A key resource: Hydrocarbons production continues to play a crucial role in the economy

Since the country gained independence more than 50 years ago, Algeria’s economy has evolved significantly, but it has only been in recent years that its heft as an investment destination has tangibly changed, and for the better. Algeria has been following something of a contrary approach to much of the rest of the world over the past few years. Even as the global economy has struggled, Algeria has continued to sail along fairly smoothly. It has not seen the vertiginous growth rates of emerging markets elsewhere in the Middle East and Africa, but it has seen a steady increase in activity and, through prudential management, has built up its financial reserves to great effect.

Thanks to its immense natural resource wealth, the country has also channelled its commodity revenues into paying down debt and improving its overall financial position, with a large portion of budgetary savings from hydrocarbons production going into major capital projects, such as roads and power plants.

CHALLENGES: There are still a number of long-term structural issues that should be addressed, however, including an exposed position due to the dependency on hydrocarbons, which leaves the public budget vulnerable to commodity swings. Domestic consumption is also increasing rapidly, which has raised the import bill and driven a steady upward trend in inflation. The state is heavily involved in the economy through a number of parastatal institutions and a stringent regulatory regime, constraining private sector growth. However, the 38m-person country’s fundamentals are very robust, and the capital expenditures and policy reforms being taken to help address the aforementioned weaknesses offer significant scope for even higher growth in the years to come.

HYDROCARBONS-DOMINATED GDP: The National Statistics Office reported that Algeria’s GDP reached AD15.84trn (€145.73bn) in 2012, registering 3.3% growth in real terms since the previous year.

Algerian GDP remains heavily reliant on hydrocarbons production (though in recent years the trend has been a gradual easing of that dominance): in 2012, the segment represented 32.9% of GDP – down from 36.1% in 2011 and 45.3% in 2008.

Of the non-hydrocarbons sectors, agriculture accounted for 9% of GDP and industry for 4.6%. Construction and public works represented 9.3%, nearly double the share of industry. Services accounted for 37% of GDP, with this roughly divided between publicly and privately provided services.

With the state dominating hydrocarbons production and much of the industrial sector, as well as financing many construction projects, it is accurate to describe GDP as being largely state-driven. Indeed, in 2011, the most recent year for which such statistics are available, the government and other public institutions accounted for 48.4% of total GDP.

DIVERSIFICATION: Despite the economic growth sustained by Algeria’s sizable hydrocarbons reserves, the government must also work to develop the non-petroleum economy to take advantage of the country’s full economic potential, reduce unemployment and protect against external price shocks. The state is attempting to increase agricultural production, particularly wheat, and has provided investments worth AD10bn (€92m) over 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 4.2m tonnes in 2011 (see Agriculture chapter). Even with this additional support, however, the country will remain dependent on imports in the medium term to meet the domestic demand for cereals, estimated at around 7m tonnes per year.

In terms of fisheries, companies in the sector can now apply for direct financial aid and tax benefits available under the National Fund for the Development of Fisheries and Aquaculture; previously, the fund had been limited to individuals or cooperatives.

Services are also 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 promote 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 (see Tourism chapter). The procedures for granting state land to tourism operators who wish to develop in designated investment areas can also now be handled in an expedited manner by the local authorities.

NEW FACTORIES: Manufacturing is receiving a boost from ancillary support, for example a campaign to expand electricity capacity – including around $2.7bn of contracts for gas turbines – that will involve backwards integration at lower levels, creating new opportunities for value addition in the industrial sector.

Industrial production has become a major economic driver in Morocco and Tunisia, both of which have attracted large investments from foreign producers in the aeronautics and automotive segments. Algeria has been looking to catch up, announcing in 2012 the establishment of a new Renault factory that would produce 25,000 vehicles beginning in 2015.

“Improving competitiveness on international markets by complying with standards of quality and safety will become more and more necessary,” Amine Zouioueche, Algeria country chief executive for Bureau Veritas, told OBG. Partnerships with foreign firms may expedite this process. For example, in July 2013, two German motor manufacturers, DEUTZ and DEFGA, signed agreements with local firms for the production of engines, which are set to facilitate the transfer of technology and training to local employees.

PRIVATE SECTOR: Although Algeria’s key indicators have stayed strong despite economic troubles in the EU, the government has introduced new measures in the 2013 budget aimed at stimulating further private sector activity – something that currently pales in comparison to the dominant role taken by Algeria’s large state-owned enterprises.

Unsurprisingly for those familiar with the structure of Algeria’s markets, government involvement in the economy increased slightly in 2011, the last year for which data is available, with state enterprises accounting for some 48.4% of GDP, up from 45.1% in 2010, although down from a recent high of 53.6% in 2006. Parastatals are involved in a number of sectors, including heavy industry, banking and telecommunications, but the bulk of the public sector’s involvement comes from the oil and gas sector, which alone accounts for just under a third of total GDP.

Furthermore, given the push by the government to expedite widespread and broad-based diversification and improve productivity, public investment will continue to remain a key contributor to non-oil growth over the short and medium term, with large spending programmes in transport, agriculture, telecommunications and real estate in particular.

In December 2012, Prime Minister Abdelmalek Sellal stated that he wished to further reduce the dominance of the public sector by boosting public-private partnerships and providing additional support to small and medium-sized enterprises (SMEs). Signed in December 2012, the 2013 budget law includes a number of measures to support investment in the economy, diversification and the growth of SMEs. In terms of investment, the law raises the threshold for projects that are required to seek the approval of the National Investment Council, from the current AD500m (€4.6m) to AD1.5bn (€13.8m). The budget law also expanded the eligibility of loan guarantees provided by the Loan Guarantee Investment Fund for SMEs to include SMEs that had received funds from the Banque Algérienne de Développement (these companies had previously been ineligible).

