aware of the immense possibilities in Angola, which still has to develop its agriculture, social services and industry after decades of civil war (1975-2002). They are all bolstering their operations in Angola and encouraging the country’s economic diversification, in order to better penetrate the Angolan market, where even foreign SMEs seem able to thrive. France, recognized for its expertise and attention to local content, could break into the sectors of water, transport and energy, especially electricity, as Angola wants to double its electrification rate by 2025 to 60%. The opportunities in this sector were highlighted by the fact that during Hollande’s tour, a French SME landed a contract for the construction of two solar and thermal plants.
Low Oil Prices Threaten to Undermine Development Goals
However the drop in oil prices in the past year (more than 40%) could undermine Angola’s economic attractiveness. The economy has been severely hit by the decrease as oil represents over 70% of tax revenues and 90% of exports. Luanda slashed its 2015 budget by 26% last February thus delaying construction projects, decreasing public investment, depreciating the national currency, and raising inflation. Consequently, the Angolan government plans to borrow $25 billion this year: $15 billion from the sale of Treasury bills and bonds, the rest from foreign debt. The World Bank already agreed to give Angola $650 million.
Unlike the 2008 downturn Luanda has reacted promptly, thus reassuring investors. Specifically, after 2008 Angola built up financial reserves, basing the budget on an oil price assumption below the market price. But the highly oil-dependent economy remains fragile. The economic slowdown (expected 3.8% this year) could increase poverty in a country already ranked among the poorest in the world. Moreover austerity could worsen social tensions. The opposition has already denounced the lack of transparency regarding reserves, as the $30 billion that Luanda saved in the last four years seem to be missing.
Demonstrations, though quickly repressed by the police, have increased: many young people demand President Dos Santos’ resignation (in power since 1979), better living conditions and social justice. Last June, the police arrested 15 human rights activists who had peacefully protested against the regime. Amnesty International condemned these arrests as a violation of the freedom of assembly.
The situation in Luanda accurately reflects the strong inequalities affecting the country. In a country where 54% of the population live with less than $2 a day, the capital is the most expensive city in the world for expatriates. Corruption, the weakness of non-oil sectors (most consumer goods are imported), high interest rates and inflation encourage high prices. Rapid oil-driven growth has financed post-war reconstruction but has also encouraged speculation and soaring prices, as Luanda became a hub for investors, expatriates, and real estate projects.
Despite the harsh living conditions, defence and security spending (15% of total expenditures this year) remains above education and health spending (13%). Therefore a growing part of the population is disgruntled which could lead to serious social unrest ahead of the 2017 elections. The aforementioned arrest of activists shows that the government takes the situation seriously but has the situation under control.
In the short to medium term the regime should remain stable. Hollande’s business-centred visit showed that Angola’s social tensions and democracy issues do not worry foreign countries and investors. Angola is likely to be more and more courted and to become the largest recipient of FDI in Africa in the near future.