algeria (country report)

Country report

ALGERIA

July 2009 Rabobank Economic Research Department Page: 1/8

Summary

The hydrocarbon sector covers 29% of GDP, 70% of government revenues and 98% of all

merchandise exports. It has supplied Algeria with strong external and budgetary positions. The

country is rapidly accumulating large foreign reserves and has repaid virtually all foreign debt.

Algeria’s net foreign creditor position equals almost one year’s GDP and is expected to continue to

increase.

Unfortunately, the economic structure remains very one-sided towards energy production. Despite

government rhetoric and well-intended efforts, the overall orientation of the economy has hardly

changed. The political situation is currently stable, but small radical Islamic groups may resume

violent actions, creating an insecure environment. Earlier this year, a change in the constitution

allowed for a third presidential term for President Boutéflika. He won this spring’s elections with an

overwhelming majority of 90%. There is some risk to the political stability in the longer run as the

opposition boycotted the polls. High (but decreasing) unemployment and too slow growth of the

private sector and middle–class pose other long term social-political threats.

Things to watch:

• Global energy prices

• Youth unemployment and social stability

• Relations with EU and accession to WTO

Author: Leendert Colijn Country Risk Research Economic Research Department Rabobank Nederland Contact details: P.O.Box 17100, 3500 HG Utrecht, The Netherlands +31-(0)30-21-67063 [email protected]

Country report ALGERIA


Algeria

National facts Social and governance indicators rank / total

Type of government parl iamentary republic Human Development Index (rank) 100 / 179

Capital Algiers Ease of doing business (rank) 132 / 181

Surface area (thousand sq km) 2,382 Economic freedom index (rank) 107 / 179

Population (millions) 33.4 Corruption perceptions index (rank) 118 / 180

Main languages Arabic Press freedom index (rank) 121 / 169

French, Berber dialects Gini index (income distribution) 35.3

Main religions Sunni Muslims (99%) Population below $1 per day (PPP) 2.70%

Christian, Jewish (1%)

Foreign trade (2008)

Head of State (president) Abdelaziz Boutéflika Main export partners (%) Main import partners (%)

Head of Government (PM) Ahmed Ouyahia US 23 France 20

Monetary unit Algerian Dinar (DZD) Italy 15 Italy 11

Spain 11 China 9

Economy (2008) Canada 9 Spain 8

Economic size bn USD % world total Main export products (%)

Nominal GDP 156 0.26 Hydrocarbons 97

Nominal GDP at PPP 273 0.40 Semi-finished goods 2

Export value of goods and services 82 0.42 Raw materials 1

IMF quotum (in mln SDR) 1255 0.58 Capital goods 1

Economic structure 2007 5-year av. Main import products (%)

Real GDP growth 3.0 4.5 Capital goods 34

Agriculture (% of GDP) 8 9 Semi-finished goods 19

Industry (% of GDP) 62 59 Food 18

Services (% of GDP) 29 32 Consumer goods 15

Standards of living USD % world av. Openness of the economy

Nominal GDP per head 4611 48 Export value of G&S (% of GDP) 52

Nominal GDP per head at PPP 8067 73 Import value of G&S (% of GDP) 30

Real GDP per head 3314 41 Inward FDI (% of GDP) 1.2

Source: EIU, CIA World factbook, UN, Heritage foundation, Transparency International, Reporters without

borders, World Bank.

Economic structure and growth

Algeria’s economy is to a large extent dependent on oil and gas, which accounted for almost a third

of GDP at current prices in 2007. The energy sector is largely stated-owned. Much of the economic

activity, particularly in construction, would not exist without the energy sector: many

infrastructural projects are driven by the needs of this branch of industry. Non-hydrocarbon

industry accounts for another 30% of GDP, half of it is state-owned. Agriculture (8% of GDP) and

services (ca. 30% of GDP) have mostly private ownership.

Real GDP growth over the past five years averaged almost 4.5% p.a., largely domestically driven

by private consumption, fixed investment and government spending. A multi-year government

economic growth program focuses on rural development and social services. Real growth of the

non-energy sectors since 2004 averaged almost 6% p.a. and has exceeded that of the oil & gas

sector (+0.6%). In volume terms energy production actually decreased since 2006, indicating that

an economic restructuring away from energy is slowly underway.

