Angola Sovereign Credit Risk Assessment

Bond Risk Analysis — Angola Government Securities

Investing in Angola’s government bond market requires a clear-eyed assessment of multiple risk dimensions. While yields in the 18-22% range for kwanza bonds and 7-9% for USD-indexed Eurobonds offer substantial compensation, each layer of return corresponds to a distinct risk factor. This analysis breaks down the primary risks facing bondholders.

Credit Risk

Angola’s sovereign credit ratings sit deep in sub-investment grade territory:

These ratings reflect the country’s high dependence on oil revenues, elevated debt levels ($61.93 billion total, debt-to-GDP 59.9%), and structural economic vulnerabilities. The IMF classifies Angola at high risk of debt distress.

Key credit risk factors:

• Oil price sensitivity — Government revenues are heavily concentrated in the oil sector. Brent crude at ~$74.50/bbl provides adequate fiscal support, but a sustained decline below $60/bbl would materially stress debt service capacity.
• Eurobond maturity wall — The concentration of Eurobond maturities in 2028-2029 creates a refinancing risk event that markets are already pricing.
• Debt composition — External debt of $45.57 billion (73.6% of total) exposes the sovereign to FX risk on debt service obligations.

Foreign Exchange Risk

FX risk is the most distinctive feature of Angola’s bond market and manifests differently across instrument types:

• Kwanza bonds (BT, OTNR) — Denominated and settled in AOA. Investors earning 18-22% nominal yields face the risk that kwanza depreciation against the USD erodes returns in hard currency terms. With USD/AOA at 914.60, any further depreciation directly reduces the USD-equivalent return.
• USD-indexed bonds (OTX) — Principal and interest are indexed to the USD, providing protection against kwanza depreciation. Yields of 7-9% reflect this protection, with the spread to kwanza bonds representing the market’s implied depreciation expectation.
• Eurobonds — Denominated in USD, eliminating direct FX risk for USD-based investors but introducing it for kwanza-based investors purchasing Eurobonds.

Liquidity Risk

Angola’s secondary market presents significant liquidity challenges:

• BODIVA recorded 10,328 transactions in 2024 — low by international standards
• Bid-ask spreads of 50-200 basis points on kwanza bonds
• Many individual bond series trade infrequently, with gaps of days or weeks
• Liquidity is concentrated in short-dated BTs; longer OTNRs are substantially less liquid

Investors must generally be prepared to hold bonds to maturity. The inability to exit positions at fair value during periods of stress is a material risk, particularly for portfolios with liquidity requirements.

Reinvestment Risk

In a high-yield environment, reinvestment of coupon income at prevailing rates is a significant component of total return. Key scenarios:

• BNA rate cuts — If the policy rate (17.5%) declines, coupon reinvestment will occur at lower yields, reducing compound returns. This is particularly relevant for long-dated OTNRs with semi-annual coupons.
• Maturity reinvestment — When a BT or OT matures, the investor must reinvest at then-prevailing rates, which may be lower than the original yield.

Inflation Risk

Current inflation of 15.7% sits below nominal bond yields, producing positive real yields. However, inflation risk remains elevated due to:

• Potential administered price adjustments (fuel subsidies, utilities)
• Kwanza depreciation pass-through to consumer prices
• Food price volatility in a heavily import-dependent economy

Risk Mitigation Approaches

For comparison of Angola’s risk profile against regional peers, see the peer comparison series.