Africa > North Africa > Algeria > Algeria Outlook for 2015-17

Algeria: Algeria Outlook for 2015-17

2015/08/08

The country (Algeria) is situated in Northern Africa and bordering the Mediterranean Sea, between Morocco and Tunisia.
it has borders with Western Sahara for 42km, , Morocco for 1559km, Libya for 982km Mali for 1376km, Mauritania for 463km, Niger for 956km and Tunisia for 965km.
The Land in Algeria is usually with high plateau and desert and some mountains, narrow, with discontinuous coastal plain.
The Algerian land covers an area of 2 381 740 km². The climate is arid to semiarid and mild with wet winters and with hot and dry summers along coast. Drier with cold winters and hot summers on high plateau with the sirocco who is a hot, dust/sand-laden wind particularly common in summer. Algerian(s) speak Arabic (official), French, Berber dialects.

OVERVIEW

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.

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.

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.

Political outlook

The 2014 presidential election will be the major political event in the estimate period. It is still unclear who will replace Mr Bouteflika, but we expect a consensus and regime-approved candidate to be selected.

Economic policy outlook

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.

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.
 

Economic forecast

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.

 

Outlook for 2015-17

  • Abdelaziz Bouteflika\\\'s third term will come to an end in April 2014. Mr Bouteflika suffered a mini-stroke in April, but at present he has no clear successor. A consensus candidate is likely to emerge closer to the election.
  • Abdelmalek Sellal, the prime minister, will continue to carry out modest political and economic reforms. Although the changes will be minimal, a critical outbreak of political unrest during the estimate period is not expected.
  • Security risk will again be a priority for the government following a hostage crisis at a natural gas facility in January and the potential of a new Islamist militant threat inspired by the unrest in Egypt.
  • The fiscal balance will be vulnerable to movements in oil prices. High social spending will mean that it will remain in deficit on average in 2013-17, at around 2% of GDP, which will be covered easily by fiscal reserves.
  • Real GDP will grow by 3.2% in 2013 as oil production is held back by concerns over depletion rates. Thereafter, increase will be restrained, at below 4% on average, despite ample public funds to support investment .
  • Banque d\\\'Algérie (the central bank) will continue to operate a managed float of the Algerian dinar against the US dollar. The dinar is presently expected to weaken towards the end of the estimate period as oil prices decline.
  • Algeria\\\'s external balances will be highly sensitive to movements in oil prices. We expect the current account to move from a surplus of nearly 4% of GDP in 2013 to a small deficit by 2017 as oil prices slide under US$100/barrel.

Review

  • The age at which Algerians can begin apprenticeships has been extended to 30 to allow additional young people to enter formal training.
  • A Spanish engineering firm has been awarded a arrangement to develop the Touat gasfield in south-eastern Algeria. At the same time as producing, at the end of 2016, the project should have output of 4.7bn cu metres/year.
  • Six new power plants are in line to be awarded for development by 2017. The gas-fired plants will have capacity between 1,200 mw and 1,600 mw.
  • The Ministry of Finance is taking steps to crack down on what it believes are illicit flows of capital out of the country. The government will empower the customs agency to ensure import values are not misreported.
  • The leader of a moderate Islamist opposition party has called for an independent electoral observer ahead of next year\\\'s presidential election.
  • Only a few figures have announced their intention to run in the 2014 election so far. However, the establishment has from presently on to coalesce around one candidate.

Related Articles
  • safewater

    2015/11/12 Gal Water Technologies Ltd. is backed by 20 years of experience in supplying water treatment systems for Industrial, Agricultural and Consumable water.
  • Bilateral trade continued to grow and China has become the largest source of commodity import for Algeria.

    2015/10/01 In 2013, the strategic and cooperative relationship between the People's Republic of China and the People's Democratic Republic of Algeria maintained sound momentum of increase, with fresh evolution made in practical cooperation in various fields.
  • North Africa: EU Not Showing 'Political Will' Over Migration Crisis

    2015/08/07 The 28-country European Union has told member states that expressing regret over the new migrant tragedy was no substitute for action. Some 200 migrants were feared drowned at the same time as their vessel sank off the Libyan coast. One NGO helping to save shipwrecked migrants in the Mediterranean Sea is the medical charity Doctors Without Borders. DW has been talking to the chief of their German section, Florian Westphal.
  • Algeria continues to post comparatively robust headline indicators,

    2015/02/14 Recent years have seen a relatively strong economic performance from Algeria, although the IMF has noted that falling oil prices may weigh down near-term performance, highlighting the continued dominance of the hydrocarbon sector on growth.
  • The World Bank fails to credit the intelligence of the world’s poor

    2015/01/31 At the same time as a statement by the world’s most influential development agency provides evidence that a lot of of its staff are “biased” in their perceptions of the poor and their needs, one may expect eyebrows to be raised. At the same time as the president of that institution — the World Bank, no less — acknowledges the flaw and goes on to call for “measures to mitigate these biases, such as additional rigorously diagnosing the mindsets of the people we are trying to help”, jaws should be dropping.