Country Report Algeria
Algeria’s hydrocarbon-based economy is facing rising competition from the recent shale gas boom in the US, but thanks to ample fiscal reserves, the impact on the country has been limited so far. Its social climate will likely remain stable, even if President Bouteflika should be re-elected next year.
Strengths (+) and weaknesses (-)
(+) Strong external and fiscal position
Thanks to recurrent large hydrocarbon-based trade surpluses, Algeria has accumulated large foreign exchange reserves (about USD200bn) and fiscal savings (about USD 70bn) that boost its resilience against external and domestic shocks.
(-) Narrow economic base centered around the hydrocarbon sector
Due to its dependence on the hydrocarbon sector, which generates about 40% of GDP and 97% of exports, Algeria’s economy is strongly exposed to a fall in oil and gas prices. Moreover, export destinations are hardly diversified, as most exports go to the euro area.
(-) Business climate not conducive to private sector growth
Algeria’s economy is dominated by the public sector, which redistributes hydrocarbon revenues via subsidized prices, welfare programs and employment opportunities. The private sector is small and suffers from outdated regulation, bureaucracy and weak competitiveness.
1. Moderate economic growth amid sizeable challenges
Algeria’s economy expanded by a moderate 2.5% last year, up from 2.4% in 2011, as sizeable government spending intended to buy off social unrest during the Arab spring boosted domestic demand. Besides public infrastructure investment, private consumption, particularly car purchases, surged, following marked wage increases in the very large public sector in recent years. Benefitting from the government stimulus, Algeria’s non-hydrocarbon GDP increased by 7.1%, but the ongoing struggles to maintain current output in the hydrocarbon sector (accounting for about 30% of GDP) depressed overall growth. In 2012, added value of the hydrocarbon sector contracted by 3.4% yoy, on top of an 18.4% contraction between 2006 and 2011. This year, overall economic growth is expected to come in at about 3%, while growth in the years beyond is unlikely to exceed 4%, as Algeria’s current public-sector-driven economic model seriously limits the country’s growth potential. In particular, the dominant position of the hydrocarbon sector and the associated redistribution of oil and gas revenues by means of an oversized public sector and subsidized employment at various state-owned enterprises leaves little room for the development of a meaningful competitive private sector. Consequently, Algeria will remain heavily dependent on the hydrocarbon sector in the coming years. Yet, the challenges for the sector continue to increase, as the current boom of non-conventional oil and gas, particularly in the US, as well as lackluster demand from Europe, Algeria’s main export market, depresses prices. Meanwhile, rising domestic demand will put downward pressure on Algeria’s export volumes, as output continues to stagnate, conventional reserves are limited and huge non-conventional reserves have not been exploited yet. In order to boost upstream investment, the government has embarked on a cautious relaxation of foreign investment regulations this year. Yet, these measures only received lukewarm support from foreign investors, some of which had sold their participations in Algerian hydrocarbon projects following the deadly terrorist attack in January on a BP-Statoil-Sonatrach natural gas facility that left several expat workers dead.
2. Next year’s presidential elections unlikely to lead to major change
Algeria will be heading for its first post-Arab spring presidential elections in April 2014, but major political changes are unlikely, as the dominant Front de la Libération Nationale (FLN) of incumbent President Abdelaziz Bouteflika endorsed the 76-year old head of state for a fourth term. Even though the likely re-election of Mr Bouteflika could result in incidences of social unrest by disappointed youth, Algeria’s ability to buy off social tensions by using its ample financial reserves should prevent an Arab-Spring style revolt. Moreover, the firm grip on power of the country’s political and military leadership, particularly the country’s secret service, commonly known as le pouvoir (the power) is expected guarantee political stability. While another Bouteflika presidency should ensure policy continuity, it remains to be seen whether the president will be able to complete his term in office. Earlier this year, he received months-long treatment in Paris following a mild stroke that caused speculations in Algeria whether he was fit enough to govern the country in the years to come. While the names of possible successors are kept secret, any candidate would likely need the support of both the Bouteflika clan and the country’s secret service.
3. Public expenditures scaled back in the aftermath of the Arab Spring
Following two years of strongly growing social expenditures during the Arab Spring, Algeria’s government intends to cut current spending by 11% and reduce capital spending by 10% in 2013. As lower oil and gas revenues left their mark on the 2014 budget, the government opted to further reduce spending next year in spite of the upcoming presidential elections in April. Still, the provision of housing and jobs in the (semi-) public sector received particular attention, while subsidies for food and fuel remain in place. Consequently, Algeria will likely run its sixth successive budget deficit of about 2% of GDP next year. However, as budget deficits are generally financed out of fiscal savings accumulated in the USD 72bn (34% of GDP) Fonds de régulation des recettes (FRR), public debt should remain at a very low 8% of GDP.
4. Algeria’s external position remains very solid despite decreasing current account surpluses
Algeria’s external position remains very strong, even as declining hydrocarbon export revenues, rising domestic demand on the back of the government’s recent spending surge, and declining investment returns contribute to a continuous decline of the current account surplus from 20% of GDP in 2008 to an expected 1.7% of GDP next year. While Algeria’s foreign exchange reserves of about USD 200bn currently provide about 35 months of import cover, declining current account surpluses that might even turn into deficits in the coming years, have contributed to a slowdown in reserve accumulation. However, given the current ample foreign exchange reserves levels and external debt of a mere 2% of GDP, Algeria still has some way to go before its current economic challenges start to undermine its external position.
Algeria is a medium-sized economy in Northern Africa with about 37 million inhabitants and a nominal GDP of USD 212bn in 2012. Owing to large oil and particularly gas deposits located in the Algerian Sahara, the local economy is dominated by the hydrocarbon sector, in which the government holds a significant stake through the state-owned oil company Sonatrach, as foreign investment is limited to 49% of project values. While part of the hydrocarbon revenues accruing to the government have been saved in a special fund, the remaining part has contributed to the emergence of a bloated public sector, which is today one of Algeria’s main employers. Restricted by considerable bureaucracy and an overall poor business climate, the private and financial sectors are seriously underdeveloped, however, which contributes to recurrent supply bottlenecks and overall weak competitiveness. While the government has taken steps to broaden Algeria’s economic base, a major review of the public sector’s role in the economy is needed to unleash the country’s growth potential. Yet, given strong vested interests, these developments are unlikely to occur in the coming years. So far, the dominant role of the public sector and ample financial resources enable the government to buy off social anger by means of grants and subsidized jobs. Still, given the country’s strong population growth and the declining ability to provide public sector employment due to declining hydrocarbon revenues, changes to this model are needed.
Following a decade-long civil war in the 1990’s, Algeria’s current political system is characterized by a strong president, whose power is counterweighed by the military and the secret service. The regularly elected parliament’s role is usually limited to the approval of presidential decrees.