Note that the oil & gas sectors employ only 2% of the total labour force. Thanks to government

spending high job creation occurred in the non-hydrocarbon sectors. Unemployment has been

reduced from 30% at the end of 2000 to around 11% at the end of 2008.

With lower energy prices nominal GDP will contract by about 8% from USD 156bn in 2008 to

USD 144bn in 2009. This decrease is almost fully attributable to projected lower prices for oil

(- 33%) and gas (-25%) and complemented by an expected depreciation of the Dinar. However,

this will hardly impact the immediate living standards of the population as this loss of revenues will

be absorbed by lower contributions to government coffers and external reserves.

From a global perspective, Algeria is at most a middle ranking energy supplier with between 1 % to

2 % of known world hydrocarbon reserves. Its oil production can be sustained for 20 years, when



presently known (high quality) oil reserves will have been depleted. However, for Europe the

country is a major gas supplier: it is providing 15% of Europe’s gas needs. Gas reserves could last

for a comfortable 50 years at current gas production levels. Gas pipelines to Spain and Italy and

two liquefied natural gas plants are under construction and reflect Algeria’s probable long run

economic relation with Europe.

Algeria is also involved in an international large-scale carbon capture and storage project in empty

gas fields aimed at reducing carbon dioxide in the global atmosphere: an additional long term asset

in view of the CO2-reduction initiatives in Europe and the US. Recently, a consortium (named

Desertec) of major German energy-related industries and one Algerian state-owned company

presented a long-term EUR 400bn plan for developing solar energy aimed at the European market.

The financial position of the banking sector is reported to be fundamentally sound due to the

financial strength of its principal owner, the central government, which owns around 85% of the

total banks assets and accounts for 80% of lending. These public banks have not engaged in

sophisticated financial activities and excessive risk-taking. Banks’ assets are largely financed by

domestic deposits, which are readily available. Banks’ foreign debt is virtually non-existent apart

from debt linked to trade finance. Overall, financial markets are hardly developed: stock market

capitalisation stands at a poor 5% of GDP and banking penetration is lower than that of

neighbouring countries Tunisia and Morocco.

Although domestic banks are stable, their books contain much exposure to structurally loss-making

state-owned enterprises. Again, some improvement is noted over the past years, when high

average returns on equity reached a decent 25%. Privatisation of banks has been stalled since

August 2007 when Citibank, an important prospective owner, withdrew it s bid as it was hit by the

US mortgage crisis. No other investor has replaced Citibank and Algeria seems to have abandoned

the privatisation process altogether.

Chart 1: Growth performance Chart 2: Governance indicators

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Inventory changes Private consumption Gross fixed investment

Government consumption External demand Overall economic growth

% change p.a. % change p.a.

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Algeria

Egypt

Libya

Morocco

Tunisia

rank (low is best)

Human development index 09 rank

ease business (rank)

Econ freedom heritage 2009 rank

Corruption (rank)

Press Freedom 2008 rank

Average rank

Source: EIU

Sources: UNDP, World Bank, Heritage

Foundation, Transparency International and

Reporters without borders

Political and social situation

Constitutional amendments were approved by the parliament in 2008 allowing the president to be

re-elected for a third term. President Abdelalziz Boutéflika was re-elected on April 10, 2009 for a

third five-year term. He won the re-election with about 90 percent of votes, although the poll was

boycotted by cash-stripped opposition parties, who accused the government of electoral fraud.

Still, in light of Algeria’s very gruesome and violent recent history which led to over 100,000 killed

in a civil war, the recent (albeit overstated) mandate given to Boutéflika by the electorate is a sign

that Algerians opted for continuity and stability rather than risk another round of civil war.

The president’s political party, the National Liberation Front (FLN), together with its allies has

dominated the political scene since independence in the early sixties. Currently, this tri-partite



coalition has 249 of the 349 parliamentary seats. The next parliamentary election is scheduled for

2012.

With the adoption of some policies encouraging democratic practices, Algeria has succeeded in

somewhat opening the political process, despite a difficult socio-political environment.

Almost all Algerians are Berber in origin, not Arab. A minority of Berber are also Muslim but identify

with their Berber rather than Arab cultural heritage. These Berbers have long aspired, sometimes

violently, for autonomy. The government is unlikely to grant autonomy but has offered to allow

usage of Berber language in schools.

