The steep fall in international oil prices in the past year is severely impacting the revenues of oil exporting countries, including Algeria, particularly in view of its heavy economic dependence on the hydrocarbon sector. This resulted in a budget deficit and current account deficit in 2014 and in the medium term this trend is expected to intensify as oil prices are predicted to remain relatively low for a long period. However, thanks to years of large fiscal and external surpluses, Algeria has been able to build up large external assets. As a result, the country’s foreign exchange reserves are at the second highest level in the MENA, after Saudi Arabia. Moreover, external and public debts are virtually non-existent, about 2 and 9% of GDP respectively at the end of 2014. Thanks to these buffers, Algeria is in category 2 for short-term political risk and category 3 for long-term political risk on a scale of 1 (best) to 7 (worst).
Algeria enjoys robust economic growth while inflation, which has been very volatile in the past, is expected to be at a good, stable level. The availability of credit to the private sector at limited cost is also perceived as a positive factor of the country’s systemic commercial risk. On the negative side, Algeria’s state-dominated economy shows low competitiveness and a weak business climate. The currency depreciation against the USD by nearly 30% since September 2014 is another negative element. All in all, Credendo Group’s category for the commercial risk assessment is C on a scale of A-C.
- Low external and public debt
- Abundance of natural resources
- Position of high liquidity (foreign exchange reserves)
- Robust economic growth
- Dependence on energy for public and export revenues
- Difficult business environment
- Large twin deficits
- Unclear political succession
Main export products
- hydrocarbons (85.1% of total current account receipts in 2013), investment income (4.5%), net private transfers (3.5%)
- Upper middle income
Per capita income
- USD 5,330
Description of electoral system
- Presidential: 5-year term, next elections in April 2019
- Legislative: 4-year term, next elections in May 2017
- Abdelmalek Sellal (since 2014)
Head of State
- President Abdelaziz Bouteflika (since 1999)
Public spending, memories of civil war and the popularity of Bouteflika foster domestic stability
Algeria is frequently confronted with popular protests and Algerians share many of the grievances of other people in the region, such as high unemployment (particularly among young people), inequality, corruption (whether real or perceived), etc. However, the regional protests of early 2011 failed to turn into sustained mass protests in Algeria, contrary to developments in most other countries in the Middle East and North Africa. The limited impact of the regional events on Algeria’s political stability is generally explained by three factors.
Firstly, President Abdelaziz Bouteflika’s popularity was higher than that of the fallen heads of state in the region. In Algeria political power remains mainly with Bouteflika, who was re-elected for a fourth term in office in 2014. Bouteflika is very popular as he is accredited with restoring peace to the country after the civil war of the 1990s. However, Bouteflika is now 78 years old and in poor health, having suffered a stroke in April 2013. Hence, in the run up to the elections of 2014, there was speculation that this would be the moment for the ruling regime to put forward a new head of state or nominate a vice-president. This has never happened, however, which may indicate that the opaque Algerian political establishment, 'le pouvoir'– consisting of leaders of the ruling FLN party, business magnates and security and army officials – has failed to rally behind a new leader. In recent years there has been increasing disunity within 'le pouvoir', with corruption investigations affecting the state-owned energy company Sonatrach and the restructuring of key segments of Algeria’s powerful intelligence agency, the 'Département du Renseignement et de la Sécurité' (DRS). A future president will also need the support of the country’s military, which has traditionally been considered an important factor in ensuring the government’s stability and has an official role as guarantor of the 'institutions of the Republic'. Secondly, Algerians still have the civil war between the government and militant Islamists, which raged throughout the 1990s, fresh in their memory. Algerians are said to be more risk averse than their neighbours when it comes to political change because of the memory of this civil war. Thirdly, thanks to oil and gas revenues, the Algerian government has more means at its disposal to respond to economic grievances through higher public spending. For example, the government subsidises petroleum products, food, water and electricity. It also provides public-sector housing and employment. An example of the importance of the latter is the violent clashes in July this year in the south of the country between the region’s two major communities, the Arabs and the Berbers. There is longstanding animosity between Berbers and Arabs but at the root of the conflict are economic grievances, specifically to do with social housing and public employment.
Although the above-mentioned factors have mitigated the political risks in the past, today they are under stress, which could lead to an increased risk of civil unrest. Firstly, there is the continued political uncertainty about the succession of President Bouteflika, which could give rise to political tensions. Secondly, a prolonged slump in the price of oil could undermine the state’s strategy of easing unrest through higher public spending.
Terrorist attacks on the rise
The internal security situation is stable but the risk of terrorist attacks has increased, mainly due to the turmoil in the country’s chaotic neighbour Libya. The deadly attack on the In Amenas gas field in January 2013 showed Algeria’s vulnerability to an increase in Islamist militancy in the region. More recently there has been increased activity by groups affiliated to Al-Qaeda in the Islamic Maghreb (AQIM) in Aïn Defla province this summer, with one attack on a military convoy killing nine soldiers. Islamic State is perceived to be active in Algeria as well. In September 2014, an AQIM group in Kabylie announced its allegiance to Islamic State, kidnapping and killing French tourist Hervé Gourdel a week later. Two other armed groups operating in eastern Algeria have pledged their allegiance to Islamic State in recent months. However, it should be noted that the state and the army retain a strong presence in Algeria and security forces have a high capacity.
