Algeria: Year in Review 2012
While there are structural issues that remain to be addressed, the economy performed comparatively well in 2012, despite rising inflation and the recession in Europe, Algeria’s main trade partner. The country saw GDP growth of 2.6% in 2012 – roughly average for the region – and is expected to grow further to 3.4% in 2013, according to the IMF.
In November, a review by the IMF confirmed that growth should remain solid in the near term, supported by high oil prices, strong domestic demand and an expanding non-hydrocarbons economy. Global oil prices, which averaged $109.55 per barrel in 2012, compared to $107.46 in 2011 and $77.45 in 2010, have compensated for decreased demand for energy exports and have strengthened Algeria’s financial position. The national budget requires the price of oil to be at least $110 per barrel, according to the Bank of Algeria, spurring worries of a fiscal deficit if oil prices dip.
The country’s foreign exchange reserves reached $193.7bn at the end of September, up from $188bn in the same period in 2011, creating a cushion for public spending programmes. In November the IMF projected the current account surplus to reach 8.2% of GDP by year-end 2012, but it expects that to decline to 7.1% in 2013 on the back of higher levels of government investment. In addition to boosting growth in the non-hydrocarbons economy, one of the government’s top priorities in 2013 will be to bring inflation back down from the 8.4% it reached in 2012 to the recommended target of 4-4.5%.
Dependency on the oil and gas sector, which continues to represent 97% of total exports and roughly 30% of GDP, remains a problem but nonetheless the industry saw some promising changes in 2012 which will help ensure a comfortable flow of revenues and capital in the medium-term. The state has indicated that it plans to invest $80bn in the energy sector in the next five years to boost production and exploration.
In recent years, stagnating investor interest has raised concerns about Algeria’s ability to sustain current production levels, as a number of maturing fields will need to be replaced by new projects in the near term. Following a number of lacklustre bidding rounds over the past four years, the government launched a review of the 2005 Hydrocarbons Code in January, with the view to make the sector more attractive to foreign investors.
A draft amendment of the code reforms, released in November, will revise the tax system and primarily encourage the development of unconventional and offshore reserves. Most notably, the draft proposes linking taxes on foreign firms to profits instead of turnover. In addition to tax incentives, investors in unconventional reserves exploration will be granted prospecting licences for up to 11 years and exploitation licences of 40 years for shale gas and 30 years for shale oil.
In September 2012 the Council of Ministers reviewed and approved the draft act to amend Act 05-07 law relative to hydrocarbons, which aims to maintain the attractiveness of the Algeria energy investment. The text is currently under discussion at the level of the National Popular Assembly (APN) and the key debates are targeting the development of shale gas.
The reform has been prompted not only by decreased interest from IOCs in recent years in Algerian blocks, often attributed to poor fiscal structures, but also to increased potential for technologically-challenging and non-conventional resources. Algerian officials are increasingly optimistic about the potential of the country’s shale gas reserves. Sonatrach officials estimate that shale gas reserves may be as high as 2trn cu metres, compared to the country’s 4.5trn cu metres of conventional gas reserves. If shale gas reserves turn out to be as high as initial estimates, this will significantly increase the country’s resource outlook.
While Europe remains the primary market for Algerian oil and gas, trade relationships with other developing countries are expanding. Most notably, total exports to Asia reached $2.03bn in the first quarter of 2012, double the level seen in the same period the previous year. Asia accounted for one-tenth of all Algerian exports in early 2012, making it the third-largest export market after the EU. The rise in new export and import linkages come on the back of a dramatic increase in capital flows from east Asian markets in recent years, including South Korea and China, whose companies are now active in a variety of construction and infrastructure projects.
However, the government must also work to develop the non-petroleum economy in order to take advantage of its full potential of economic growth, reduce unemployment and protect against external price shocks. The state is attempting to increase agricultural production, particularly wheat, including a AD10bn (€97.67m) investment in the past three years to boost equipment stocks and encourage mechanisation. Ministry of Agriculture officials estimated that the total grain harvest in 2012 reached 5.8m tonnes, up from only 4.2m tonnes in 2011. However, the country will remain dependent on imports in the medium term to meet the domestic demand for cereals, estimated around 7m tonnes per year.
Services are a particular focus for strategic development. While growth in the tourism sector has been slow to take off in the past decade, compared to neighbouring Morocco and Tunisia, the National Tourism Office recorded 1.3m visitors as of mid-October 2012 and projected this to rise to 3m by the end of the year, up from 2.5m at the end of 2011. To encourage development, the state has designated around $1bn to renovate state-owned hotels in the near term and announced the construction of 750 hotels nationwide for a further $5bn in the medium term.
While a number of programmes are in place to develop the non-petroleum economy, Algeria remains heavily dependent on oil and gas exports. Efforts to diversify export markets and build up foreign currency reserves should help to protect the country from fluctuations in external demand, which had a considerable impact on public finances in 2009-10. Strong oil prices in 2012 have put Algeria on solid economic footing heading into 2013, but the development of sectors such as agriculture, tourism and industry will be necessary to harness Algeria’s full economic potential, reduce unemployment and raise the standard of living.