Although unemployment has halved in the past five years thanks to government development

programmes, the influx of youth into the labour markets is such that –if current low employment

perspectives in the non-energy sectors persist- it poses a long-term risk. Frustrated youth could

affiliate themselves with radical Islamic groups and a civil war could re-ignite. However, the

domestic security situation has improved steadily in recent years.

The government has made progress in restoring domestic order, although sporadic terrorist attacks

by radical Islamist groups still occur. Lately, Russian, Ukrainian and Chinese oil workers were

targeted, but the number of casualties is much lower than in previous years. The training and

performance of the army and security forces have been improved, enabling them to more

effectively confront armed opposition.

In terms of governance (civil and economic freedoms, level of corruption) and ease of doing

business Algeria scores similarly poor as Morocco and Egypt, much better than Libya but definitely

below Tunisia (see chart 2).

The EU has a clear interest in a stable political and social environment. Algeria is the homeland of a

large, potentially radicalising, Muslim minority in France. Moreover, Algeria is a strategic energy

source for the EU. Negotiations for an EU association agreement are underway. The EU wishes to

mitigate Algeria’s social risks, that could feed back into Europe and is keen to diversify its energy

delivery for the medium and long run. However, accession to the World Trade Organisation is

stalled as Algeria is not sufficiently willing to address the issues of intellectual property and the

very substantial implicit gas price subsidies benefitting energy-intensive domestic industries.

The relationship with neighbouring Morocco is troubled by the Algerian recognition of Western

Sahara (now part of/ occupied by Morocco) as a nation in its own right, while disputes over borders

in the Sahara with Libya are dormant. Little progress in stimulating regional trade in the Maghreb

is one of the results, although there is also little production complementarity to make the benefits

of -so far only token- regional trade evident.

Economic policy

Overall policy direction is geared to open up of the economy, reduce state influence in economy

and maintain macro-economic stability. At the same time the government is entering an ambitious

five-year development program valued at USD 150bn (or one year’s GDP).

Although structural changes are towards more market, progress here is very slow. Many

enterprises to be privatised figured already on the initial privatisation lists of 1995. Despite a

favourable global environment, bureaucracy and vested étatiste interests hindered the reform

policies. Enthusiasm for privatisation further stalled when the financial crisis began in the US in the

summer of 2007: it has not resumed since. Also, domestic energy prices remain subject to implicit

subsidies giving rise to extensive smuggling to neighbouring countries.

Macroeconomic policies helped by favourable energy prices are delivering satisfactory results. With

fiscal revenues of over 40% of GDP (75% energy–related) and expenditures mostly at around 35%

of GDP, very comfortable fiscal surpluses of more than 9% of GDP have been attained. These have

resulted in government reserves of at least 30% of GDP in 2008. The projected fiscal deficits in



2009 and 2010 of approximately 3.5% of GDP can easily be absorbed by these reserves held at

domestic banks. However, if energy-related revenues are excluded, the fiscal situation would have

shown very large deficits of up to 50% of (non-energy) GDP.

Government sponsored fixed investment takes up to 75% of all investment outlays, which in turn

cover approximately 35% of total spending. A low oil price future must lead to significant cutbacks

in public investment programs and will likely have politically and socially destabilising

consequences.

Chart 3: Public finances Chart 4: Money market and inflation

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Public debt (l) Budget balance (r )

% of GDP % of GDP

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Lending rate Interbank rate Inflation (CPI) Deposit rate

% %

Source: EIU Source: Ecowin

In terms of results, monetary and exchange rate policies are reasonably effective. Efforts to limit

price increases to 3% p.a. have largely been successful, although in 2008 and 2009 a marginally

higher inflation of 4.5% is registered and estimated. Price inflation is contained partly through

mentioned implicit and explicit price subsidies. Credit growth to the non-state sectors was

substantial in the past years, but the concomitant liquidity was largely absorbed by increased

imports and growth of medium-term bank deposits. This was achieved despite negative real

deposit rates since 2006 (see chart 4). In line with price stability, the exchange rate is also noted

for its long-term stability vis-à-vis a basket of trade-relevant currencies (EUR, USD and others).

The real effective exchange rate is considered to be close to its equilibrium level since 2003 and

thus poses no threat to economic stability. The FX-market is tightly controlled by the central bank,

who –given the very large FX reserves- can easily afford to maintain a managed float.

