Angolan consumer demand in decline

• As with the majority of African consumer markets, weaker purchasing power as a result of supply and demand shocks resulting from the coronavirus disease 2019 (COVID-19) pandemic will bode ill for activity in 2020 and 2021.
• Annual headline inflation in Angola remained elevated in September and October, limiting space for the central bank to cut interest rates further in the near term to support small and medium-sized enterprises and raise private consumption.
• The Angolan government showed prompt action to support households and businesses in 2020 during the pandemic through for instance the introduction of exemptions from value-added tax (VAT) on goods imported as humanitarian aid and donations, but also VAT tax credits on imported capital goods and raw materials for producing essential consumption goods.

Rising price pressures and higher unemployment

Figures available as of 4 November from the National Bank of Angola (Banco Nacional de Angola: BNA) suggest that price levels stood at 22.9%. September's annual headline inflation rate rose to 23.8%. Annual headline inflation reached the 20% mark back in April. In addition, April registered the highest increase on a month-on-month basis, at 2.1%, identical to the monthly price growth observed in January. Monthly headline inflation in September fell to 1.8%, down by 0.3 percentage point from the previous month. The combined demand and supply shocks of the COVID-19 pandemic have caused a significant deterioration in macroeconomic fundamentals contributing to a worsening in poverty levels and general weaker purchasing power in Angola. The weaker purchasing power that results from these developments is expected to have a significant negative impact on the consumer market. And anticipated higher unemployment levels in 2021 will challenge a rebound next year.

Furthermore, and according to the Angolan National Institute of Statistics (INE), the unemployment rate during the third quarter of 2020 is estimated at 34%, 1.3 percentage point higher than in the second quarter and 3.9 percentage points higher than in the third quarter in 2019. To mitigate the negative impacts of the COVID-19 pandemic, the BNA announced in September plans to implement a deferral measure in the constitution of impairments for regulatory effect.

Limited scope for monetary adjustments

However, further monetary policy adjustment is expected to remain constraint. We maintain our view that for instance interest rate hikes or further rate cuts by the BNA are unlikely in the near term amid expected continuous high inflationary pressures. IHS Markit expects Angola's annual average headline inflation rate to reach around 22.5% in 2020. Although softening moderately, inflationary pressures are expected to remain elevated in the near term, before tempering in 2022. The higher price levels in tandem with a weaker exchange rate of the kwanza, which is the result of oil price softness, are expected to continue to burden private-sector business growth, in particular, and IHS Markit expects private consumption to decline by 4.3% in 2020, before gradually recovering during the second half of 2021. This outlook remains under high risk, however, from the outcome and duration of a second wave of COVID-19 pandemic globally.

Fiscal policy changes to support the economy

Given little scope to adjust interest rates, we have seen other prompt action by the Angolan government to support households and businesses in 2020 during the pandemic. These included exemptions from VAT on goods imported as humanitarian aid and donations, but also VAT tax credits on imported capital goods and raw materials for producing essential consumption goods. Additional liquidity support to banks and a liquidity line to buy government securities from non-financial corporations have also been implemented to support business activity.

The quantitative impact of the COVID-19 pandemic on business growth in Angola and on other macroeconomic criteria such as consumer spending has not been measured yet by the Angolan government. However, to obtain critical information on the impact of the pandemic on the productive and commercial activity of mostly small and medium-sized companies and to assist their actions and decision-making, the BNA launched a survey on 30 October. The survey is of monthly frequency and should be reported to the BNA by the 15th day of the following month, with data based on turnover, number of workers, and use of support instruments created by the government. The launch of the survey bodes well for further, much-more targeted action by the government to address domestic demand. Lowering excise duties, for instance, would be one additional action we expect the government to undertake. Angola's beverage sector raised concerns in October that, if excise duties are not lowered, further reductions in employment and productivity will arise, following a drop in revenues as a result of COVID-19 this year. The excise duty stands at 25% for spirits and 19% for soft drinks. According to the Association of Beverages Industry of Angola, the beverage market has seen a drop in orders of 30% so far in 2020, leading to a significant rise in redundancies contributing to higher poverty levels.

Posted 17 November 2020 by Alisa Strobel, Senior Economist