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June 11, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Angola. Directors stressed the importance of preserving the health of the banking sector, including the need for concrete actions to complete asset quality review and to strengthen crisis management, emergency liquidity assistance, and the anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks. They supported ongoing efforts to reinforce capital and liquidity buffers while strengthening governance at the state-owned banks.

With respect to developments in the banking sector, the staff report notes that the National Bank of Angola (BNA) increased by threefold the minimum regulatory capital requirement for commercial banks to be met by the end of 2018, which could lead to some consolidation in the sector. In addition, banks continue to suffer from subdued lending and, in the case of state-owned banks, very high non-performing loans (NPLs). The economy’s heavy dependence on oil is a challenge for banks. Oil price volatility and pro-cyclical public spending create feedback loops for liquidity and credit, leading to windfalls for some banks while building vulnerabilities for others, especially state-owned banks. The key recommendations of IMF for strengthening the banking system are as follows:

  • Intensifying efforts to complete the second phase of bank asset quality reviews, with a view to gauge capitalization needs of banks
  • Pursuing a swift resolution of NPLs to strengthen bank balance sheets and ensuring enforcement of loan provisioning and monitoring loan restructuring
  • Raising the efficiency of state-owned banks by fully implementing their restructuring plans
  • Monitoring liquidity position of banks in both foreign and local currency and taking prompt corrective action when problems are identified
  • Strengthening crisis management and emergency liquidity assistance frameworks

The selected issues report examines the impact of lower oil prices on banks by articulating the transmission mechanism of the shock, stress testing the resilience of the banking sector over time, and investigating the nexus between the sovereign and banks. Static event analyses and stress test results confirm a deterioration of banks’ soundness indicators as lower oil prices linger—and this is more pronounced for state-owned banks. Moreover, sectoral balance sheet analyses confirm growing exposures of banks to the sovereign. Panel regressions on the performance of banks show that weakly capitalized and poorly run banks are adversely impacted while suggesting that sound macroeconomic policies should help mitigate the impact of the shock.

Stress tests conducted for individual banks for successive years are used to determine the evolution of banks resilience in the wake of the oil price shock. The tests focus on credit risk. The credit risk shock comprised an aggregate increase in NPLs focusing on downgrade of classified loans across the entire credit spectrum. Stress tests confirm a deteriorating capacity to withstand oil price shocks. The capital position of the banking system declines by 6 percentage points in 2013 but overall banks remain well-capitalized. Reverse stress testing was also used to gauge bank resilience to the oil price shock. 

 

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Keywords: Middle East and Africa, Angola, Banking, NPLs, Stress Testing, Financial Stability, IMF

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