Algeria: Year in Review 2011
In a tumultuous year for several North African countries, increased revenue from hydrocarbons exports and substantial financial reserves sheltered Algeria from much of the region’s uncertainty. GDP expanded by 2.9% in 2011 on the back of rising global oil prices, which fuelled ambitious public investment in infrastructure and local industry. The International Monetary Fund (IMF) forecasts GDP will continue to expand by 3.3% in 2012 and up to 4% in 2013.
The government’s focus in 2011 was to leverage rising hydrocarbons revenue to diversify the economy and improve living standards. The 2009-14 investment plan includes €222bn aimed at encouraging local business development, including support for small and medium-sized enterprises (SMEs), transportation and water infrastructure improvements, as well as education and housing projects.
The government revised the 2011 budget in May, increasing public spending by 25% from AD6.6trn (€64bn) to AD8.3trn (€80.5bn) to provide additional support for SMEs and training programmes aimed at reducing youth unemployment. The new spending also includes subsidies on basic goods such as sugar, cooking oil and wheat, designed to ease consumer tension. Inflation has picked up in recent years from 4.9% in 2008 to a peak of 5.7% in 2009. While consumer inflation held steady at 3.9% in 2010-11, rising food prices sparked street protests in January last year.
In light of the Arab Spring, the government is making an effort to ensure food security and boost citizens’ purchasing power. In addition to subsidies, Algeria also imported a record 6.35m tonnes of wheat between January and October 2011, up 40% from the same period in 2010. With sustained high levels of government spending, inflation remains a potential risk in 2012. IMF estimates in September put inflation at 4.3% for 2012.
The state was able to increase spending without running an unsustainable deficit, as global oil prices have been approximately double the €28.50 per barrel estimation on which the budget was based. Benchmark Brent crude futures reached €84 per barrel in mid-December. Higher prices pushed Algeria’s trade surplus to €12.82bn between January and September 2011, a 20.4% increase from €10.64bn in the same period last year. Oil and gas exports in the first three quarters increased by 17.9% year-on-year to reach €38.56bn, up from €32.71bn last year.
The government has indicated it hopes to increase gas exports by 50% to 250m cu metres per day in the next five years, and several new exploration and infrastructure projects bode well for the sector. Commercial operation of the MedGaz pipeline to Spain was launched in April, representing a total investment of €1bn. The pipeline will deliver 8bn cu metres of natural gas per year for the next 20 years. The national energy firm Sonatrach is the project’s majority stakeholder with 36%, followed by Spanish firms Cepsa and Iberdrola with 20% each. Spain’s Endesa and France’s GDF Suez each hold 12%. MedGaz is Algeria’s third link to European markets, joining the Transmed and Maghreb-Europe Gas (GME) pipelines, with a total capacity of 32bn cu metres per year. A fourth pipeline, Galsi, connecting to Italy via Sardinia, should come online in 2014.
Algeria’s first major oil and gas discovery of year came in November, at an exploratory drilling project by E.ON Ruhrgas in the Rhourde Yacoub field. Joint development with Sonatrach is expected to begin once the extent of reserves has been established. Additionally, the country will soon see two new liquefied natural gas (LNG) sites come online. Sonatrach officials indicated that a unit in Skikda with an estimated output of 5.4m tonnes per year will be operational in 2012. A second in Arzew is expected in 2013, with estimated annual production of 7.4m tonnes.
The country is also looking to explore shale gas reserves, utilising new technology to access gas that was previously too difficult to extract. Sonatrach plans to launch a pilot exploration project in the south-west of the country in early 2012, and foreign partners may play a key role in this effort. Italy’s ENI signed an agreement earlier in 2011 to help carry out shale gas explorations, and Sonatrach has reportedly signed memoranda of understanding with additional partners.
These new projects are promising as Algeria looks to replace mature fields, which account for much of the country’s current output but will see dropping production in coming years. The government has also launched a review of the restrictive hydrocarbons law in response to weakening foreign investor interest. The Ministry of Finance is reportedly considering relaxing taxes levied on foreign investors and terms in production-sharing contracts. However, Yousef Yousfi, the minister of energy, has indicated the 51-49% ownership structure, which requires an Algerian company to be the majority stakeholder in all joint ventures, is unlikely to change.
While the launch of new hydrocarbons projects has recently slowed, Algeria saw increased foreign interest in a variety of sectors in 2011. Several joint projects were announced with French companies, including the creation of two insurance companies by the French player Axa, and plans by Sanofi-Aventis to build a pharmaceuticals factory in Algiers for a total project cost of AD6.6bn (€67.68m). Additionally, negotiations were launched in mid-2011 with Renault wanting to establish a factory with a production capacity of 150,000 vehicles per year after three years. German and South Korean automobile companies have also indicated interest in launching operations, which would be a strong step toward government goals for economic diversification.
While the 2012 outlook is positive, with promising initiatives from both public and private sectors, officials have acknowledged the state may need to reduce its expenditures in 2012 due to the impact from the eurozone crisis. Karim Djoudi, the minister of finance, indicated to local press the state is prepared to reduce public spending by 10% in 2012. However, with internal debt decreasing and national savings at 50% of GDP, Algeria has built a strong base for future growth.