Angola Devaluation's Just the Start as Investors Expect More

(Bloomberg) -- Angola may have devalued its currency by more than 10 percent, but it will take more than that to end dollar shortages and revive the OPEC member’s battered economy.

The kwanza weakened 11 percent to 187.95 per dollar on Wednesday, a day after the central bank let it drop in an auction of foreign exchange, its first since announcing last week it would end an almost two-year peg to the greenback. The currency pared losses on Thursday, rising 1.3 percent to 185.47 by 9:30 a.m. in Luanda, the capital.

It’s still much stronger than its black-market rate of about 430, which has barely budged this week. Derivatives traders were expecting a move closer to 200, based on quotes for kwanza one-month non-deliverable forwards of 190/218 per dollar.

The new exchange rate is “well below the estimated equilibrium level,” said Cobus de Hart, an economist at Paarl, South Africa-based NKC African Economics. “It does not seem as if it was the Banco Nacional de Angola’s intention to let the currency depreciate to a market-clearance level immediately.”

Angola Devaluation's Just the Start as Investors Expect More

Africa’s second-biggest oil exporter joins a long list of commodity producers, from Russia to Kazakhstan and Nigeria, that have floated or devalued currencies in recent years to stop bleeding reserves. Angola’s cash pile more than halved since 2014 as it tried to defend the peg.

New Governor

The move is part of President Joao Lourenco’s efforts to attract investment just three months after replacing Jose Eduardo dos Santos, who ruled the former Portuguese colony for almost four decades. Lourenco had already shaken up the economy by appointing a new central bank governor and sacking Isabel dos Santos, the former president’s daughter, as head of the state oil company. This led him to be depicted by Angolans on social media as The Terminator, Arnold Schwarzenegger’s movie character.

On Wednesday night, Lourenco dismissed Dos Santos’ son, Jose Filomeno dos Santos, as head of Angola’s $5 billion sovereign wealth fund.

While the devaluation is a “major change” in policy, the kwanza will probably fall further to between 210 and 225 this year, according to Victor Lopes, an economist in London at Standard Chartered Plc. Angola will still have to turn to the International Monetary Fund for financial help, especially given that its shallow debt markets and absence of a stock exchange will prevent it from attracting much portfolio investment, he said.

“A request for IMF assistance is more likely now that elections are over, and given government changes and reduced access to external funding,” he said. “Overall, a weaker currency was needed and the new currency regime is a step in the right direction, especially in terms of seeking IMF financial assistance.”

Trading Band

Angola’s new central bank governor, Jose Massano, said last week he would let the exchange rate be decided in currency auctions, which restarted on Tuesday after a two-month gap. The BNA will set a trading band -- though it won’t be publicly disclosed -- and continue to intervene in the market to prevent the kwanza depreciating too much and to curb inflation, which stands at 28 percent.

While Brent crude prices are still well below levels of mid-2014, their increase of more than 50 percent since June to almost $70 a barrel probably led Angola to weaken the kwanza by less than it would have otherwise done, according to Absa Bank Ltd.

“A 10 percent devaluation was probably much less than the market was expecting,” said Samantha Singh, a Johannesburg-based strategist at Absa. “Unless oil prices continue to rally, further currency adjustments are warranted.”

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