Balance of Payments

Algeria’s merchandise export revenues of over USD 78bn in 2008 are almost fully (97%)

determined by global energy prices and trade. Crude and refined oil products comprised 70% of

exports, while natural and liquefied gas made up the remaining 27%. Only about 3% of physical

exports were non-hydrocarbons, clearly illustrating the non-diversified character of the external

sector of the economy. Half of exports is destined for European Union countries, the United States

being the second largest market. These energy exports represent over 50% of GDP in 2008.

Although export volumes only slowly picked up, export values steeply increased in line with global

energy price levels. Given the much lower energy prices and demand in 2009, exports will

decrease by USD 28bn to approximately USD 50bn in 2009 representing a loss of almost 20% of

nominal GDP.

Imports are likely to continue to increase as infrastructural projects are undertaken. Capital and

semi-finished goods cover over half of imports. Also, with increased disposable incomes imported

consumer goods complement the narrow range of domestically produced goods and foodstuffs. As

chart 5 illustrates, despite rising imports and lower energy revenues the trade balance remains

positive in 2009.



The usual negative services and income balances remain modest in comparison with the trade

surplus. Services could remain in deficit as tourism is negligible and remains solely a geographical

and climatic potential source of foreign exchange. A small surplus is recorded for transfers as

received remittances from abroad still exceed the earnings outflows by foreign workers in the

energy sector and on infrastructural projects.

Chart 5: Current account Chart 6: Oil price development

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Transfers Income Services Trade Current account

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Brent crude OPEC reference basket

USD per barrel

Source: EIU Source: EIU

For many years the current accounts closed with very comfortable and steadily increasing

surpluses, that represented over 20% to 25% of GDP. However, 2009 is likely to be more modest

as the trade surplus drops from 25% of GDP in 2007 and 2008 to just 10% of GDP in 2009, but

still enough to keep the current account in surplus (5% of GDP). The dependence on oil and gas

has not led to any discernable diversification towards production of non-hydrocarbon exportable

goods. On the import side, wheat is an important import product: Algeria’s high dependency on

imports to feed its population is reflected in its status of being the world’s fifth wheat importing

country.

Relative to the substantial revenues related to trade and other current transactions (in 2008 close

to USD 35bn, in 2009 still USD 7.5bn), annual inflows of net foreign direct investment are modest

and aimed at the energy and telecom sectors only. Macro-economically, they stay at a level just

below USD 2bn or 1.4% of GDP only. Portfolio inflows are negligible as there are just two majority

state-owned firms listed on the exchange, no full private sector company has yet even requested a

listing.

On a net basis the stock of total external debt decreased by USD1bn to USD 2bn, a level that is

likely to be the minimum to facilitate the regular trade and financial relations with foreign entities.

No further gross debt reductions are envisaged.

In line with the large current account surpluses, Algeria not only decimated its foreign debt, but

also increased its foreign reserves substantially over the past decade by between USD 5bn and

USD 33bn per annum. For 2009 a relatively small and very uncertain reduction in reserves of

USD 5bn is projected, but this is hardly a reason for concern in view of the reserves buffer that is

already available.

External position

Total external debt stock has been reduced from USD 25bn in 2000 to less than USD 3bn in 2008,

partly as a result of early repayments in 2005 and 2006 in particular. Simultaneously, total foreign

reserves have increased from USD 12bn in 2000 to USD 114bn in 2008. In these eight years the

net external position of the country as roughly measured by debt minus official reserves has

improved from a net debt position of USD 13bn to a net credit position of USD 140bn. This



Chart 7: Foreign debt and reserves Chart 8: External liquidity

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Total external debt FX-reserves

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Import cover (l) Short-term debt cover (r)

Debt service cover (r ) Total foreign debt cover (r)

months %

Source: EIU Source: Covers offered by official FX-reserves, EIU

improvement of over USD 150bn equals almost 100% of last year’s nominal GDP. Chart 7

illustrates the developments in absolute amounts with data since 2004 and projections till 2010.

As Algeria has a state-dominated economy, its foreign debt was mostly owed by state enterprises.

However, these have now largely eliminated their debts. Presently, a large part of external debt is

between private enterprises and private sector foreign creditors.

Debt service due amounted to an acceptable 15% of export revenues in 2004, but has been

reduced to a very low 2% to 3% of export revenues at present. Algeria has no recent history of

repayment delays, the last date from the mid-90s. As noted above, the country has more recently

established itself as an early rather than a late payer.

