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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Out of Africa - Portugal solicits Angolan investment

The following is an interesting and cautionary tale for investors looking at relatively "stable" Old Europe and Africa, seemingly mired in perennial crisis.

Since last year the Portuguese government has been heavily lobbying its former colony Angola to invest its petrodollars there as the nation struggles to comply with the terms of a $99 billion financial rescue package. For 500 years, Angola was Portugal's biggest and richest African colony, with huge reserves of oil, gas and diamonds.

The event marks something unique in world history since Columbus first set sail, ushering in centuries of European colonial domination - reverse colonization by an African country of its former masters. Angola, which the Portuguese discovered nine years before that epochal voyage, only became independent in 1975, and immediately slid into 27 years of vicious civil war, which only ended in 2002.

So, what has happened in the intervening decade?

Oil.

Lots of it - Angola is now Africa's second largest oil exporter, exceeded only by Nigeria. Angola now exports 1.7 million barrels per day, leaving the country of 19 million awash in cash.

And, given that its economy cannot absorb such a massive infusion of petrodollars, Luanda for the last five years has been quietly parking some of its surplus dollars in Portuguese assets.

The differences between the Portuguese and Angolan economies are striking. While this year economists predict that Portugal's economy may contract by as much as 2.8 percent, with unemployment soaring to 13.4 percent, leaving 27 percent of Portuguese youth without work, Angola's economy is predicted to grow by up to 12 percent.

And while in 2011 agencies downgraded Portugal's credit rating to junk status, Mercer's Cost of Living survey designated Angola's capital Luanda the most expensive city in the world for the second year in a row among the 214 cities evaluated, where a basic hotel room can cost over $450 a day.

Angolan companies now own four percent of the firms listed on the Euronext Lisbon Stock Exchange, and, as Portugal comes under increasing pressure from both the European Union and the International Monetary Fund to sell off state-owned assets, Angola's presence in Portugal is expected to accelerate. Setting an official seal of approval on the trend, two months ago Portuguese Prime Minister Pedro Passos Coelho visited Angola to encourage the former colony to invest in a Portuguese privatization program and said that his government would look "very favorably" on Angolan investment in its $8.9 billion privatization program and other areas.

But this picture has a dark side. More than 70 percent of Angolans live on less than $2 a day, and the massive influx of petrodollars has fuelled equally massive corruption.

Earlier this month Human Rights Watch reported that $34 billion in oil revenues linked to Angola's state oil company Sonangol have disappeared, leading the advocacy group to demand that Angolan President Jose Eduardo dos Santos investigate.

The damning Human Rights Watch report is based on documentation issued in December by the International Monetary Fund, which determined that during the period 2007-2010 government funds were spent or transferred without being properly documented in the budget. The IMF noted that Sonangal has been the primary culprit for the fiscal irregularities since at least 2002 for losing track of billions of dollars when it "stopped channelling foreign currency receipts through the central bank as mandated by the law."

Needless to say, the reports have brought outraged denials from President dos Santos.

So, what sectors of the Portuguese economy might Sonangal, currently the biggest investor in Portugal, corporate raiders be interested in? Sonangol is now the biggest single shareholder in Millennium BCP, one of Portugal's largest listed banks and analysts believe that Sonangol could be eyeing the Portuguese GALP Energia energy company, of which 7 per cent is still owned by the state and which ironically discovered oil in Angola in the 1950s.

Other sectors of the Portuguese economy of potential interest to Sonangal include the nation's banking sector, Energias de Portugual (EDP) electricity company and perhaps the 100 percent state-owned national airline Transportes Aereos Portugueses, SGPS, S.A. (TAP) and the Navegacao Aerea de Portugal (NAV Portugal) airport navigation company, especially as Coelho during his visit to Angola stated that Angolan companies were "very welcome" to invest in upcoming sale of state holdings in TAP, the national airport operator ANA-Aerportos de Portugal and public transport companies.

For those interested in further developments, on 24 January the Portugal-Angola Chamber of Commerce and Industry (CCIP) in Lisbon will hold a dinner conference on Trade and Investment for Portuguese investors.

So, for foreign investors, what to chose? An old European nation state teetering on the verge of bankruptcy or a rising Third World petro-state awash in both oil and corruption?

A tough call, but, as always, caveat emptor.

By. Dr. John C.K. Daly




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