Algeria: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: B

Risk Assessment²

Strong growth driven by the hydrocarbon sector and public spending
In 2010, the rebound of GDP growth was spurred by the upturn in barrel prices and oil production, as it adjusted a growing foreign demand and to the quotas set by OPEC. In the non-hydrocarbon sector, business activity has grown at a strong pace, driven by public spending.

In terms of overall growth, 2011 is expected to be comparable to 2010 with economic performance thus remaining below Algeria's potential. Hydrocarbon production is expected to record little growth with demand likely to suffer, in particular, from modest economic growth in Europe. Conversely, non-hydrocarbon sectors are likely to continue to achieve good performance thanks mainly to continuation of the vast public investment program (infrastructure and habitat). Since non-hydrocarbon sectors represent a relatively limited proportion of the economy, however, they make only a moderate contribution to overall GDP growth.

Moderate public debt and solid external financial position
The fiscal deficit that emerged in 2009 after a decline in oil revenues compounded by expansionary economic policy, narrowed in 2010 despite a sharp rise in public spending. The deficit will nonetheless be likely to persist in 2011 amid the continuing efforts on infrastructure modernization and an increase in civil service wages.  But the oil revenues set aside in the Revenue Regulation Fund facilitate the financing of the deficits. Algeria moreover benefits from relatively moderate public debt that provides it with room for maneuver.

Thanks to the hydrocarbon exports, the trade balance can be expected to show a surplus, and the same applies to the current account, notwithstanding the increase in the price of wheat of which Algeria is among the largest importers in the world. And the import bill will be limited moreover by strict measures taken by the authorities since 2009, intended to reduce purchasing abroad.

In this context, Algeria's imposing foreign exchange reserves bolster an already solid external financial position. And active policy to pay down foreign debt, via the early repayment of rescheduled debt and a ban on corporate borrowing abroad, has resulted in improvement in the relevant debt ratios, which have come down to very low levels.

Challenges on social issues and business climate
Political continuity prevailed with the re-election of President Bouteflika in April 2009, for a third term in office until 2014, with parliamentary elections scheduled in 2012. Although the security situation has improved, sporadic actions by the radical Islamist group Al Qaeda in the Islamic Maghreb remain possible despite their limited destabilizing effect on investment or economic activity in general. Moreover, high unemployment among youth and poor distribution of oil wealth feed social and political unrest.

Restrictive measures on imports and foreign investments were adopted in the framework of the July 2009 Supplementary Budget Law (SBL). Although the SBL enacted late August 2010 eased some of the measures slightly, it also instituted new restrictions intended to defend Algeria's economic interests and promote national industries. But they do not seem propitious, however, to either improving the business climate or developing the private sector.

Strengths

• Extent of oil and gas reserves
• Solid external financial position (very limited debt and enormous foreign-exchange reserves)
• Public investment policy focused on economic diversification

Weaknesses

• High dependence on the hydrocarbon sector
• Excessive economic weight of the public sector
• Poor business environment offering little incentive to attract foreign companies
• High unemployment, particularly affecting youth