Related to debt service and annual merchandise import needs, overall liquidity is very good as

illustrated by chart 8. Reserves cover almost four full years of merchandise imports and debt

service is almost negligible in terms of available reserves.

Algeria is not active on the international financial markets and is unlikely to become so soon. Given

the strong reserves position there is no real need for external financing or a credit rating for the

sovereign and state enterprises.



Algeria

Selection of economic indicators 2004 2005 2006 2007 2008e 2009f 2010f

Key country risk indicators

GDP (% real change pa) 5.2 5.3 2.1 3.1 3.0 2.8 4.3

Consumer prices (average % change pa) 3.6 1.6 2.6 3.5 4.5 4.3 3.2

Current account balance (% of GDP) 13.0 20.5 24.7 22.8 22.5 5.2 4.4

Total foreign exchange reserves (mln USD) 43246 56303 77914 110318 143243 139950 150310

Economic growth

GDP (% real change pa) 5.2 5.3 2.1 3.1 3.0 2.8 4.3

Gross fixed investment (% real change) 8.1 6.8 7.3 7.5 7.9 6.1 6.6

Private consumption (% real change) 6.0 4.5 3.9 5.8 5.8 4.6 4.6

Government consumption (% real change) 5.7 4.7 5.7 6.7 6.8 6.9 6.1

Exports of G&S (% real change) 3.1 5.8 1.7 1.3 2.3 1.4 5.4

Imports of G&S (% real change) 11.5 7.8 7.2 8.0 11.3 9.0 9.6

Economic policy

Budget balance (% of GDP) 5.3 13.6 13.9 6.2 9.0 -4.3 -2.6

Public debt (% of GDP) 16 14 22 12 10 13 13

Money market interest rate (%) 1.1 2.0 2.3 3.4 3.3 3.5 3.5

M2 growth (% change pa) 10 9 21 23 16 7 13

Consumer prices (average % change pa) 3.6 1.6 2.6 3.5 4.5 4.3 3.2

Exchange rate LCU to USD (average) 72.1 73.3 72.6 69.3 64.6 71.5 71.6

Recorded unemployment (%) 17.7 15.4 12.3 11.8 12.5 12.2 11.7

Balance of payments (mln USD)

Current account balance 11120 21180 28950 30600 34991 7470 6730

Trade balance 14270 26470 34060 34200 39074 14540 13400

Export value of goods and services 32220 46330 54740 60600 78234 50000 51790

Import value of goods and services 17950 19860 20680 26400 39160 35450 38390

Services balance -2010 -2270 -2200 -4000 -4332 -4700 -5040

Income balance -3600 -5080 -4520 -1800 -1442 -3790 -3000

Transfer balance 2460 2060 1610 2200 1691 1420 1370

Net direct investment flows 2242 1058 1760 1375 1650 1850 1800

Net portfolio investment flows 10 12 13 13 10 10 20

Net debt flows -2309 -3740 -4048 -231 -305 -780 70

Other capital flows (negative is flight) -929 -5477 -5050 662 -3429 -11830 1750

Change in international reserves 10134 13033 21625 32419 32917 -3290 10360

External position (mln USD)

Total foreign debt 22158 16839 5583 3955 2700 1830 1880

Short-term debt 431 516 541 750 915 660 910

Total debt service due, incl. short-term debt 5885 6412 5867 1641 1697 1880 1280

Total foreign exchange reserves 43246 56303 77914 110318 143243 139950 150310

International investment position n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Total assets n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Total liabilities n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Key ratios for balance of payments, external solvency and external liquidity

Trade balance (% of GDP) 16.7 25.6 29.0 25.5 25.1 10.1 8.7

Current account balance (% of GDP) 13.0 20.5 24.7 22.8 22.5 5.2 4.4

Inward FDI (% of GDP) 2.9 1.0 1.5 1.2 1.2 1.5 1.5

Foreign debt (% of GDP) 26 16 5 3 2 1 1

Foreign debt (% of XGSIT) 58 32 9 6 3 3 3

International investment position (% of GDP) n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Debt service ratio (% of XGSIT) 15 12 9 2 2 3 2

Interest service ratio incl. arrears (% of XGSIT) 3 2 1 0 0 0 0

FX-reserves import cover (months) 29 34 45 50 44 47 47

FX-reserves debt service cover (%) 735 878 1328 6723 8441 7436 11724

Liquidity ratio 257 294 367 438 422 383 386 Source: EIU

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algeria (country report)

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