São Tomé and Príncipe's ENCO - the primary fuel importer and distributor

The ENCO Problem: São Tomé and Príncipe's Hidden Fiscal Time Bomb

When analyzing investment risk in São Tomé and Príncipe, most observers focus on official debt statistics or macroeconomic indicators. But beneath these headline figures lurks a specific, concrete problem that threatens the country's fiscal stability more than any abstract economic concept: ENCO, the national fuel company.

Understanding ENCO is essential for any serious investor consideration of São Tomé and Príncipe, because this single company sits at the center of a debt spiral that could derail the country's entire reform program.

What is ENCO?

The Empresa Nacional de Combustíveis e Óleos (ENCO) is São Tomé and Príncipe's primary fuel importer and distributor. Established by government decree in 1998, it operates as a limited liability company with mixed ownership:

75-77.6% owned by Sonangol (Angola's state-owned oil company)
16% owned by the São Tomé and Príncipe government

This ownership structure is the first clue to understanding the problem. ENCO isn't truly a private company operating on commercial principles, nor is it fully a domestic state enterprise accountable to local fiscal constraints. It exists in a gray zone—majority-controlled by a foreign state oil company but operating as the essential fuel supplier for a country that imports 100% of its fossil fuel needs.

The Core Problem: A Debt Spiral with No Exit

Here's the central issue in its simplest form: The government-owned electricity company (EMAE) cannot pay for the fuel it buys from ENCO, creating a massive accumulation of arrears that represents one of the largest single fiscal liabilities in the country.

The numbers are staggering:

EMAE's debt to ENCO: $178.3 million (2022) – representing 35.3% of total public debt
As a share of GDP: 23-26% – meaning this single debt relationship equals roughly one-quarter of the entire national economy
The government's own regularized debt to ENCO: $37.4 million (8.9% of GDP as of end-2019)

To put this in perspective: in a country where total public debt in optimistic scenarios is projected at 43.6% of GDP, the ENCO-related arrears alone account for approximately 23% of GDP. This single commercial relationship represents more than half of the country's debt burden.

How Did This Happen?

The debt accumulation results from a perfect storm of structural problems:

1. EMAE's Operational Inefficiency

The state electricity company operates expensive, inefficient diesel generators. It cannot generate electricity profitably at current tariff rates, meaning every kilowatt-hour produced adds to its financial losses.

2. Political Pricing

Electricity tariffs are kept artificially low for political and social reasons. The government cannot raise prices to cost-recovery levels without causing social unrest, so EMAE continues selling electricity below the cost of the fuel required to generate it.

3. Fuel Price Mechanisms

The government failed to fully implement automatic fuel price adjustment mechanisms. When international oil prices rise, EMAE (and ultimately the government) owes ENCO the difference—creating additional debt from the "fuel price differential."

4. Continuous Supply Requirement

Despite non-payment, ENCO must continue supplying fuel because EMAE is the monopoly electricity provider. If ENCO stops deliveries, the country experiences blackouts. This creates a hostage situation where debts accumulate because stopping supply isn't a realistic option.

The Cascade Effect: ENCO's Own Debt Crisis

The problem doesn't stop with EMAE owing money to ENCO. Because ENCO itself cannot collect payment, it cannot pay its own supplier—Sonangol, its Angolan parent company.

ENCO's debt to Sonangol:

$256.7 million (2023) – representing 31.4% of STP's GDP
$205 million (end-2019) – approximately 51% of GDP at that time

This creates a secondary fiscal threat. While this debt is technically between two companies, it represents a contingent liability for the São Tomé government. If ENCO collapses under this burden, the government would face pressure to assume these obligations to maintain fuel supply—potentially adding another 30-50% of GDP to public debt overnight.

The situation became so severe that ENCO lost its preferential credit arrangement with Sonangol, forcing it to operate on more expensive payment terms and further straining fuel supply reliability.

Why This Matters More Than Official Debt Figures

Here's the critical investment insight: ENCO-related arrears are sometimes included in public debt calculations and sometimes excluded, which explains the wild variance in reported debt figures.

When you see projections showing public debt at:

43.6% of GDP – this likely excludes or heavily discounts ENCO arrears
79-91% of GDP – this includes EMAE's debt to ENCO

For debt sustainability analyses to show the country falling below critical thresholds by 2025-2027, they must explicitly discount or exclude the arrears owed to ENCO. In other words, the optimistic fiscal projections assume this massive liability somehow doesn't count.

This is accounting engineering, not problem-solving.

The Government's Attempted Solutions

Authorities recognize the severity and have attempted several interventions:

Debt Restructuring (ongoing): The government and ENCO agreed to restructure outstanding arrears into a new loan with favorable terms—small installments with no interest or penalties. However, new arrears continue accumulating faster than old ones are being restructured, making this a treadmill situation.

Emergency Credit Lines: In 2023, the government contracted a $30 million credit line (drawing $12 million) specifically to address the fuel supply crisis linked to ENCO.

Direct Payment Intervention: Since 2024, the government has begun making direct payments to ENCO for new fuel imports on behalf of EMAE, bypassing EMAE's inability to pay.

EMAE Restructuring Plan: Authorities committed to developing a comprehensive EMAE restructuring plan with fixed deadlines by December 2025 under the IMF program.

