Algeria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant oil and gas reserves especially in shale gas
- Potential in the fields of renewable energy and tourism
- Solid external financial position (very low external indebtedness, significant foreign exchange reserves)
- Highly dependent on hydrocarbons and problems using this income
- Dividing lines between those in power and the general population
- High youth unemployment
- Excessive weight of the public sector
- Bureaucratic red tape, weaknesses in the financial sector and problematic business climate
A Further Decline in Growth in 2018
State support for the economy has helped limit the impact of lower oil prices on the Algerian economy since 2014. However, Algerian growth slowed in 2017 due to the state’s dwindling financial resources and public spending cuts. Although the oil sector posted strong growth during the year, it did not offset the slowdown in non-oil activity.
The economy is expected to continue to slow in 2018. The reintroduction of quotas in line with the OPEC agreement is expected to limit the growth of the oil sector, already adversely affected by a lack of investment and the maturity of some oil fields. A new law aimed at enhancing the sector’s attractiveness for foreign investors by limiting the restrictions on foreign companies is due to be implemented in 2018, although its effects are unlikely to be visible in the short term. Non-oil activity is expected to show signs of cooling. The authorities want to continue to support consumption by increasing social spending, but this will be to the detriment of public investment. The impact of this measure on household purchasing power is likely to be limited by the rise in inflation. This is because, to finance the deficit, the Algerian government passed a new framework law in September 2017 allowing the state to borrow directly from the Bank of Algeria for five years. This financing method will lead to greater domestic inflationary pressures while import barriers will tend to increase prices for foreign products.
Sizeable Twin Deficits
The fiscal position will continue to suffer the consequences of lower oil prices. The public deficit fell slightly in 2017 but remained in double digits. The slight rise in the barrel price during 2017 helped boost tax receipts but spending only fell weakly. Although slightly lower, the public deficit is expected to remain significant in 2018. The finance law is a sign that the government is changing its fiscal policy following successive changes of prime minister over the previous year. The fiscal consolidation plan adopted in 2016 to allow the public deficit to be brought down over three years based on a cut in investment spending has been put to one side. The fiscal envelope allocated to investment has been increased by over 50% and is expected to help finance projects which have to date been frozen in the education and healthcare sectors and in land use planning. The amounts allocated to operating costs have been cut by half. Subsidies and social spending are unlikely to be cut, apart from a small reduction in the amount paid for fuel costs, which is expected to push up the price of gas and of petrol at the pump. While the slight increase in the barrel price to above USD 50 per barrel and the rise in exports are expected to boost revenues, they will not cover the government’s expansionary policies. The public deficit is likely to be financed directly by borrowing contracted with the central bank. The public debt looks set to rise as a consequence, but the main risk of this policy is that of higher inflation. For the moment the public authorities have ruled out external borrowing.
External accounts have continued to run a large deficit since 2015. Algerian exports, chiefly comprising oil, rose slightly in 2017 and this increase, although weak, is set to continue in 2018. However, the gap between exports and the country’s import needs remains. Foreign exchange reserves continue to decline and are expected to fall below the USD 100 billion threshold in 2018. The steps taken to reduce the import bill went some way to reducing imports in 2017 and new steps intended to limit the decline in foreign exchange reserves are due to be implemented in 2018. FDIs into Algeria are nonetheless expected to grow. The government is promoting a new investment law in a bid to increase the attractiveness of the oil sector.
Risk of Social Unrest
The May 2017 parliamentary elections, which took place amid the lowest voter turnout ever recorded, did not affect the country’s political status quo and returned the governing coalition made up of the National Liberation Front and the National Rally for Democracy to power. However, government reshuffles have succeeded one another over the past year, the most recent one being the sacking of Abdelmadjid Tebboune in favor of Ahmed Ouyahia, brought back by President Bouteflika Prime Minister for a fourth term as prime minister. Algeria’s deep economic downturn is starting to have impact socially, which will prompt the government to continue its generous policy of social transfers to the detriment of fiscal consolidation. However, Sonatrach’s recent declarations regarding the exploitation of shale gas fields in parts of southern Algeria could trigger renewed pockets of protest.