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At independance there were 26 insurance companies of which 12 were foreign. Progressive nationalisations and closures led to the creation in 1978 of the Empresa Nacional de Seguros (ENSA) a state owned monoply that inherited a market worth $53 million in anual premiums of which 5% came from the oil industry.

In February 2000 new insurance legislation (Law 1/100) allowed local and foreign participation in the insurance industry. In January 2001 AAA Seguros (AAA Insurance) was founded putting an end to ENSA's 23 year monopoly. Today the Angolan insurance market is worth an annual $100 million, half of which come from oil industry premiums.

Finance

 

The fall of the Berlin Wall in 1989 marked the beginning of the decline of Soviet influence in Africa. At the time, Angola joined many African states moving away from soviet sponsored Marxist-Leninist policies, embarking on the brighter yet bumpy transition to a western style democracy driven by market forces.

In fact, the reform of Angola's economy can be traced as far back as 1987. Since then nine successive economic reform packages have attempted to tackle the problems of rising urban poverty, the collapse of industrial and farming output and the huge macroeconomic imbalances brought on by the war and the structural failures of a planned economy.

The basic weakness of previous reform programs has been the lack of synchronization of policy measures. Successive devaluation were not accompanied by sufficient fiscal and monetary restraint thus contributing to spiraling inflation. In such an environment, the fixed exchange rate system led to the development of a parallel foreign currency market adding pressure against the Kwacha and pushing inflation even higher. Additionally, the absence of tradable instruments to finance budget deficits pushed the government to go to the printing press thus contributing to hyperinflation.

Such results led President Dos Santos to appoint a new economic team in early 1999 including the present governor of the central bank, Aguinaldo Jaime. In a recent seminar held in Luanda, Mr. Jaime described his latest economic reform program as the best designed package of economic reforms since the beginning of the country's transition to a market economy.

Indeed, the package introduced in May 1999 responds to long standing IMF demands. The fixed exchange rate system has been abolished allowing the Kwanza's exchange rate to be determined by market forces and budget deficits are now financed by the introduction of treasury bills. Other changes include the partial liberalization of the import regime and the banking sector.

By requesting, since April of last year, that its economic program be formulated in consultation with the staff of the IMF, the Angolan government is continuing to affirm its commitment to long-standing and coherent economic reform.

Angola is a member of the IMF but so far does not qualify for structural reform loans. The IMF staff monitored program is a step in the right direction. Its latest report published in February mentions progress in introducing 'a number of important structural reforms' notably going ahead with the diagnostic study of the oil sector won by KPMG and allowing a similar independent audit to be done on the BNA, Angola's central bank. A five year contract has also been signed with Crown Agents a British company specializing in the modernization of customs administration. A decree abolishing restrictive import licensing has also been published. The privatization plan for state owned banks and enterprises has now been prepared and an inventory of domestic public debt and intra-public sector arrears have been completed.

 

Apart from the war, inflation remains the No.1 obstacle for reducing poverty and promoting economic development in Angola. In 2000, inflation rose by 268%. The government aims to bring that figure down to 75% by December 2001. This may seem enormous to readers used to a stable currency; monetary discipline and single digit inflation but these are new rules for a young market economy that only recently accepted the challenge of globalization. Considering inflation in Angola averaged 1227% per annum between 1995 and 1999, the government can safely say that it is on the right track.

However, often-inadequate expenditure controls combined with unbudgeted transactions and a strong dependence on oil revenues to satisfy the country's consumption needs, remain sore points for Angola's ruling elite. While efforts have been made in all these areas, there is still room for improvement in the control of fiscal imbalances and the preventing of an over-expansive monetary policy. This possibly explains the government's decision to extend the staff monitored program at least until June 2001. Another important factor affecting this decision involves Angola's debt reform strategy.

Throughout the nineties, Angola's deep economic crisis led to default on a large proportion of its foreign debt, the subsequent breakdown of normal relations with bilateral creditors and the accumulation of costly non-concessional debts with commercial lenders. According to the IMF, Angola's debt stock amounted to US$ 8,3 billion (95% of GDP) at end of September 2000, of which US$ 4 billion was in arrears. However, by January 2001 the government had cleared all arrears to multinational creditors including the Arab Development Bank and the African Development Bank to which it owed US$75 million.

