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Country Report Algeria

Country Report

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Algeria’s social situation remains stable as President Bouteflika was elected for his fourth term in office. The government presented a new five-year plan that once more aims to diversify the economy away from the hydrocarbon sector.

Strengths (+) and weaknesses (-)

(+)      Strong external and fiscal position

Thanks to recurrent large hydrocarbon-based trade surpluses, Algeria has accumulated a large amount of foreign exchange reserves (about USD200bn) and fiscal savings (about USD 70bn) that boost its resilience against external and domestic shocks.

(-)       Narrow economic base centred on the hydrocarbon sector

Due to its dependence on the hydrocarbon sector, which generates about 40% of GDP and 97% of total 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 The private sector is small and suffers from outdated regulation, bureaucracy and weak competitiveness.

Key developments

1. Ailing President Bouteflika re-elected as government prepares a smooth transition

Benefitting from the dominant position of his FLN party in Algerian politics and an apparent preference of the electorate for political stability in the aftermath of the country’s devastating civil war in the 1990s, incumbent President Abdelaziz Bouteflika won a landslide victory in the first post-Arab Spring presidential elections on April 17th 2014  . Even though Mr Bouteflika has been in office for 15 consecutive years already, his re-election did not spark major protests, even as Algeria continues to suffer from elevated youth unemployment and almost stagnant GDP per capita growth. Given the president’s age (77) and frail health, it remains to be seen whether he will be able to finish his fourth five-year term. Still, even though an official successor has not yet been presented to the public, recent efforts at national reconciliation and constitutional reform initiated by the government suggest that both Mr Bouteflika’s clan and his party try to prepare a smooth transition of power. Although several opposition parties boycotted the talks on constitutional reforms initiated amid the Arab Spring in 2011, the government tried include a broad variety of social groups in the negotiations, including leading members of the banned Front Islamique de Salut (FIS) in an apparent attempt at post-civil war reconciliation.

Figure 1: Growth fails to pick up
Figure 1: Growth fails to pick upSource: EIU
Figure 2: No more current account surpluses
Figure 2: No more current account surplusesSource: EIU

The talks resulted in the promised re-introduction of a two-term presidential limit, improved powers of the prime minister and parliament, strengthened media freedom and the right to peaceful protest. The constitutional reforms will be voted upon in a referendum. Despite the FIS’s involvement in the process, no legalisation of the party is considered. The reforms should help smooth the political transition in the event that President Bouteflika had to withdraw from politics, but they are unlikely to lead to a marked democratization.

2. Incidental Islamist terrorist attacks continue, but do not pose a threat to the government

Following last year’s attack on a BP-Statoil-Sonatrach natural gas facility in southern Algeria that left 39 foreign contractors dead, the country remains exposed to incidental Islamist terrorist attacks and authorities remain concerned about the influx of weapons and fighters from neighbouring conflict areas in Libya and Mali. While Algeria’s army incurred its heaviest losses in years when members of the Al Qaeda spin-off AQIM killed 14 soldiers in April, an AQIM splinter group pledging allegiance to the ISIL terror group in Syria and Iraq beheaded a French tourist in September. As competition for fighters between these two groups may increase, the incidence of terrorist attacks in Algeria could rise, which may negatively affect foreign investment into its energy sector. Still, given Algerian security services’ extensive experience in fighting Islamist terrorists and the population’s preference for political stability in the aftermath of Algeria’s civil war, a possible increase in Islamist terrorist activity is unlikely to seriously destabilise the country.

3. Government presents five-year plan to re-ignite economic growth

Algeria’s government presented its new five-year economic plan in June. The plan outlines new measures to boost economic growth to 7% p.a., up from the recent years’ average of about 3%. Notwithstanding this ambitious goal, the plan does not contain major policy changes, while job creation and house building remain overarching policy objectives. In order to boost jobs growth, diversify the economic base and reduce the dependency on food imports, large investments into agriculture are planned, while additional measures are taken to attract foreign investment into the car, steel and pharmaceutical sectors. While government investments into various sectors once more take centre stage, the urgently needed improvement of Algeria’s very unfavourable business environment is largely neglected. Similarly, the opening up of the economy and a stronger role for the private sector is not considered, reflecting staunch opposition from vested interests. Instead, the plan heavily relies on boosting conventional oil and gas production, while first limited steps will be taken to assess Algeria’s shale gas and oil potential. Output in the hydrocarbon sector could indeed be boosted in the coming years, as the EU strives to reduce its energy dependency on Russia. However, the outlook for a meaningful diversification of Algeria’s economic base remains bleak. Due to its dirigiste nature, the action plan is unlikely to yield the aspired results, and consequently, economic growth will likely remain lacklustre unless the government embarks on serious market liberalization to unleash the private sector’s full potential.

4. Algeria’s current account balance turns negative, but its external balance remains strong

Algeria’s external position remains very strong, even as declining hydrocarbon export revenues and rising domestic demand, contribute to a continuous deterioration of the current account from a surplus of 20% of GDP in 2008 to an expected deficit of 0.5% of GDP this year. While Algeria’s foreign exchange reserves of about USD 200bn currently provide a vast 36 months of import cover, declining current account surpluses have contributed to a slowdown in reserve accumulation in recent years. 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 benign external position. 

Factsheet of Algeria
Factsheet of AlgeriaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Algeria is a medium-sized economy in Northern Africa with about 37 million inhabitants and a nominal GDP of USD 209bn in 2013. 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. 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 international 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 has enabled the government to buy off social tensions by means of grants, subsidized jobs and housing. As a result, the country’s political and social situation is relatively stable. 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.

Economic indicators of Algeria
Economic indicators of AlgeriaSource: EIU
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Author(s)
Fabian Briegel
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 64053

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