Angola New Oil Law Taking Force May Boost Liquidity

An oil law in Angola, Africa’s second-biggest crude producer, that enters into force today may increase domestic banks’ liquidity and strengthen the currency, the Economist Intelligence Unit said.

The legislation, which requires foreign oil companies to pay suppliers from accounts with local banks, may funnel $10 billion a year through Angola’s economy and support the value of the kwanza while risking higher prices if lending increases, according to the London-based EIU. It may also delay projects.

“There is also a risk that payment delays could lead to a reduction in short-term oil production,” the EIU wrote in a note to clients Sept. 24.

Oil producers such as Exxon Mobil Corp., Chevron Corp., BP Plc and Total SA operate in the southern African nation, which pumped about 1.7 million barrels of oil a day in September, second in Africa to Nigeria, according to data compiled by Bloomberg. Its crude accounted for 2.9 percent of U.S. imports in May and 16 percent of China’s in July, data compiled by Bloomberg showed.

The total liquidity will be “a huge number” because the law requires taxes on oil revenue to be paid through local banks, a figure that amounted to $12.6 billion last year, Joao Fonseca, executive director at Banco Angolano de Investimentos in Luanda, said by phone on Sept 28. Payments to suppliers and salaries would add to it, he said.

Companies’ Concern

“This is a concern from the oil sector companies as it will be a big change for the banking system,” Fonseca said. “It’s huge amounts of payments that will be processed and banks must prepare for straight-through processing instead of manual, otherwise oil companies will have difficulty working in the local system.”

Oil companies have helped banks invest in the changes and tests have been successful, he said. The Angolan central bank has improved instruments that can absorb excess liquidity, allowing it to adhere to its stated aim of maintaining the kwanza’s strength while limiting inflation, Fonseca said.

These include requirements for foreign reserves to cover import spending for a certain number of months and bank regulations concerning weekly foreign currency auctions, capital ratios, and amounts of dollar holdings, he said.

“It is great news in terms of giving local banks a new source of liquidity to fund private- and public-sector investment,” Kim Polley, executive director for southern Africa at consultants Africa Practice in Johannesburg, said in an e-mailed response to questions on Sept. 28. “It makes Angolan banks a much more attractive investment proposition.”

July Deadline

The measure could benefit Portuguese banks such as Banco Espirito Santo, Millennium BCP and Banco Portugues de Investimento, which have units in Angola, Polley said.

Oil companies have until July 1 to pay all domestic suppliers in the local currency, which isn’t tradable on foreign exchange markets. The kwanza was valued at 95.64 a dollar on Sept. 21 by the central bank, while traders on the street in Luanda, the capital, where most residents change their money, paid 100 to the dollar.

“Esso Angola supports the development of a domestic banking market that fosters transparency and competition,” David Eglington, a Houston-based spokesman for Exxon Mobil, said in an e-mailed response to questions on Sept. 28, referring to the company’s Angolan unit. “It is our hope that the new foreign exchange law will achieve this.”

Foreign Reserves

Jim Craig, a spokesman for San Ramon, California-based Chevron, said in a Sept. 28 e-mail that “Chevron complies with the laws of the countries where the company operates.” Amilcar Costa, a spokesman for BP, said by telephone from Huambo, Angola, he couldn’t immediately comment.

Angola’s foreign currency reserves, which were $30 billion in July, according to the central bank, will increase, supporting the kwanza, the EIU said. The influx of liquidity may lead to “excessive lending and inflationary pressures,” the EIU said.

Inflation slowed to 9.9 percent in August from 10 percent a month earlier, the statistics office said on Sept. 10. Angola is targeting inflation of less than 10 percent this year.

Angola has 23 registered domestic banks and 10 units of foreign financial companies, according to the website of the central bank. E-mails sent Sept. 27 and 28 seeking comment from Central Bank Governor Jose de Lima Massano were not returned by his assistant, Katia Carvalho.

Angola’s economy may expand by 6.8 percent this year, according to the International Monetary Fund, as the country rebuilds from a civil war that ended in 2002. Petroleum accounts for more than 60 percent of the economy, 97 percent of exports and about 80 percent of state revenue, the EIU said.

LNG Project

Projects expected to start up in the next quarter include a $9 billion liquefied natural gas plant that includes Chevron, Total, BP and Eni SpA as shareholders. BP is also expected to start the PVSM field with eventual production of 150,000 barrels a day.

Block operators have another year before the law requires them to pay foreign suppliers via Angolan bank accounts in either local or international currency. The change taking effect today governs their payments to local suppliers.

Oil companies may want to ensure their contracts with suppliers include provisions for exchange-rate fluctuations, according to a May report prepared by Pieter van Welzen, a lawyer with Clifford Chance LLP in Amsterdam, and Fonseca.

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