In Angola 2007/2008 - (Page 7) Economic Review – BPI July 2007 10% by year’s end would not be fulfilled; instead, inflation would close out around 12%. However, following a slight appreciation of the exchange rate in early May, achieving a 10% inflation rate for 2007 seems more feasible, considering the weight of consumer goods and, mainly, of imports. Government officials have taken decisive initiatives regarding the Kwanza, reflecting their commitment to this goal. Inflation (monthly & homologous) 3% 30% 25% 2% 1% 0% Mar-05 Sept-05 Mar-06 Sept-06 Monthly (LHS) Homologous (RHS) 20% 15% 10% 5% 0% Mar-07 Source: BNA comprised of the Newhorizon consortium and the companies Endiama and Dourang, has announced that they will soon begin prospecting for diamonds in Quito. In 2006, USD 10 million was invested in this project. De Beers is another company that has increased its prospecting efforts in Lunda Sul and Lunda Norte. This year the company dedicated approximately USD 40 million to diamond mining in Angola. Inflation Inflation for the month of May stood at 0.88%, the greatest change since early 2007, while the homologous rate stood at 12.37%. The categories displaying the highest rates included Hotels, Cafés, and Beverages (1.91%); Food and Non-alcoholic Beverages (1.28%); and Clothing and Footwear (1%). Much of the pressure in these categories was due to the structural problems related to the transportation of food products through the Port of Luanda. Inflation thus broke its sustained downward trend. In the first months of this year, the inflation trend has been somewhat consistent with the previous year, which suggests that it will be hard to push it down to the 10% goal set by the government. Inflation seems, in fact, to be holding at around 12%. The economy is growing strong, while structural constraints on supply remain, thus creating inflationary pressure. Although the supply of imported goods is quite elastic, there are temporal gaps between expressed demand and corresponding supply that go beyond the constraints related to customs, transportation, and logistical infrastructure problems. The Banco Nacional de Angola’s monetary policy has entailed increasing mandatory reserves and interest rates. However, structural imbalances and the immaturity of the credit market jeopardize the efficacy of this policy, since transmission mechanisms are still underdeveloped. Furthermore, in developing economies, formal and informal oversight of prices is often more vital in fighting inflation than exchange rate and monetary policies. Intervention on the exchange market may prove to be more efficient. The nominal variation in the exchange rate is the financial variable that correlates most tightly with the inflation rate—about 87% in the past two years. The weight of the consumer sector means that the quotation of the Kwanza plays a fundamental role in any change in prices. If the pattern observed during the first months of the year holds steady, the official scenario of a homologous inflation rate of Credit Market While the pace of deposits has slowed in recent months, credit is still expanding at a rapid pace. In homologous terms, credit grew around 81% in May. Despite this pace, the volume of credit placed on the market is still low; nevertheless, the future outlook is encouraging. More credit is needed to boost the performance of non-oil sectors, which should display growth in response to further investments. As economic activities become normalized, there will be more room for business outside of oil, diamonds, and commerce, expanding opportunities to grant credit and allowing banks to diversify their portfolios. This will in turn let monetary officials reduce efforts to absorb liquidity. Another noteworthy point is the growing relative weight of credit in national currency, observed since January. While this shows that economic agents have greater confidence in the Kwanza, it also reflects the impact of the exchange rate on statistics prepared in Kwanzas (this impact has been marked since April). Following the rise observed in May, interest rates have remained stable, with real interest (182 days) at positive levels, in tune with the commitment to meet the 2007 goal for inflation. Growth of Interest and Deposits 700000 in millions of AKZ 600000 500000 400000 300000 200000 100000 0 May-06 Credit Aug-06 Nov-06 Feb-07 May-07 Deposits Source: BNA Source: BPI Economic and Financial Studies, Angola July 2007 7
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