While these measures show awareness of the problem, they essentially represent the government assuming EMAE's obligations—transferring debt from one public entity to another without addressing the underlying operational losses.

Why This is So Difficult to Fix

The ENCO/EMAE problem resists easy solutions because it involves multiple interlocking constraints:

Political Constraints: Raising electricity tariffs to cost-recovery levels would significantly increase living costs for the entire population, risking social instability in a small, fragile democracy.

Technical Constraints: Transitioning from diesel generation to renewable energy requires massive upfront investment that the government cannot finance, and the timeline for such transitions extends far beyond the immediate debt crisis.

Institutional Constraints: EMAE lacks the technical capacity and institutional strength to dramatically improve operational efficiency in the short term.

External Constraints: The government cannot simply default on ENCO obligations without risking fuel supply disruptions that would cause widespread blackouts and economic collapse.

Ownership Complexity: With ENCO majority-owned by Sonangol (Angola's state oil company), debt negotiations involve international diplomatic considerations beyond simple commercial restructuring.

The Contingent Liability Threat

Perhaps the most dangerous aspect of the ENCO situation is the contingent liability represented by ENCO's own debt to Sonangol.

In a stress scenario—economic shock, political crisis, or collapse of ENCO—the government could face pressure to assume this $256 million obligation (31% of GDP) to maintain fuel supply. This would immediately add this amount to public debt, pushing the debt-to-GDP ratio well above sustainable levels and potentially triggering a sovereign debt crisis.

Currently, this massive obligation sits off the government's balance sheet because it's technically a private company debt. But in a small island economy where fuel supply is existential, the distinction between private and public obligations becomes meaningless when crisis arrives.

What This Means for Investors

The ENCO problem creates several specific investment risks:

Fiscal Projection Uncertainty: Any macroeconomic projection or debt sustainability analysis must be evaluated based on how it treats ENCO arrears. Optimistic scenarios that exclude or heavily discount this liability are not necessarily more accurate—they're simply measuring different things.

Energy Sector Risk: Any investment depending on reliable electricity supply faces elevated risk. The EMAE/ENCO crisis creates ongoing vulnerability to supply disruptions, and the government lacks resources to meaningfully improve energy infrastructure in the near term.

Government Capacity Constraints: The ENCO debt absorbs government attention and limited fiscal resources. In 2023, emergency fuel credit lines consumed scarce borrowing capacity that might otherwise support productive investment. This crowding-out effect will continue until the problem is structurally resolved.

Reform Implementation Risk: The IMF program requires EMAE restructuring by December 2025. If authorities cannot deliver—and restructuring loss-making utilities has proven extremely difficult globally—this could undermine the entire reform program, potentially triggering IMF program suspension and broader fiscal crisis.

Currency and Reserves Pressure: Fuel is purchased in dollars. The ongoing ENCO crisis creates continuous pressure on foreign exchange reserves (which nearly depleted to $0.51 million in late 2023), threatening the currency peg and creating profit repatriation risk for foreign investors.

The 2025 Critical Window

The December 2025 deadline for the EMAE restructuring plan represents a critical moment. Investors should monitor whether this deadline produces:

Genuine structural reform: Tariff adjustments toward cost recovery, operational efficiency improvements, and credible plans for renewable energy transition

Cosmetic measures: Debt rescheduling without operational reforms, continued government subsidies, and deferred decisions on difficult tariff questions

The difference will largely determine whether São Tomé and Príncipe can achieve the optimistic fiscal trajectory projected in IMF scenarios or whether the ENCO debt bomb eventually explodes, derailing the entire reform program.

Investment Implications

For investors evaluating São Tomé and Príncipe opportunities:

Treat ENCO debt as real: Don't rely on debt figures that exclude or heavily discount these arrears. The liability exists regardless of accounting treatment.

Avoid energy-dependent investments: Until the EMAE/ENCO situation stabilizes, investments requiring reliable electricity face elevated operational risk.

Monitor the December 2025 restructuring plan: This will be the clearest indicator of whether authorities can tackle difficult structural reforms or will continue deferring hard decisions.

Account for contingent liabilities: In stress scenarios, add ENCO's debt to Sonangol ($256 million, 31% of GDP) to government obligations to understand true fiscal risk.

Consider timing carefully: If EMAE restructuring succeeds by late 2025-2026, the fiscal outlook improves dramatically. If it fails, the optimistic debt projections collapse.

summary

The ENCO problem illustrates why headline debt figures can be misleading in small, structurally constrained economies. A single commercial relationship—EMAE buying fuel from ENCO—has created fiscal liabilities equal to 23-26% of GDP, with contingent liabilities potentially adding another 31%.

This isn't an abstract macroeconomic concept. It's a concrete, specific problem involving diesel fuel, electricity generation, unpaid bills, and the basic challenge of keeping lights on in a small island nation.

Until this problem is structurally resolved through genuine EMAE reform—operational improvements, tariff adjustments, and transition away from diesel dependency—it will continue threatening São Tomé and Príncipe's fiscal stability regardless of how well other reforms proceed.

For investors, the ENCO situation represents the single clearest stress test of the government's reform capacity. Success here would signal genuine institutional capability to tackle difficult structural problems. Continued deferral or cosmetic solutions would suggest the fiscal stabilization promised in optimistic projections remains aspirational rather than achievable.

The December 2025 restructuring deadline will tell us which scenario is more likely.