The importance of oil and gas
Algeria is a resource-rich country and is the world’s ninth largest gas producer. It has extensive proven natural gas reserves that are expected to be depleted in 55 years’ time. The country also has oil reserves and is a member of the OPEC cartel. The country’s proven oil reserves are estimated to be depleted in 20 years’ time. Algeria’s shale gas sector also has important potential: it is estimated that its technically recoverable shale gas resources are the third largest in the world. However, when the government carried out shale gas drilling in Ain Salah at the beginning of the year, this led to widespread protests in the south, where the population has fears about the environmental impact, in particular on water resources.
Oil and gas are all-important for Algeria. Hydrocarbon revenues represent 85% of current account receipts and about 60% of government revenues. The dependence on hydrocarbon revenues is higher than in many other countries, which make Algeria vulnerable to the erratic nature of world energy markets. The strong fluctuations in the international oil market are demonstrated in the graph below. After years of relative stability, oil prices dropped in mid-2014. This was caused mainly by the growth in non-OPEC production – in particular the development of shale oil extraction technologies in the USA – and weaker growth in consumption. In November 2014 OPEC decided to defend its market share and not lower its production quota, a decision which was reaffirmed in 2015. In this way OPEC aimed to displace high-cost producers, such as the US shale producers, attracted into the market by exceptionally high prices. The expectation was that production cuts by high-cost producers, together with rising demand, would eventually lead to higher oil prices. In spring 2015 crude oil prices started rising once more but fell again shortly afterwards. This can mainly be explained by the unexpected resilience of US shale operators, disappointing growth in the emerging markets, in particular China, and the nuclear deal with embargoed Iran, which could lead to an easing of the oil sanctions in the near future. In the medium term the World Bank has projected that oil prices will remain low, on average below USD 70 per barrel until 2018.
Double-digit fiscal and current account deficits following energy price drop
Oil prices are clearly below Algeria’s fiscal and external break-even oil prices since the drop in mid-2014. The fiscal and external break-even oil prices are the theoretical oil prices that would yield a fiscal or external balance in a given year. As shown on the graph, Algeria has one of the highest break-even prices in the region among oil exporters. The external break-even oil price is projected to stay stable in the coming years. The fiscal break-even price is estimated to fall to USD 111 in 2015 from USD 130 in 2014, but this level is still much higher than the projected oil prices.
Declining international oil prices and also lower hydrocarbon production in Algeria have resulted in declining hydrocarbon revenues. In 2014 this caused a current account deficit of 4.3% of GDP, the first deficit since 1999. The IMF estimated that hydrocarbon export revenues would fall further in the coming years and the current account deficit this year will reach a huge 15.7% of GDP – a record deficit. The current account deficit is likely to remain large in the coming years as oil prices are expected to remain low. Falling hydrocarbon revenues and rising public spending also led to a budget deficit of 6.8% of GDP in 2014. A large deficit of 12.9% of GDP is projected for this year, which would be another record, confirming that an ambitious consolidation effort is needed over the medium term in order to adjust to the new reality of low energy prices. Diversification of the economy and exports is also critically important to reduce dependence on strongly fluctuating international oil markets.
Large net external creditor position
Thanks to large energy windfalls in the past, Algeria had been able to book important fiscal and current account surpluses, particularly during the last decade. This in turn helped to create important external buffers by bringing external debt down and increasing external assets. As a result, the country’s external and public debt plummeted from more than 60 and 80% of GDP respectively in 1999 to about 2 and 9% respectively at the end of 2014. The country’s oil stabilisation fund (Fonds de régulation des recettes, FRR) amounted to nearly USD 60 bn or almost 30% of GDP in 2013. Moreover, foreign exchange reserves are currently at a very high level of over 2 years of import covers. This is the second highest level in the MENA region (see graph below).
These external and fiscal buffers make both the Algerian government and the country as a whole a net external creditor. Nevertheless, as Algeria’s current account has fallen into a large deficit, this net external creditor position has started to erode. The FRR and the foreign reserves are declining at a fast pace. The IMF projects that FX reserves will more or less halve by the end of the decade compared with the end of 2013.
Recent reforms, but bolder steps may be necessary
Given the high energy dependency and the falling hydrocarbon revenues, the government has made some reforms over the summer to deal with the situation. This includes changes to the tax system to incentivise productive activity and limiting import, as well as a fiscal amnesty aimed at bringing the informal sector into the regular economy and boosting non-oil revenue streams. The central bank is also trying to cut back imports and is piling up the local currency value of oil sales by allowing the currency to depreciate and by setting tighter limits on banks’ import finance credit by limiting documentary credit for importers.
However, there are still some critical issues that need to be addressed. As mentioned above, the diversification of the Algerian economy and greater efforts to consolidate the fiscal budget (for example by cutting subsidies) are essential. Another major sore point in Algeria is improving the business environment. The country is placed 154 out of 189 in the World Bank’s 2015 Ease of Doing Business ranking, 7 places higher than last year. This is one of the worst ratings amongst its MENA peers, with only Iraq and Libya performing worse (see graph). Algeria is known to have a burdensome regulatory environment, leading to regular payment delays, and a rather unfriendly foreign investment environment. An example of the latter is that foreign investors are limited to a 49% ownership. The Algerian government is trying to attract more foreign investment and technology, especially in the oil and gas sector. It adopted a new hydrocarbon law in 2013, which aims to attract new investments in the energy sector. However, new investment remained restrained due to security concerns (particularly after the events in the In Amenas gas facility in 2013) and the requirement that state-owned Sonatrach has a majority ownership in the country’s oil and gas projects. This was illustrated by an unsuccessful oil bidding round in 2014, when the authorities managed to auction just 5 of the 33 blocks offered.