Algeria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Major oil and gas reserves; significant potential for shale gas development
- Potential in agriculture, renewable energies, and tourism
- Favorable geographical position, close to the European market
- Heavily dependent on hydrocarbon revenues
- High youth unemployment rate; few opportunities for graduates
- Overly large public sector
- The acute political and social crisis triggered in 2019
- Dilapidated infrastructure
- Red tape, financial sector weaknesses, and an uncertain business environment
Recovery linked to the future of the hydrocarbon market
Algeria went into recession in 2020 because of the COVID-19 crisis. The country is heavily dependent on the hydrocarbon sector (21% of GDP and 93% of exports) and had to contend with the collapse of hydrocarbon prices linked to weak global demand and the constraints of the OPEC+ agreement on oil production. Furthermore, in order to curb the COVID-19 epidemic, the government imposed lockdown measures in February 2020, which included canceling commercial flights. This was followed by the closure of schools, businesses, restaurants, and borders. In 2021, the activity should gradually pick up again. While they should be higher than in 2020, hydrocarbon prices and demand are expected to remain below their pre-crisis levels, which will continue to impact export revenues (21.6% of GDP). Moreover, despite a modest increase in OPEC+ production quotas, the restrictions under the agreement will continue to constrain oil production in 2021. After falling back significantly in 2020, due to rising unemployment (16.5% in 2020 versus 12% in 2019) and the decline in diaspora remittances (1.1% of GDP) as a result of the health crisis in Western Europe, household consumption (44% of GDP) will recover slightly in 2021, as the government has introduced social assistance, which, despite being worth only 0.4% of GDP, should provide a small boost. However, consumption is expected to grow timidly due to persistent political and economic uncertainty, as well as the still-high unemployment rate. Investment (37% of GDP), especially public investment, which is mainly concentrated in hydrocarbons, infrastructure, and housing, was frozen. In 2021, investment is expected to pick up but only slightly due to difficult budgetary conditions and economic uncertainties, despite the repeal in June 2020 of the law imposing a 49% cap on foreign interest in Algerian firms, excluding strategic sectors.
Domestic debt and erosion of foreign exchange reserves
With COVID-19, the government increased its spending on health (0.2% of GDP) as well as on social and economic aid as part of a support plan (1% of GDP). At the same time, tax revenues (41% from hydrocarbons) fell. Despite cuts in capital and current expenditures (excluding subsidies representing more than 8% of GDP), the traditional public deficit widened. In 2021, it is expected to shrink only slightly, as spending to support the economy should remain high, while revenues are set to increase only slightly. External indebtedness will remain low (less than 1% of GDP), although Algeria may seek multi- or bilateral assistance to finance the large deficit. The country could also resort to central bank financing, which ceased in 2019.
The current account deficit also widened, due to the large trade deficit, which increased following the crisis and the decline in hydrocarbon exports. Admittedly, Algeria recorded a decline in imports linked to weaker domestic demand as well as the tightening of import conditions in order to save foreign currency, but not enough to compensate. In 2021, the deficit is expected to narrow only modestly. Despite the slight rebound in exports, imports will resume in line with the recovery in domestic demand. This deficit will continue to be financed by drawing on the foreign exchange reserves, which have fallen sharply (equivalent to 12 months of imports at the end of 2019, but only eight months at the end of 2020), continuing their decline since 2014. FDI will remain low. However, the removal of the cap on a foreign equity interest in local companies and the obligation to find a local partner, as well as the ability to obtain foreign financing, could generate additional FDI in the long-term, except in the mining sector, hydrocarbons, electricity transmission, railways and retail trade, which are excluded. As a result, investors, which sometimes tire of working with the national company, Sonatrach, are likely to continue to be lukewarm on the hydrocarbon sector.
Increased political instability
Faced with large-scale protests, which began in February 2019 after he announced his candidacy, President Abdelaziz Bouteflika, who had been in power since 1999, was forced to resign in April 2019. Regular demonstrations (known as the Hirak movement) continued, forcing two postponements of the presidential election, which finally took place in December 2019. Abdelmajid Tebboune, Bouteflika's prime minister in 2017, emerged victoriously. He is trying to distinguish his administration from that of his predecessor through greater transparency. He also committed to responding to the Hirak movement's demands by initiating a constitutional reform, which was approved by a referendum on 2 November 2020, although turnout was low (23.7%). The government hopes that the parliamentary election, which took place at the end of 2020, and the constitutional reform will alleviate the political and social risk. Widespread poverty, the lack of employment opportunities, and the difficult economic context, all of which have been exacerbated by the health crisis, plus the feeling that nothing is really changing in governance, will likely fuel discontent. Military and government tolerance for unrest may decrease and security measures may be strengthened. Furthermore, the major role played by the army on the domestic scene could increase externally against a backdrop of incursions by jihadists from Libya and Mali, as well as the disagreement with Morocco over Western Sahara.