Oil companies will soon have to process all their supplier payments through the local financial system but will the system be able to cope? Published in Africa Confidential, 7 September 2012
Eight years after it was first proposed, the government is bringing in a law that will force oil companies to pay their suppliers through banks inside Angola. The Law on Foreign Exchange Regulations Applicable to the Oil Sector will provide a huge boost to liquidity levels in the local banking sector but it remains unclear if there will be many practical benefits for the local economy and how well local banks will cope with the influx of funds (AC Vol 52 No 24).
The law takes effect on 1 October and payments by oil companies may be made in dollars or kwanza. Over the next year, the measures will be gradually tightened.
From 13 May, payments necessary to settle local tax bills must also be deposited with Angolan banks: until now, some oil companies have paid their tax bills via banks abroad, including in London. Then, from 1 July 2013, all payments to local suppliers must be made in kwanza. Finally, from 1 October 2013, any oil company payment to foreign suppliers or service providers will also have to be made from Angolan bank accounts.
The potential impact on the local banking sector is huge. Speaking at a meeting at the Royal Institute of International Affairs (Chatham House) in London in July, the Chief Executive Officer of the Banco Espírito Santo Angola, Álvaro Sobrinho, said that he expected US$2 billion a month in extra funds to flow through the banking sector. The scale of the changes is a key reason why the law is only now being implemented, despite being first mooted in 2004. Oil companies and others have been concerned that banks would not be able to handle the scale of transaction involved. The government is betting that the banks will indeed cope.
The gradual process increases the chances that the law will go smoothly but not everyone is convinced it will be problem-free. While the banking sector is generally perceived as far stronger than in 2004, some smaller banks could still struggle. At least one small bank is thought to have serious liquidity problems, says a banking source, and others may lack the institutional capacity to deal comfortably with the higher volume of transactions. ‘I’d say the banking sector is better prepared than in 2004 but probably not totally prepared,’ a senior accountant in Luanda says. ‘Only when we see it put into practice will we know. It is a great question mark.’
The International Monetary Fund has also raised concerns about the new law while noting potential benefits. In a statement after an Article IV consultation and monitoring mission in May, the head of the IMF’s country team, Mauro Mecagni, said that the shift in transactions from offshore to domestic banks was ‘expected to increase the scope for domestic financial intermediation and serve as a channel to promote increased competition and financial innovation’. He cautioned, however, that ‘it may also result in a rapid expansion of banks’ balance sheets. In order for the process of financial deepening to be sustainable, a significant strengthening of prudential supervision is advisable prior to the gradual implementation of the law.’
For now, oil companies are unlikely to alter their investment decisions because of the foreign exchange regulations. They are likely to favour Angola’s larger banks with their funds. Among the main institutions expected to win out are the Banco Angolano de Investimentos and Banco Privado Atlântico, both part-owned by the state oil giant, Sonangol. Other banks well placed to capture a significant share of the funds include South Africa’s Standard Bank (AC Vol 51 No 21), which is expanding its presence in the country, Banco Caixa Geral Totta de Angola and Banco de Fomento Angola.
Sobrinho says that the entire economy could feel the benefits. ‘I think this is very important for the Angola economy,’ he told Chatham House. ‘In terms of business, it is very important to finance the economy, entrepreneurs and the largest companies. We need to invest in some sectors. The banks need to have funds because there are no capital markets in Angola...the funds will be very important, first to the banks and second to companies, because the banks will have the necessary money to give credit for the Angola economy.’
Banks have already been making noises about boosting lending to the private sector. In May, 19 signed up to a new initiative led by the ministries of Economy and Finance called the ‘Angola Invests’ programme, to boost finance for micro-, small- and medium-sized companies at low interest rates. Yet the funds that they will receive from oil companies as a result of the new law will largely be in the form of short-term deposits. They are not well suited to acting as the basis for longer term loans or investments.
One practical difference which the new measures will make is a need to revise some existing long-term contracts between oil companies and their suppliers, particularly after 1 July 2013, when oil companies will have to pay local bills in kwanza. ‘To date, most payments for the oil sector have been done offshore or, if onshore, they have been done in dollars rather than the local currency,’ says one international lawyer with clients in Luanda. ‘All these contracts will have to be made in the local currency. Receiving the money in local currency may not be a bad thing but you must be able to export the currency and get dollars for it if you need to repatriate it. So, if you have longer term contracts you probably want to ensure that your contracts provide for a dollar reference rate and then receive the relevant amount in kwanza.’
In the long term, the new measures are likely to boost the kwanza and help to reduce Angola’s current reliance on dollars. That could affect not just the oil and banking sectors but the entire economy.