By diminishing its external debt and introducing long awaited economic reforms, the government is improving its credit worthiness and gradually reducing its dependence on costly non-concessional commercial loans. This may explain the central bank governor's satisfaction with his package of economic reforms and the staff monitored program as Angola is thus on course for qualifying for the IMF's Poverty Reduction Growth Facility (PRGF). Such a turn of events could help catalyze fresh disbursements from multilateral creditors and donors as well as induce a return to normal relations with bilateral creditors.
No surprise then that AAA Seguros is part of AAA Financial Services, 90% owned by by state oil giant SONANGOL EP, Angola's largest company and sole concessionary of Angola's mineral rights.

Offshore platform on block in Cabinda

'Sonangol needed a good risk management company capable of controlling and covering its risks' says Sao Vicente, Director of Sonangol's risk management directorate. AAA financial services was the solution. A group of five companies speciliasing in risk management, insurance sales, pension fund management, insurance and re-insurance. The group's total paid out capital amounts to $17.65 million.

By creating AAA Financial Services SONANGOL has introduced integrated risk management services for the first time to Angola's financial sector. The logical clients were the oil companies.'We realised that we were managing an industry in which no risk survey had been conducted even in oil concessions that have up to $5 billion in assets' adds Mr Vicente. The Cabinda Association operated by the Cabinda Golf Oil Company (CABCO) was the first to take advantage of this new service with a survey on exploration blocks 14 and 0. According to Mr. Vicente it is thanks to this survey that AAA handed in the most competitive bid, wining a $15million insurance contract. In February the company was negociating with Total Elf Fina to carry out their second survey on exploration blocks 5 and 6.

'Part of our revenues will always come from the oil industry but that is not where we are going to stop' says Mr Vicente. AAA aims to diversify its services in other sectors such as aviation, telecommunications, war compensation and life insurance. To improve its technical know how and participate in the global re-insurance market, AAA will shortly be opening close on 30% of its capital to a foreign multinational company active in the global re-insurance business. In Mr. Vicente's words'you can't establish a re-insurance company just by insuring your domestic risks. You have to spread your risks geographically and look for opportunities that do not exist locally.'

 

As Angola's most established insurance company, ENSA has been preparing itself for competition. Criticised for not capitalising sufficiently on its monopoly years, the management points at improvements in the areas of computerisation, human resources, sales and finance departments. In its 1999 annual report the board of directors reported a change in the company's approach to the market:'leaving behind a static routine in favour of creative and dynamic flexibility towards the market and an increase in the level of knowledge of the sales force allowed us to achieve a greater performance in this area, which is in line with the current period of development of the company'.

Indeed ENSA changed its status to reflect the liberalization of the insurance sector. The company is currently restructuring its human resources through training programs in collaboration with American and British insurance companies. For example, last year, the company sent a team to Houston to perfect their knowledge of oil industry insurance, a growing segment of the Angolan market. In addition, ENSA recently completed the computerization of its operations.

As Mr. Augusto Aleixo Chairman of the Board and General Manager of ENSA likes to put it: 'we are taking action with a view to facing up to competition'.

Today ENSA controls the lions share of Angola's insurance market but needs fresh capital, high technology and commercial know how to preserve its lead. Privatization is the solution put forward by the government, which has announced a sell off of 49% of ENSA's capital by the first quarter of 2002.

In 1999 total premium collections from direct insurance amounted to Kz162 million equivalent to $ 28.76 million dollars at the rate of 5,63335 applied by the BNA at the end of 1999. 41% of the premiums came from the petrochemical line of business followed far behind by motor vehicle insurance.

Mr Aleixo points out 'collections for fire cover on industrial premises dropped from a peak of $45 million to a mere $2 million in 1999'. An indication of the impact of war on manufacturing and a revealing figure on the opportunities that lie ahead for the insurance industry. If Angola's insurance market could accommodate 26 companies in 1975 for a total market of $50 million surely there is room for more than 2 insurance companies for a total market now approaching $100 million'.

 

 

II

 

Angola's banking sector is in its infancy. Due to mass nationalisation following independence there were only two banks until 1991: The Banco Nacional de Angola (BNA), which combined central and commercial banking functions, and the Banco Comercial Angolano (BCA) a retail bank. Reforms in 1991 restricted the BNA to central banking activities and ended the state monopoly on financial services. The state owned BCI was founded and the BPA changed its name to Banco de Poupanca y Credito (BPC).

Since then, three Portuguese banks and two Angolan private banks, the Banco de Investimientos de Angola (BAI) and the Banco Comercial Angolano (BCA) have joined the state owned banks in providing regular commercial banking services, mainly outside the oil sector.

