Currency risk is the dominant concern for any foreign investor allocating capital to Angola. A kwanza-denominated treasury bond (Obrigação do Tesouro, OT) yielding 17-18% in local currency delivers an attractive hard-currency return only if depreciation stays below that yield – but the USD/AOA rate has demonstrated it can move 30-40% in a single year, as it did in 2019 and 2023. Managing this exposure is not optional; it is the central challenge of the Angolan investment case. The difficulty is that conventional hedging tools available in more developed markets are either absent, illiquid, or prohibitively expensive for the kwanza.
The Core Problem: No Domestic Forward Market
In a typical emerging market with a liquid FX regime, investors can hedge currency exposure by purchasing forward contracts or options from local or international banks. Angola does not yet have a functioning domestic forward market for the kwanza. The reasons are structural:
Shallow interbank market. The foreign exchange market remains dominated by the BNA’s twice-weekly auction system, with limited interbank trading. Without a deep spot market, the foundation for a forward curve does not exist.
Regulatory constraints. While the 2019 liberalization removed many capital controls, the regulatory framework for derivative instruments in Angola is still underdeveloped. The BNA has signalled interest in developing an onshore derivatives market, but progress has been slow.
Counterparty risk. Even if forward contracts were technically available, the counterparty risk involved in a long-dated FX commitment with an Angolan bank would be substantial for most international investors, given the banking sector’s credit profile and the concentrated exposure to the same oil-driven macroeconomic risks that drive the currency.
One-sided demand. Virtually all foreign portfolio investors in Angola are long kwanza (through local-currency bond holdings) and would seek to sell kwanza forward. Without a natural counterparty willing to take the other side at a reasonable price – for instance, an Angolan corporate with future dollar obligations wanting to lock in a kwanza conversion rate – no liquid market can form.
Available Hedging Instruments
Despite the absence of a domestic forward market, several instruments and strategies are available to investors seeking to manage AOA exposure:
1. Offshore Non-Deliverable Forwards (NDFs)
The primary instrument for hedging AOA exposure is the non-deliverable forward (NDF), traded over-the-counter among international banks in London and New York. An AOA NDF is a contract that settles in US dollars based on the difference between the contracted forward rate and the BNA reference rate at maturity. No kwanza changes hands.
Availability. AOA NDFs are quoted by a handful of international banks with Angola exposure, including Standard Chartered, Citibank, and Standard Bank. Liquidity is limited compared to NDFs for currencies like the Nigerian naira (NGN) or Egyptian pound (EGP), but sufficient for moderate position sizes.
Tenors. Typical NDF tenors range from one month to twelve months. Longer tenors (up to two years) may be available on request but at significantly wider bid-ask spreads.
Pricing. NDF forward rates embed the market’s expectation of kwanza depreciation plus a risk premium. In the current environment, with the USD/AOA spot rate at 914.60 and the BNA base rate at 17.5%, one-year NDF forwards typically price at a 12-18% discount to spot (i.e., implying depreciation to approximately 1,025-1,080 AOA/USD). This means the cost of a full one-year hedge consumes a substantial portion of the kwanza yield advantage.
Settlement risk. NDFs settle against the BNA reference rate. In a crisis scenario where the official rate diverges significantly from the rate at which kwanza can actually be converted – as occurred during the 2015-2018 parallel market blowout – the NDF settlement may not fully compensate for actual economic losses. This “fixing risk” is inherent to NDF markets in managed exchange rate regimes.
2. Dollar-Indexed Bonds (OT-X)
Angola has periodically issued Obrigações do Tesouro indexadas ao dólar (OT-X), treasury bonds denominated in kwanza but with principal and coupon payments indexed to the USD/AOA exchange rate. These instruments provide a natural hedge against kwanza depreciation: if the exchange rate weakens, the kwanza-equivalent payout increases proportionally.
OT-X bonds effectively transform what would be a kwanza-denominated investment into a dollar-equivalent exposure. The yield is lower than on standard kwanza OTs – typically 200-400 basis points less – but the elimination of currency risk justifies the yield compression for foreign investors.
