Algeria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large oil and gas reserves; significant potential for shale gas development
- Potential in agriculture, renewable energy, and tourism
- Favorable geographical position, close to the European market
- High dependence on hydrocarbon revenues
- High youth unemployment rate, low opportunities for graduates
- Excessive weight of the public sector
- Acute political and social crisis triggered in 2019
- Poor state of infrastructure
- Bureaucratic red tape, corruption, financial sector weaknesses, and uncertain business environment
A constrained recovery despite high hydrocarbon prices
The Algerian economy rebounded in 2021, driven by higher energy prices and increased OPEC+ production quotas. In 2022, growth, which is heavily dependent on the hydrocarbon market (nearly a third of GDP and more than 93% of export earnings), will slow as the base effect weakens, while oil production could resume its structural decline owing to under-investment in the sector. However, despite the closure of the Maghreb-Europe gas pipeline following the dispute with Morocco, strong demand from Italy and Spain is expected to result in growth in gas exports. Non-hydrocarbon exports, consisting mainly of fertilizers, mineral products, chemicals, and agri-food products, including dates and sugar, will remain modest in 2022. Household consumption (45% of GDP in 2020) recovered timidly in 2021, as the government's support measures failed to sufficiently counter the erosion of household purchasing power caused by food price-driven inflation. In 2022, despite expected progress in the COVID-19 vaccination campaign, purchasing power will continue to be constrained by an unemployment rate of around 15% and stubbornly high inflation. After being put on hold in 2020, public investment, targeting the hydrocarbon, infrastructure, and housing sectors, resumed in 2021. In 2022, the government was set to prioritize the mining sector (iron, phosphate) following the 2021-2023 national mining program. However, the investment recovery will be significantly restricted by fiscal frailties. In contrast, the private share of investment will be constrained by the business environment, which continues to face challenges despite the repeal in June 2020 of the law capping foreign ownership of Algerian firms at 49% (except in strategic sectors) and new support for start-ups.
Substantial deficits and erosion of foreign exchange reserves
In 2021, the public deficit widened further as the increase in spending to support the economy was not offset by the increase in hydrocarbon revenues (45% of government revenues). In 2022, the deficit was projected to decrease on the back of the 9% increase in oil revenues forecast by the government. However, it will remain significant due to the government's substantial operational and capital expenditure and the large share of social transfers (9.5% of GDP). While public debt rises, external debt will remain low (less than 1% of GDP), as the country is still reluctant to seek external assistance to finance its large deficit. The government is therefore expected to continue with monetary financing via the central bank, which resumed in 2021.
The current account deficit followed the trade deficit in narrowing in 2021, reflecting the sharp recovery in hydrocarbon prices and export volumes, as well as import control policies. In 2022, the current account deficit will continue to shrink as these policies to restrict foreign purchases, mainly machinery, and food, continue to reduce the import bill. The current transfer surplus will be unchanged, preventing it from offsetting the primary income deficit linked to the repatriation of foreign firms' profits. FDI will increase but remain low. The removal of the ceiling on foreign ownership of local companies will generate only a slight increase, as it excludes the most attractive sectors, such as hydrocarbons and mining. Weak investment flows and the government's refusal to take on the external debt will continue to pressure foreign exchange reserves, which have been falling since 2014, decreasing from USD 193 billion to USD 45.5 billion in September 2021.
Persistent domestic instability heightened tensions with Morocco.
After nearly 20 years in power, President Abdelaziz Bouteflika resigned in April 2019 under pressure from regular protests known as the Hirak movement, which began in February 2019. Despite his resignation, Hirak protests continued, but after two postponements of the presidential election, Abdelmajid Tebboune, Bouteflika's prime minister in 2017, was elected in December 2019. Against continuing protests and the constitutional reform approved by referendum in November 2020, legislative elections, initially scheduled for 2022, were finally held in June 2021. Like the presidential election and the constitutional referendum, they featured record abstention (77%), reflecting the population's continuing distrust of the political class. While the National Liberation Front (98 of 407 seats), the country's dominant political party since independence in 1962, came out on top in the elections, it lost more than 60 seats, while its traditional ally, the National Democratic Rally (58 seats), lost more than 40 seats. The Movement of Society for Peace (65 seats) and independents (84) made significant gains. Although demonstrations have ceased for the time being, popular discontent and the potential for political instability will persist, with increasing numbers of Hirak prisoners of conscience being put in prison, perceived corruption among political elites, and continuing difficult social and economic conditions.
Relations with Morocco have soured over Western Saharan sovereignty. After the two countries broke diplomatic ties at the end of August 2021, Algeria, Morocco's leading gas supplier, announced in October 2021 the official closure of the Maghreb-Europe gas pipeline. Also, in October 2021, the country shut its airspace to French military aircraft over comments by French president Emmanuel Macron about Algeria's history.