Angola Shifts Away From Oil

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By BENOîT FAUCON

Buildings under construction in the Angolan capital, Luanda. As the nation works to bolster agriculture, oil exports are keeping its economy afloat.

MABUIA, Angola—As oil-rich Angola seeks to raise at least $2 billion from Western investors with its first international sovereign bond, the key question for investors is the extent to which the country can diversify its economy away from its dependence on crude.

For some underdeveloped economies, oil can be a curse rather than a blessing, as a lack of alternative economic opportunities often fuels discontent over the allocation of oil wealth.

In Angola, oil provides 90% of the country's export revenue but employs less than 1% of the population. About 63% of the population still depends on agriculture for a livelihood, mostly subsistence farming. A 27-year civil war, which ended in 2002, devastated its agriculture industry, cutting access to seed and fertilizer and severing export routes to sell its products. Once the world's fourth-biggest coffee exporter and self-sufficient in most crops, the country now is a net importer of food.

The war also left Angola with up to 6 million buried landmines, making almost half its land too dangerous to walk on, let alone to farm.

But while oil is keeping Angola's economy afloat, ratings firms, the International Monetary Fund and potential creditors also are focused on the long-term prosperity of agriculture.

The Angolan government has vowed to revive agriculture, announcing last year that it would invest $2 billion in the sector. It has asked oil companies, including Total SA of France, to invest in areas that will boost Angola's farming sector, helping to diversify the nation's economy.

U.K. oil major BP PLC, with partners, runs a microcredit program in Angola, where small loans of as little as $100 can help turn a subsistence farmer into an entrepreneur, and has separately financed a system to irrigate land in the Mabuia area. U.S. oil company Chevron Corp. owns a stake in microcredit bank NovoBanco, which lent $5 million to farmers in 2009. It also has poured $3 million in a program, which it runs with others, to train more than 5,500 farmers in agricultural techniques and help them access international markets.

The diversification strategy is paying off. A May study on oil nations by the IMF singles out Angola as a rare example of an economy where crude drove the nonoil sector instead of destroying it. While Angola ranks second only to Libya as the world's most oil-reliant economy, its nonoil sector has grown an average of 11.6% annually between 1997 and 2008, slightly faster than oil at 7.8%. Agriculture is by far the fastest growing part of the nonoil sector, with its share of national income increasing by a third in 2009—compared with 10% for manufacturing and construction, according to the IMF.

The study also warned that a difficult business environment and poor infrastructure means Angola could face growth issues, much like other oil countries do.

Angolan farmers pay nearly four times more for fertilizers than their U.S. counterparts and triple that of farmers in neighboring Zambia, according to a World Bank report.

In May, Angola received its first set of credit ratings. Moody's Investors Service Inc. assigned Angola a B1 rating, in line with peers Standard & Poor's Corp. and Fitch Ratings, which both assigned the African nation a single B-plus rating. The solidly speculative ratings came after the IMF agreed to provide the country a loan of $1.4 billion after interrupting talks two years earlier. Angola said at the time that it didn't need any IMF support, but critics said it wanted to avoid scrutiny on its revenues.

Both the ratings agencies and the IMF focused not so much on Angola's oil wealth as on its ability to tap its fertile land. Standard & Poor's said its rating "was constrained by our view of the country's narrow economic base." In recent statements, the IMF said Angola must "lay the foundation for the development of the non-oil sector as a source of sustained growth."

Should Angola fail to broaden its economy, it risks becoming another Nigeria, which vies with Angola as Africa's top crude producer. Nigeria's oil industry has replaced agriculture as the main source of revenue. It employs very few people, and angry residents have been disrupting production by sabotaging or stealing from pipelines. And quarrels about the distribution of oil revenue have fueled civil unrest.

Write to Benoît Faucon at benoit.faucon@dowjones.com