Impulsores de riesgo y perspectiva general

  • Mass protests driven by profound socio-economic issues.
  • Since Bouteflika’s resignation, the army has de facto led the country. It is likely to play a significant role in the coming years. 
  • A large twin deficit, that followed the oil price collapse in mid-2014, has driven a rapid deterioration of the liquidity position.
  • The country has almost no external debt, hence a strong financial situation.
  • The government’s reform track since the drop in oil prices has been very limited. 

Hechos y cifras

Pros

  • Large oil and gas reserves
  • Very limited external debt
  • Gross foreign exchange reserves are still large, although they are under pressure

Contras

  • Without reforms, the economic outlook appears gloomy
  • The nationalist development plan hinders foreign investors
  • A bureaucratic government
  • High unemployment rate, particularly among youths

Head of State

  • Abdelmadjid Tebboune

Head of Government

  • Abdelaziz Djerad

Population

  • 42.2 million

GDP per capita

  • USD 4,060

Income group

  • Upper-middle income

Main export products

  • Oil/gas (78.4% of total current account receipts), private transfers (6.7%)

Evaluación Riesgo País

The end of the Bouteflika era

Between 1999 and 2019, Abdelaziz Bouteflika ruled Algeria. After Bouteflika suffered a stroke in 2013, a number of questions were raised about his health and his ability to run the country. He has not given a public speech since 2014 and rarely appeared in public during his last presidential term (2014-2019). The general assumption is that it was more his inner circle and especially a group of people connected with his brother Said Bouteflika who had been ruling the country. 

In February 2019 large-scale protests erupted when Bouteflika announced through a signed statement that he would stand a fifth time for re-election, although he had not appeared in public for a long period of time. Initially the President tried to cool the protests by announcing that he would not stand for re-election, but this turned out to be in vain. By 2 April 2019 he had to announce his resignation under pressure from the military. The protests were without precedent since the Algerian civil war in the 1990s. 

While the protests were sparked by the re-election announcement, they were reflective of profound issues that had remained unchanged since the Arab Spring protests of 2011. In particular, there is frustration among the population with the ruling elite (“le pouvoir”), which is deemed corrupt and unable to manage the country properly. Frustration also arises from socio-economic issues such as the lack of economic progress and the high unemployment rate, which has become more pronounced in recent years. As Algeria’s economy has been over-reliant on oil rents, the oil price collapse in 2014 together with a lack of any reforms has led to a sharp deterioration in the health of the economy. 

The army in firm control of the country

Since Bouteflika’s resignation, the army’s chief of staff, General Ahmed Gaid Salah, de facto led the country as the military has worked hard to remain in control of the political process. Nevertheless, a transitional government headed by Noureddine Bedoui has been put in place. In order to deal with protesters’ frustration over the high level of corruption, a series of high-profile corruption trials were launched. These led to long jail terms for some of the very unpopular members of Bouteflika’s inner circle, namely his brother and a number of other businessmen associated with the old regime. However, these trials should be seen as inter-elite score settling rather than a genuine way of dealing with the high corruption rate. 

The military is expected to remain in control of the political process, even following the election of Abdelmadjid Tebboune as President on 12 December 2019 and after the unexpected deadth of General Ahmed Gaid Salah. The elections had already been postponed twice, given the absence of credible candidates. Multiple opposition parties boycotted the elections and protesters demanded their postponement. Nevertheless, the participation of a few high profile candidates gave them sufficient credibility for the military to go ahead with them. Abdelmadjid Tebboune as well as another candidate were former Prime Ministers who served under Bouteflika. However, Abdelmadjid enjoys some credibility as he was Prime Minister only for a few months in 2017 and had to resign quite rapidly after starting an anti-corruption process that clashed with Said Bouteflika’s interests. The death of General Ahmed Gaid Salah does create more uncertainty as the power of his interim chief of staff Said Changriha is untested. This could lead to more internal fractions in the army and could potentially offer President Tebboune a bit more manoeuvring space.

The expectation is that the military will push for a rapid transition after the elections. Nevertheless, there is no indication that there will be a structural break with the policies (or lack of economic policies) of the past regime. The protests are also likely to continue amid widespread social discontent, an additional drag on reform implementation. 

