The Asian Drivers and Angola Renato Aguilar Gothenburg University, Sweden

March, 2006R. Aguilar2 Understanding a relationship Several different approaches are important for understanding the relationship between Angola, on the one side, and China and India, on the other side. –The structure of Angolas economy. –The impact of oil markets. –The evolution of trade. –Angolas financial problem. –The political economy of this relation.

March, 2006R. Aguilar3 The Structure of Angolas economy A number of features of Angolas economy are crucial for understanding the new relationship with Angola and India. –Oil specialization. –Macroeconomic instability. –Financial problems. –Relationship with the IMF.

March, 2006R. Aguilar4 Oil Specialization Angolas economy is mostly oil GDPExports

March, 2006R. Aguilar5 Oil Markets Three Different perspectives on Oil. China and Oil. India and Oil. Angola and Oil.

March, 2006R. Aguilar6 China and Oil Increasing energy demand because of rapid GDP growth. Strongly biased towards coal. Environmental considerations and international pressure to move towards oil and gas. In spite of improvements in the efficiency of use of energy and oil, demand is expected to grow at 4.5 percent annually.

March, 2006R. Aguilar7 Angola and Oil Already the second largest African producer. Reserves: 5.4 billion barrels. Reserves increasing faster than depletion. A rather well managed sector. A large state-owned firm, SONANGOL, a main player in this market and the regulator.

March, 2006R. Aguilar8 The Asian Drivers in Angolas Oil. China is already Angolas second customer, and Angola a large provider for China. India has no significant imports from Angola. China is a junior partner in two blocks. India failed to acquire a participation in a block.

March, 2006R. Aguilar9 Trade Angolas exports are almost exclusively oil, diamonds, and gas. The main customer is the U.S. (decreasing followed by China (increasing) and the EU (decreasing). An increased diversification in exports

March, 2006R. Aguilar10 Imports are also increasing rapidly. China and India have increased their shares. But also Brazil. The EU has a decreasing share (exception Portugal) and more recently South Africa. An increased diversification

March, 2006R. Aguilar11 Financial Problems External Debt. –Not too large (less than GDP). –Short Profile. Mostly arrears and short-term loans. –Unable too reach an agreement with the Paris Club. Angola is excluded from concessional financing. It has to borrow expensively in secondary markets, against oil.

March, 2006R. Aguilar12 Chinese Finance and Investments A 2.billion credit with a 17-year maturity, including a 5-year period of grace, and a 1.5 percent interest rate per annum. This is an Eximbank credit that excludes non-Chinese providers. Thus, the real cost is bit higher, but still much cheaper than usual financing to Angola. A few direct investments, mostly in trade and industry.

March, 2006R. Aguilar13 Conclusions The empirical evidence suggest that India and, especially, China are rapidly increasing their shares in Angolas markets. To some extent this is a natural consequence of the rapid growth of two quite large economies. This is also happening in other markets around the world.

March, 2006R. Aguilar14 Especial features of this process. This process is faster in Angola than elsewhere. But Angola is through a period of rapid growth and structural change). Especially in the case of China it has a strong financial dimension. But Angola has serious financial problems. There is an investment dimension.

March, 2006R. Aguilar15 How important is this for Angola? Both China and India provide financing for a strategically important purpose: infrastructure recovery and agricultural development. This financing was provided when most of the concessional financial sources were closed. Increased trade with China and India has led to a more diversified trade. The losers have been mostly the EU (exception: Portugal) and, possibly, South Africa and other African partners.

March, 2006R. Aguilar16 Are China and India playing an important role in Angola? China has only a junior position in two blocks and India a minor position in the diamonds sector. This is unlikely to increase to significant positions. Angolas economic leadership has a decreasing interest in reaching a agreement with the IMF and the Paris Club, because the financing sources found in China and India, but also in Brazil and other non Paris Club countries.

March, 2006R. Aguilar17 Possible risks The conditionality is different with the new partners. – There is some conditionality: Clear rules and controls for payments and use of the funds. –Conditionality with the older partners was not unique and not necessarily consistent. Monitoring was poor and unsystematic. –The leverage was small because the funds were small as compared to the needs. Effect on poverty unknown but possibly positive.