Crude Realities

Angola hopes to turn steel into gold as oil hammers economy

Local youths play on the beach beyond heavy lifting shipping cranes on barges moored off the shoreline in Luanda, Angola.
Simon Dawson | Bloomberg | Getty Images

Angola is about to provide a test case of whether diversification can help boost an economy that relies heavily on oil production

The brutal global bear market in crude has forced a number of commodity-linked emerging markets to retrench economically, particularly in oil-rich Persian Gulf countries. Saudi Arabia and the United Arab Emirates for example, are weighing the imposition of new taxes to help plug exploding budget deficits —a solution backed by the International Monetary Fund just last week.

Against that backdrop, Angola — a member of OPEC where oil production contributes to half its economic growth and more than 70 percent of government revenues, according to the CIA World Factbook — has moved to broaden its economy to something other than oil.

Read MoreChances of OPEC freeze 'very high': Nigerian min.

Taking the advice of the International Monetary Fund, the Sub-Saharan African country has turned to steel as its saving grace. Angola's first mass-producing steel mill opened for business in December, part of a $300 million investment that officials hope will lead to a revival.

Yet oil still pinned near $30 per barrel, calling into question Angola's ability to practice economic alchemy by turning steel into financial gold. Analysts say the country is battling against years of pent-up imbalances.

"Angola is struggling," said Rachel Ziemba, managing director of emerging markets at Roubini Global Advisors.

"It struggled to balance its budget when oil prices were high and now faces a greater challenge in the current environment as it is unable to increase its oil exports and will also have to draw down its limited savings," Ziemba added. Given the current weak business environment, it has few buffers.

Steeling the economy

It's been a sharp reversal of fortune for Angola, which until a few years ago was a major draw for foreign investment, powered largely by rising crude prices. Last year, Angola overtook fellow OPEC member Nigeria in crude oil production.

Much as has been the case with other commodity-reliant economies, Angola became vulnerable to oil's downturn, putting it in the same camp as Nigeria, Venezuela and Saudi Arabia as countries forced to sell dollar reserves to shore up deteriorating public finances. In order to help curb government spending, Angola recently slashed domestic fuel subsidies, a move that sent prices surging by up to 80 percent.

Last year, the IMF pointedly urged Angola to find new ways to ignite growth outside of crude production.

"Increasing the non-oil revenue base by rationalizing tax incentives and strengthening the newly created tax administration agency is a priority," the IMF's deputy division chief, Ricardo Velloso, said in August during a mission to Angola.

Yet the move into steel production might not have the desired impact. Roubini's Ziemba said that investing in sectors like steel that are already oversupplied on a global level, largely due to excess capacity in China, is unlikely to help Angola truly diversify its economy.

"Increasing infrastructure and improving human capital might be a better way to diversify," Ziemba said. "Moreover, increasing revenue streams [via taxation] might actually have a more meaningful effect."

For now, growth is expected to check in this year above 4 percent, helped by what analysts say is resilient domestic demand. In addition, the country may grasp for a lifeline from the World Bank. Both Angola and Nigeria have been in talks with the lender to help offset the effects of low oil prices and a weakening currency.