An economic situation that continues to deteriorate

Since the oil price collapse, Algeria has been running a significant twin deficit and has barely adopted any significant reform measures. This is a major issue as it has created large domestic and external imbalances. In 2013, before the oil price collapse, oil revenue represented a significant share of public revenue and an even greater share of total current account receipts. 

The impact on public finances was thus considerable, especially because, even during the oil price high, Algeria ran a public deficit. In the years 2012–2013, when the oil price averaged more than USD 100 per barrel, the fiscal deficit still averaged 2.4% of GDP. This translated into a much higher deficit once the oil price dropped, as the deficit peaked at 15% of GDP in 2015. After that, it decreased steadily to 4.8% in 2018, but for 2019 it is again expected to have widened to 8.1% of GDP. The narrowing of the public deficit between 2015 and 2018 was due to higher tax revenue (mainly arising from higher import tariffs) and a rebound in the oil price between 2015 and 2018. As a result of the structural fiscal deficit, the public debt level rose from 7.7% of GDP in 2013 to 38.3% in 2018. It is expected to reach 46.1% of GDP in 2019. In the coming years, the IMF is fairly optimistic, as it projects a steady consolidation of public finances, which should result in a primary surplus by 2023. However, in the current political climate, it is highly uncertain that the authorities will be able to implement such fiscal consolidation. 

The impact on the current account balance was even more substantial: while Algeria was running a current account surplus of 0.3% of GDP in 2013, this became a 16.5% deficit by 2016. It narrowed to 9.6% of GDP by the end of 2018 but it is expected to have risen in 2019 to 12.6% of GDP and to remain above 10% of GDP until 2023. It is remarkable that Algeria has funded this current account deficit almost completely by using its foreign exchange reserves and oil stabilisation fund. Indeed, the country has refused to borrow externally since it experienced a debt crisis in the 1990s, and foreign investments in the country are very low while portfolio investments are non-existent. 

The result has been that reserves have been decreasing at a rapid pace. At the end of 2013, Algeria’s foreign exchange reserves stood at USD 192 bn, while its oil stabilisation fund contained an additional USD 70 bn. In total, this buffer could cover 42 months of imports and represented an amount equal to 125% of GDP. Extensive use of both led to a depletion of the oil stabilisation fund by the end of 2017, while the reserves dropped by the end of July 2019 to USD 65 bn or 12 months of import cover. Given the continued high (but decreasing) current account deficit, the reserves are expected to drop further in the coming years.

It is positive to note that the country has almost no external debt. Ever since the debt crisis Algeria went through during the 1990s, there has been a government policy in place to avoid any external borrowing. However, given that reserves continue to be under pressure, in the coming years the government will have limited options: either it implements drastic reforms (including limiting imports) or it starts borrowing externally. 

A poor reform track record underlies the deteriorating economic situation

The track record of past reforms has been very poor and currently there is no change in the expected economic policy. In the current political climate and in the context of the continued protests, it is very difficult to further consolidate public finances. Part of the measures that have been taken also have a negative impact on the economy. In order to reduce the pressure on foreign exchange reserves, the government has taken measures to make importing more expensive and difficult. While these measures potentially reduce imports somewhat (and thus external imbalances), they also hurt the business climate, as products become more cumbersome and difficult to import. These kinds of measures are a sort of economic nationalism that should officially protect local industries, but are rather a way to protect the profit margins of a number of businesses closely associated with the ruling elite. Additionally, they lead to bigger inefficiencies, as companies have less motivation to become more efficient. 

These kinds of measures thereby affect long-term growth prospects. For years already, growth in Algeria has underperformed when compared to its regional peers. Indeed, if it has averaged just 2.8% since 2008, it was only around 1.3% in 2017 and 2018. Looking ahead, the IMF currently expects growth to remain at around 1.9%. Even while this is an optimistic estimate, it would remain too low to deal with the structurally high unemployment rate (total unemployment stood at 12% at the end of 2018 while youth unemployment is close to 30%), with other sources of social discontent. 

Although the situation in Algeria is clearly deteriorating, the fact that the country has almost no external debt means that it is unlikely to default on its existing limited external debt. This explains why the medium- to long-term political risk classification for Algeria currently remains in category 4, although it stays under clear pressure. 

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com