Home Finance The Challenges of Public-Debt Management and Economic Growth

The Challenges of Public-Debt Management and Economic Growth

by internationalbanker

By H.E. Vera Daves de Sousa, Minister of Finance of Angola

 

 

 

 

In the context of economic slowdowns, increasing social pressures and geopolitical tensions with global impacts, the management of public debt is an exercise of high risk for the sustainability of economies due to constant instabilities originating from decreased productivity, population exodus and climate change, among other factors. This has led governments to adopt contingent measures aimed at reducing the risks of public-debt unsustainability for economic growth. This article seeks to explain the management of public debt carried out by the Government of Angola.

With the objective of mitigating adverse risks, the need to reduce the dispersion of bond maturities in portfolios has been identified in recent years, as they are one of the conditioning factors in the domestic market. In this sense, efforts have been made to equalize the maturity dates of bonds of various maturities to make them perfectly substitutable, reducing their spreads in terms of maturity.

Regarding the evolution of public debt, the period from 2010 to 2018 was characterized by two distinct “moments” or instances, namely: the first, from 2010 to 2014, marked by the stability of debt stock at around 33 percent of gross domestic product (GDP) and by the concentration of bilateral creditors in the debt portfolio, with the People’s Republic of China (PRC) and the Federative Republic of Brazil standing out; the second, from 2014 to 2018, was determined by the continuous growth of the public-debt stock, which went from 39 percent (in 2014) to 84 percent of GDP (in December 2018).

Another particularity refers to the increased access to the external private sector through the growth of commercial debt, which went from 39.4 percent to 53.6 percent of external debt stock, and Eurobond issuances, the stock of which reached US$5 billion in 2018.

This debt-growth trend in the second moment coincides with the prolonged decline in oil prices in the international market since 2014. Additionally, the depreciation of the national currency against the dollar accentuated the debt growth due to the existence of dollar-indexed bonds and foreign-currency debt when expressed in kwanzas.

For the period from 2010 to 2013, Angola experienced rapid and stable economic growth driven by the oil boom. Starting in 2014, with the decline in oil prices, the country faced the first exogenous shock that slowed economic growth until 2017, a period when the economy tried to recover and boost economic indicators.

After 2017, it is crucial to highlight that the period 2019-2021 was characterized by two moments, the first marked by the shocks occurring in 2019 and 2020 and the second by an economic recovery. During the first, the national economy suffered the shock of oil-price fluctuations in international markets in 2019, combined with a fall in oil production, severely affected by the COVID-19 pandemic in 2020. During the second, from 2021 onwards, Angola began to resume economic growth as a result of the recovery of oil prices in international markets and the consolidation of the economic reforms it had undertaken. From 2022 to 2024, it is expected that Angola’s economy will grow at an average rate of 3 percent.

The Angolan economy experienced economic moments marked by external shocks, which negatively affected the country’s economic performance, with strong implications for the management of public debt. This can be explained by the inverse relationship between public indebtedness and economic growth (public-debt-to-GDP ratio), as shown in the graph above.

With the economic conditions described above, the challenges of public-debt management have stemmed from the main macroeconomic risks identified by the Government of Angola—namely, the volatility of oil prices and oil-production volumes, economic growth below expectations, exchange-rate shocks and insufficient liquidity in the domestic market.

Despite the challenges in public-debt management, the Angolan government has benefited from economic reforms and cooperation with multilateral institutions, such as the World Bank and the International Monetary Fund (IMF), within the scope of technical assistance and affirming the government’s commitment to ensuring macroeconomic stability and efficient public-debt management.

Additionally, to ensure the realization of responsible public-debt management and mitigate the macroeconomic risks with negative implications for debt management, the government has defined borrowing strategies with a triennial periodicity based on the macroeconomic conditions of the respective triennium. From this perspective, the Medium-Term Debt Management Strategy (MTDS) for the 2019-2022 triennium aimed at fostering the domestic market, extending maturity in the external market and reducing indexing and exposure to the oil market. However, in the current macroeconomic context, the Debt Management Strategy for the 2022-2024 triennium favors the capture of semi-concessional financing and active liability management.

This vision aligns with the perspective of the IMF’s Fiscal Consolidation Support Program (Extended Fund Facility, or EFF), which has its basic pillars in fiscal consolidation, leading debt to safer levels, greater exchange-rate flexibility, recovering competitiveness and monetary policy that supports inflation reduction. In other words, this vision follows the line of public-debt management characterized by fostering the domestic market and extending maturity in the domestic market, prioritizing the capture of semi-concessional financing with the aim of improving the cost and maturity of debt, and active liability management.

 

 

ABOUT THE AUTHOR
H.E. Vera Daves de Sousa has been Angola’s Minister of Finance since 2019 and was reappointed following the August 2022 elections. Prior to her current role, she held the position of Secretary of State for Finance and Treasury in 2017, and she was the President of Comissão do Mercado de Capitais (Angolan Capital Market Commission) from 2016 to 2017, after being an Executive Member of the Board for nearly five years.

 

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