Availability on BODIVA. OT-X issuance has been intermittent, and outstanding supply is limited relative to the standard OT and BT (Bilhetes do Tesouro, treasury bills) markets. Liquidity in the secondary market on BODIVA is thin, and investors may need to hold to maturity. The Angolan government’s willingness to issue OT-X in volume depends on its own view of depreciation risk: heavy issuance of dollar-indexed debt is expensive for the sovereign if the kwanza weakens.
3. Holding USD-Denominated Assets
Foreign investors can maintain a portion of their Angola allocation in US dollar-denominated instruments, avoiding kwanza exposure entirely:
Angola Eurobonds. Angola’s outstanding Eurobonds (2025, 2028, 2029, and 2032 maturities at various coupons) provide dollar-denominated sovereign credit exposure without any kwanza risk. The tradeoff is lower yields – current Eurobond yields range from 7-10% depending on maturity, compared to 15-18% for kwanza OTs.
USD deposits at Angolan banks. Foreign investors with onshore accounts can hold dollar deposits, though interest rates on USD deposits are low (typically 1-3%) and the deposits carry the credit risk of the Angolan banking sector.
4. Natural Hedging Strategies
Investors with broader exposure to Angola can employ natural hedging by matching kwanza assets with kwanza liabilities, or by structuring investments in sectors whose revenues are inherently dollar-linked:
Oil-linked equities. Angolan companies with revenues tied to oil exports or other dollar-denominated commodities provide a natural offset to kwanza depreciation, since their kwanza revenues rise when the exchange rate weakens.
Partial hedging. Rather than hedging the full position, investors may choose to hedge only a portion – for instance, 50% of the notional – using NDFs, accepting residual currency risk in exchange for lower hedging costs. This approach is particularly relevant when the NDF-implied depreciation rate is close to actual expected depreciation, leaving little net benefit from a full hedge.
Rolling short-tenor positions. Instead of committing to a twelve-month kwanza position, investors can roll shorter-tenor instruments (e.g., 91-day BTs) and reassess the FX outlook at each rollover. This reduces the maximum currency exposure at any point in time, though it introduces reinvestment risk.
Cost-Benefit Framework
The decision to hedge AOA exposure ultimately reduces to a comparison of three numbers:
- Kwanza yield – the annualised return on the local-currency instrument (e.g., 17.5% for a 364-day BT)
- Expected depreciation – the investor’s best estimate of USD/AOA movement over the holding period
- Hedging cost – the NDF forward discount or the yield give-up from switching to OT-X or Eurobonds
| Strategy | Yield (Approx.) | Currency Risk | Hedging Cost |
|---|---|---|---|
| Kwanza OT (unhedged) | 17-18% | Full AOA exposure | None |
| Kwanza OT + NDF hedge | 17-18% minus NDF cost | Residual fixing risk | 12-18% (NDF discount) |
| OT-X (dollar-indexed) | 13-15% | Minimal (indexed) | Yield give-up vs OT |
| Angola Eurobond | 7-10% | None (USD) | Yield give-up vs OT |
| Partial hedge (50% NDF) | 17-18% minus 50% NDF cost | 50% AOA exposure | 6-9% effective |
In the current environment – with the kwanza broadly stable and annualised depreciation running below 2% – the unhedged carry trade has been strongly positive. A 364-day BT at 17.5% yield with only 2% depreciation delivers approximately 15% in USD terms. However, investors burned by the 39% depreciation in 2023 understand that stability can evaporate rapidly.
Monitoring and Adjustment
The most important indicators for adjusting hedging strategy are:
- Parallel market premium: A widening spread above 10% warrants increasing hedge ratios
- BNA reserves trajectory: Declining reserves signal reduced capacity to support the exchange rate at auction
- Oil price outlook: Brent crude below $65/bbl for a sustained period would pressure the kwanza
- BNA auction dynamics: Falling allotment ratios or auction cancellations indicate dollar supply tightening
- Inflation differential: The gap between Angolan and US inflation (currently ~12 percentage points) sets the long-run trend depreciation rate
Investors should revisit hedging strategy at least quarterly and be prepared to adjust positions quickly in response to changes in these indicators.