Africa > North Africa > Algeria > Algeria Outlook for 2016-17

Algeria: Algeria Outlook for 2016-17

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

 


Growth reached an estimated 3.9% in 2015, mostly driven by agriculture and a rebound in oil and gas activity.
With approximately 49% of government revenues and 96% of exports depending on the oil sector, the drop in oil prices has reduced budgetary and external savings, underscoring the need to diversify the sources of public finance.


Process of urban transition begun in 1987-88 has led to 70% of the population’s 40 million people living in urban areas by 2015.

Real gross domestic product (GDP) growth in 2015 was 3.9%, against 3.8% in 2014, driven mostly by agriculture, especially vegetable production, and by a noticeable rebound in oil and gas activity in Q4 of 2015. Against a background of falling global oil prices since June 2014, this rebound followed nine consecutive years of decline. This should be an opportunity to speed up reforms aimed at diversifying the economy and its structural transformation. Real GDP growth should reach 3.4% and 3.0% in 2016 and 2017 respectively.

Rising prices of food and manufactured goods pushed up inflation, which had declined for two consecutive years, to 4.8% in 2015. The price hikes were due to problems in the distribution channels, especially for fresh agricultural produce and industrial foodstuffs.

The economic situation is mostly dominated by the drastic fall in oil prices and its effects on the country’s external position, as well as on public accounts. For the first time in 16 years, in 2015 the trade balance was negative (-9% of GDP) because imports (31% of GDP) were not covered by exports (21% of GDP), resulting in lower official foreign-exchange reserves.

Public accounts have been affected by erosion in the resources of the revenue-stabilisation fund (Fonds de regulation des recettes) from the notable fall in oil-taxation receipts, down from 20% to 13% of GDP between 2014 and 2015. With total revenues falling (27% of GDP in 2015 versus 33% in 2014) and fiscal expenditure still high (43% of GDP in 2015 and 2014), the overall deficit grew to 16% of GDP in 2015 from 8.3% in 2014.

Regional planning has systematically included “urban” and “sustainability” as concepts in the regulations and development plans for the three major zones: Littoral, High Plateaux and Sahara. In 2015, more than 70% of the country’s population of 40 million lived in urban areas.

 

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.

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