Financial sector development in times of oil: A case study of AngolaRebecca Engebretsen, PhD CandidateFriday discussion at Development Workshop 30.9.2016

Overview• Motivation• What does existing

theory tell us?• Focusing on the

politics• Example: Foreign

Exchange Law for the Oil Sector

Angola: oil-rich

Angola: oil rich

UNCTAD 2014: ”Oil production and its associated activities account for about 85% of Angola's GDP, and 96% of its exports.”

Angola: oil rich

And a growing financial sector

• Banking sector assets in US$ billions

And a growing financial sector• Number of licenced banks in Angola

Source: Deloitte 2015: Banca em Análise 2015

Why study financial sector development? • Financial sector development positively

related to inclusive economic growth

• Can help diversify the economy

• Can help buffer against volatility

• What can existing theory tell us about why financial sectors - in countries like Angola - looks like they do?

What does existing theory tell us?

• Financial development hurt by the lack of demand– Non-oil economy non-competitive and low

demand for financing– Dominant extractive sector seek financing

on the international market

• BUT; Beck (2010) finds that the need for credit is no less amongst firms in RRC than in comparable countries. The question seem to be one of supply

• Volatility, for example related to highly cyclical commodity prices, bad for financial sector development– Commodity exporters subject to large

fluctuations

• BUT; Not automatic, some countries have been able to deal with volatility.

What does existing theory tell us?

Focusing on the politics• Weakness of current explanations:

financial sector development unlikely to be only driven solely by market-driven demands or structural factors

• Financial sectors are subject to significant regulation

• Outcomes also reflect political interest…

Focusing on the politics• Bhattacharyya and Hodler (2010):

Politicians in RRC only develop financial sectors when they are held accountable: otherwise will neglect

BUT: Seems less plausible when accounting for sector development (The Banker, 2015)

• Calomiris and Haber (2014): Financial sector outcomes driven by bargains between political leaders and domestic capitalists

• But; What if state dominates?

Weak privatesector

Resource- rich state

Focusing on the politics

• We need to look closer at the role of the state

• The way it finances itself• The way political leaders maintain support• Its policy priorities

• For RRC: Allocation rather than production: development is ability to extract rather than to redistribute

Example: Foreign Exchange Law for the oil sector

• Stated aims: Channel the substantial financial flows from the oil sector into the Angolan economy– Capitalise the banking

sector– Strengthen Monetary

Policy–More money for domestic

investments

Example: Foreign Exchange Law for the oil sector

• For implementation: Necessary to increase banking sector capacity

• Result of law (2015): Flow of US dollars into the Angolan banking system, boosted by US$30 billion. – Increased financial strength of state– Financial sector stronger– But so far little towardsproductive investments

Concluding remarks on the Angolan case• Foreign Exchange Law for the oil

sector: State driven initiative

• Private sector: reactive rather than proactive

• But result financial sector development – even if not broad yet