'The banking sector was dormant for a number of years' explains Mario Pizarro, Managing Director of the BCA, Angola's most recently founded private bank. Indeed until recently, due to excessive controls and regulations, the banking sector was limited to serving as a bureau de change for Angolan businesses, with no effective role in financing their development. However, the promulgation of a new legal framework in 1999 has resulted in the introduction of a floating exchange rate, freedom to open accounts in foreign currency, the introduction of the Kwanza as the national currency replacing the 'Kwanza Reajustado' at the rate of 1 to 1,000,000 and the introduction of freely negotiable interest rates between banks and clients. Mr. Pizarro is quick to add: 'Thanks to recent economic reforms, new opportunities have been created in financial intermediation, structured finance and consumer credit'. This opinion is backed up by businessmen as well. Etienne Brechet, Managing Director of Jembas, Angola's largest technical assistance company, explains: 'Some years back, there was huge inflation and you had to do business in the local currency. That has changed; we are now able to buy foreign currency very easily to import the goods we need.'

New bank branches are springing up on Luanda's tree lined avenues. The Banco de Fomento, a Portuguese bank is building a new 12-story office block, and the BCI recently inaugurated its new building in downtown Luanda. New York based Citibank, London based HSBC and Paris based BNP-Paribas have all representative offices in Luanda, but so far they have limited their activities to providing oil guaranteed non concesional loans to the government and SONANGOL - the state oil company. 'Most potential investors see Angola as a high risk country' explains Mr. Pizarro who recently convinced a Portuguese bank to add 30% to BCA's capital. And his ambitions do not stop there: 'we aim to double our capital with an Anglo Saxon partner because we believe a large amount of British, American and South African companies will be moving to Angola over the next few years'.

 

A difficult task in an environment where most of the bank's profit goes to hedge against the risk of inflation. Last year, BCA made an operating profit but central bank regulations oblige it to make a provision to protect the dollar value of its paid out capital against devaluation of the Kwanza. With inflation running at 268% in 2000, profits were absorbed by this provision.

While the government has come a long way towards liberalising the financial sector, inflation remains the main obstacle to the success of the banking industry. 'We have to apply interest rates as high as 120%' explains Mr. Pizarro. But with inflation running at 268% last year, real interest rates remain highly negative which is discouraging personal savings and provoking the dollarisation of the economy. Well aware that imposing a fixed exchange rate would simply push the foreign exchange market back into the street, the government is encouraging banks to become more sensitive to interest rates and to set the level of their interest rates in Kwanza denominated loans and deposits higher than the rate of inflation. To this end and in accordance with the IMF staff monitored program, the BNA began selling central bank bills through competitive bidding by commercial banks and private sector agents in January.

A law allowing foreign banks up to 100% participation in local banks has brought the privatisation of the two state owned banks onto the government's agenda. Indeed, the government has set out to recapitalise both BCI and BPC and has announced its intention to shed at least 51% of BCI to a strategic investor by June 2002.

With 18 branches and 400 staff, BCI is the second largest bank in Angola. The management is confident that privatisation will be a success, boasting entirely computerised systems that allow transactions to be executed in real time and reduce operating costs. Staff is also an asset having developed a strong sense of customer service through training programs overseas. Recently, the bank diversified into property sales, pension fund management and intends to participate in Angola's newly liberalised insurance market.
BPC, Angola's largest bank, had a paid out capital nearing $6 million and total assets worth close on $300 million at the beginning of 2000. With 39 branches spread over 10 provinces the bank is currently undergoing a restructuring process involving the computerisation of its entire network and the strengthening of its sales and marketing department targeting small and medium size businesses, a priority for the government's economic development strategy. Indeed, BPC is not on the list for privatisation as the government intends to make it the main financial channel for its investment operations.

While inflation remains high, banks are still reluctant to finance the growth of small and medium size businesses. In the meantime, the government has created the Fondo de Desenvolvimiento Economico y Social, a development fund aimed at financing Angola's new entrepreneurs.

Asked what factors are likely to affect the future progress of Angola's fledgling banking sector, Mr. Pizarro points out that 'over 80% of the financial flows from the oil sector currently transit outside Angola's banking system. The government accepted that situation many years ago because the financial system was neither credible nor efficient'. Today, the government's compliance with IMF guidelines is changing that view. Should the government consider changing that situation through new regulation, billions of dollars would start to transit through the Angolan banking system; a strong argument for prospective investors.