Credit Analysis — Assessing Sovereign and Corporate Risk

Why This Matters

When you buy an Angolan government bond, you are betting that the Republic of Angola will pay you back. When you buy a bank stock, you are betting that the bank’s borrowers will pay their loans. Credit analysis (análise de crédito) is the discipline of assessing these bets — how likely is the borrower to honor their obligations, and are you being compensated adequately for the risk?

Sovereign Credit: Angola’s Risk Profile

Credit Ratings

International rating agencies provide standardized assessments:

• Moody’s: B3 (highly speculative)
• Fitch: B- (highly speculative)
• S&P: B- (highly speculative)

These ratings place Angola in the “single-B” category — below investment grade but not the lowest tier. Comparable to many African sovereigns (Kenya, Nigeria, Ghana before restructuring).

What the Ratings Mean

At B-/B3, the agencies assess:

• Angola can currently service its debt
• Vulnerability to adverse economic conditions is high
• Oil price dependence creates concentrated revenue risk
• Reform progress is positive but incomplete
• External debt levels are manageable but require discipline

Angola’s Debt Sustainability Framework

Key metrics for sovereign credit analysis:

Key risks: Debt service consumes approximately 45% of government revenue — well above the 30% comfort zone. This leaves limited fiscal space for development spending. An oil price shock could push this ratio higher, straining the government’s ability to maintain payments.

Key strengths: Foreign reserves cover short-term debt 2.5 times over — adequate for near-term stability. The fiscal deficit is narrowing. IMF program engagement provides policy discipline and external credibility.

Sovereign Credit Analysis Framework

1. Fiscal Analysis

• Revenue dependency on oil (currently ~50% of government revenue)
• Non-oil revenue diversification progress
• Expenditure flexibility (how much spending can be cut in a downturn?)
• Debt maturity profile (bunched maturities create rollover risk)

2. External Analysis

• Current account balance (oil exports vs. imports)
• Foreign reserve adequacy
• Exchange rate regime sustainability
• External debt currency composition (USD debt with Kwanza revenue creates mismatch)

3. Institutional and Political Analysis

• Central bank independence and credibility
• Reform momentum (privatization, transparency, governance)
• Political stability and transition risk
• IMF/World Bank program compliance

4. Structural Analysis

• Economic diversification progress beyond oil
• Demographics (young population = labor force growth + social spending needs)
• Infrastructure gaps and development spending requirements
• Climate risk (transitioning global economy reducing long-term oil demand)

Corporate Credit in Angola

As Angola’s capital market develops, corporate bonds will become available. Evaluating corporate credit requires:

Financial ratios:

• Interest coverage (EBIT / Interest expense) > 3x: comfortable
• Debt / Equity < 2x: manageable leverage
• Current ratio > 1.5x: adequate short-term liquidity

For banks specifically:

• Capital adequacy ratio (CAR) > BNA minimum (currently ~10%)
• Non-performing loan (NPL) ratio < 5%: healthy asset quality
• Loan loss reserves / NPLs > 80%: adequate provisioning

BODIVA bank data:

All three listed banks show capital adequacy well above regulatory minimums and NPLs within manageable ranges — consistent with their below-book-value equity trading representing country risk discount rather than bank-specific credit problems.

Worked Example: Sovereign Credit Scenario Analysis

You hold Kz 10,000,000 in 5-year Angola treasury bonds at 21%. What happens under different scenarios?

Scenario A — Status quo (oil $75, reforms continue):

• Rating stable (B-/B3)
• Bonds pay coupons on schedule
• Yield potentially tightens 50bp as reforms impress → capital gain
• Outcome: Full return received plus potential price appreciation

Scenario B — Oil shock (oil falls to $45):

• Revenue drops 25-30%
• Kwanza depreciates 15-20%
• Debt service ratio rises above 55%
• Rating downgrade possible (to CCC+/Caa1)
• Bond impact: Secondary market price drops 10-15% but government likely continues paying coupons (domestic debt is highest priority)
• Outcome: Mark-to-market loss if you sell; full coupons received if you hold to maturity (high probability)

Scenario C — Severe stress (oil $35 + political disruption):

• Rating downgrade to CCC
• Domestic debt restructuring risk rises
• Secondary market price drops 20-30%
• Outcome: Possible coupon deferral or restructuring. This is the tail risk scenario — low probability but high impact.

Risk-adjusted view: The 21% yield compensates for the small but real probability of scenario C. For a diversified portfolio (not 100% in government bonds), this risk-return tradeoff is acceptable.

Key Takeaways

• Sovereign credit analysis assesses the government’s ability and willingness to pay its debts
• Angola is rated B-/B3 — speculative grade but with improving fundamentals
• Key metrics: debt/GDP, debt service/revenue, reserves/short-term debt, fiscal balance
• Oil price is the dominant variable in Angola’s sovereign credit outlook
• Corporate credit for BODIVA banks shows adequate capitalization and manageable NPLs
• Higher yields on Angola bonds exist precisely because of credit risk — understand what you are being paid for
• Scenario analysis across oil price outcomes is essential for sizing your sovereign exposure

Common Mistakes

Assuming government bonds are risk-free — In Angola, government bonds carry real credit risk. They are the lowest-risk domestic investment, but not risk-free by international standards.

Ignoring oil price correlation — All Angolan assets are correlated with oil. Your bonds, bank stocks, and Kwanza are all exposed. Diversify into USD-indexed instruments.

Relying solely on agency ratings — Ratings are backward-looking and slow to change. By the time an agency downgrades, the market has usually already repriced.

What’s Next

Credit analysis tells you about default risk. Portfolio optimization tells you how to combine assets for the best risk-adjusted return. The next lesson introduces quantitative portfolio theory applied to Angola.

Next Lesson: Portfolio Optimization — Quantitative Approaches

Monitor Angola’s debt metrics on the Economy Dashboard. Track bond yields and spreads on the Bond Dashboard.