Algeria

Heightened uncertainties relating to leadership

C3

SENSITIVE RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD 170.371 bn (World ranking 53, World Bank 2017)
Population 41.32mn (World ranking 34, World Bank 2017)
Form of state Republic
Head of government Abdelzaziz BOUTEFLIKA
Next elections 2019 (postponed), presidential
  • Strong hydrocarbon resources, with gas reserves estimated to last a further 54 years at current rates of extraction (and crude oil almost 22 years).
  • Strong liquidity indicators, supported by a period of sustained high oil prices, now provide a financial cushion to withstand the impact of current weak commodity prices.
  • External debt management has much improved following repayment concerns in the 1990s and debt ratios and obligations are now low, providing scope for increasing debt to cover FX shortfalls resulting from low oil and gas prices.
  • Uncertain political succession, with the health of President Abdelaziz Bouteflika a major concern.
  • High unemployment and underemployment.
  • Lack of economic diversification. Over-dependence on oil and gas (99% of export earnings).
  • Banking sector remains dominated by state enterprises that have to absorb losses from public sector companies.
  • Limited private sector opportunities and perceptions that the business environment (including regulations) is restrictive.
  • Regional dynamics are affected by continuing friction between Algeria and Morocco.
  • Oil and gas installations are vulnerable to periodic (but localised) attacks by terrorist groups.

Already low GDP growth further impacted by weak oil prices

Hydrocarbons (oil but particularly gas) remain pivotal for economic development as the sector accounts directly for around 40% of GDP and 99% of exports. The difficulty to grow despite higher prices in the first half of 2018 reveals how heavily the current bottlenecks are weighing on Algeria’s growth potential: Growth was +1% despite Brent oil prices at about $80 per bbl.

Over the ten-year period up to end-2015, annual average growth was +2.9%, suggesting that other factors were already limiting the economy’s development. Indeed, growth was markedly below that of Africa as a whole through most of that period. A protracted period of subdued growth and recession in some European markets (that region accounts for at least 40% of exports, in value terms) was one impediment to growth; another was the Algerian economic model, which relies heavily on state-run enterprises. Even programs to boost public spending (including increased subsidies and investment in infrastructure), partly reflecting an initial official response to prevent contagion from the Arab Spring, did not raise growth rates markedly above annual population expansion. Moreover, growth has weakened further and should not accelerate particularly in 2019 (+1.5%).

The general outlook increases risks of commercial disruption and insolvencies

A weak economic environment and accompanying financial pressures stemming from relatively large fiscal and current account deficits result in the government adopting countervailing measures. These include project delays and cancellations, which impact private sector suppliers. EH associates such measures to commercial disruptions and higher rates of corporate failure.

The current juncture is also risky in terms of social cohesion. Inflation has accelerated since 2016 (+6.4%), while income growth has started to decelerate. Purchasing power should continue to be an issue going forward (inflation is expected at +6% in 2019). The government has tried to cope with it, through high fiscal subsidies and various spending measures (increase of the minimum wage, tax breaks for SMEs), but the fiscal deficit increased a lot (-13.5% of GDP in 2016) as a result and was not curbed since then (-10% of GDP in 2019).

Public debt increased fast from low levels: from 8.8% of GDP in 2015 to 38.4% in 2019. Policies implemented to tackle the issue contributed to higher inflation (e.g. the shadow monetization of public debt by the Central Bank).

External accounts are under pressure

Output of crude oil is the third largest in Africa (after Nigeria and Angola) and known reserves are projected to provide almost 22 years of additional supply at existing rates of extraction. However, Algeria’s hydrocarbon wealth also stems from its gas sector. Reserves of natural gas are the 10th largest in the world and will provide output for an additional 54 years. Annual gas output is equivalent to 2.4% of global supply and Algeria is the 9th largest world producer. The external accounts depend heavily on oil and gas sales and therefore on internationally-determined oil prices.

Large annual current account surpluses (>20% of GDP in 2005-08) allowed FX reserves to be accumulated and external debt to be reduced markedly. However, the current account reversal observed from 2014 on was quite strong and structural, since the current account deficit is still expected at -9% of GDP in 2019.

Following significant pressures in relation to debt repayments in the 1990s, a revised external debt policy was adopted to target a marked reduction in the country’s dependence on external borrowings. The external debt level is still quite low (7% of GDP in 2018). Moreover, despite a striking deterioration, the level of foreign reserves is still quite comfortable (16 months of import cover). It does not fully protect corporates against liquidity issues, resulting from rampant capital controls. 

Political uncertainty heighten risks

A large financial cushion provides a buttress during the current period of low oil prices but political risk is a key concern. Until the leadership succession process is clarified, significant uncertainties will weigh against investment and consumption decisions, with negative knock-on effects for trade transactions.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Italy 17%
1
18% China
Spain 13%
2
10% France
United States 13%
3
10% Italy
France 11%
4
8% Spain
Brazil 5%
5
6% Germany

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 59%
1
12% Road vehicles
Gas, natural and manufactured 37%
2
7% Other industrial machinery and parts
Inorganic chemicals 1%
3
7% Iron and steel
Fertilizers other than group 272 1%
4
6% Specialised machinery
Sugar, sugar preparations and honey 1%
5
6% Cereals and cereal preparations

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Stéphane Colliac

Senior Economist for France and Africa

stephane.colliac@eulerhermes.com

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