Industrial and agricultural exporters will also benefit from tweaks to the current regulatory framework. New provisions facilitate the establishment of a “drawback” Customs regime, in which exporters can obtain refunds of duties and taxes paid on imported production inputs. The new law also hopes to relax and simplify Customs clearance procedures.

NEW CENTRES: The government has announced the planned construction of nine pilot industrial zones in 2014. The industrial parks represent the first wave of a broader national initiative which will see 42 dedicated zones established in 34 of Algeria’s provinces by 2017, part of a drive to stimulate investment and innovation across the manufacturing sector.

The project, led by the Ministry of Industry, SMEs, and Investment Promotion, has a particular focus on generating industrial activity in sparsely populated and underserved areas, including the Hauts Plateaux and southern regions, to help strengthen employment and revenues outside of the larger urban areas.

The authorities launched a series of public tenders in April and May 2013, calling for firms to carry out development studies and prepare the nine designated sites for construction work. Bids for the zones are currently being reviewed by the National Agency for Intermediation and Land Regulation, with the first parks expected to be operational in early 2014.

The pilot sites cover a total of 2500 ha, with five located towards the north, in Tizi Ouzou, Relizane, Ain Témouchent, Annaba and Mostaganem. Three of the facilities will be developed in Batna, Médéa and Djelfa, across the semi-arid Hauts Plateaux region, while the ninth park is earmarked for Ouargla, in the desert south, where industrial and other economic infrastructure is least developed. Of the nine sites, the Ouargla and Djelfa contracts had been provisionally awarded as of October 2013. The entire initiative should receive a combined investment of around AD88bn (€809.6m) over the five-year development period. By 2018, there should be 27 zones based in coastal areas, where economic activity is the greatest; 10 in the Hauts Plateaux region; and five established in the southern regions.

GROWTH: Though hydrocarbons prices have produced nominal fluctuations, real GDP growth has been consistently positive over the last decade, according to official figures – the lowest growth was registered in 2009 at 1.6% – though hydrocarbons volume growth has been negative since 2006 (an effect that has been masked by price fluctuations). For 2013, the IMF predicts that GDP growth will reach 3.1%, up from 2.8% in 2011 but down from the 3.3% posted in 2012. Growth is projected to continue easing upwards, to 3.7% in 2014. The growth of the non-hydrocarbons sector has generally been above 5% (sometimes considerably more so for the last decade). Agricultural growth has been predominantly and cumulatively positive, with occasional minuses reflecting bad harvests. The real growth rate of non-hydrocarbons industry has been consistently positive, though the pattern within the category has been quite complex – and the role of electricity and water has probably been decisive in pulling up the overall segment.

DEMOGRAPHIC BOOM: While GDP growth is respectable, GDP per capita growth is less impressive, as Algeria is currently experiencing a population boom. According to official statistics, mid-year population stood at just over 25m in 1990, at 30.4m in 2000 and at 37.9m in at the start of 2013 – and is expected to hit 38.7m by the start of 2014. With 978,000 live births and 170,000 deaths in 2012, the population increase was 808,000, a striking natural growth of 2.16%. A relatively young population has combined with quite a high fertility rate ( just over 3 children per woman) to produce this effect.

EMPLOYMENT: Ensuring appropriate levels of job creation has been a central priority for the government since the end of the civil war, which gripped the country during the 1990s, to help avoid the economic discontent that has riled other countries in North Africa in recent years. The proportion of the population below 15 is almost 28%, with a similar percentage aged between 15 and 29. Though determined efforts have brought unemployment rate from around 20% at the beginning of the century to an official rate of 9.3% in 2013, in part offset by a reduction in the size of the labour force, the rate among young people is still around 20%, and amongst women it is 17.2%.

The problem has a regional dimension, too: discontent at joblessness is especially acute in the country’s south, with demonstrations in 2011 and again in summer 2013, fuelled partly by perceived exclusion of locals from oil industry jobs. The authorities’ response in 2013 was symptomatic of reliance on the state as an employer: 6000 new, and not conspicuously necessary, jobs in the police were created.

Meanwhile, with oil and gas, though dominant in GDP, not inherently labour intensive – hydrocarbons account for just 2% of employment against 14% in the case of agriculture – the sector will never be the solution for employment problems. Diversification is necessary, especially given the size of the age cohorts yet to enter the labour market.

EXPORTS: Exports – consisting almost entirely of hydrocarbons – were equal to around 35% of GDP in 2012, around 10 percentage points higher than imports (though a good deal lower than the 45.7% of GDP that exports accounted for in 2008). Gross fixed investment is fairly high at 31.4% of GDP, although government consumption has risen strikingly, from 13.2% of GDP in 2008 to 20.1% in 2012, not far short of private consumption at 32.9% of GDP.

Dominated by oil and gas – the non-hydrocarbons element has been less than 3% of the total in recent years – exports have varied according to volumes (which have tended to fall) and, above all, fluctuating oil prices. Topping $78.6bn in the high-priced year of 2008, exports plummeted to $45.2bn in 2009, recovering with oil prices to $57.1bn in 2010 and more strongly to $72.9bn in 2011, but falling back slightly on reduced volumes to $71.7bn in 2012. With both volumes and prices dropping for hydrocarbons in 2013, half-year figures suggest a drop in total exports, which were down 5.4% to $35.91bn from $37.97bn during the same period of 2012.

Even when exports have been at their lowest, imports have always been less, running at between $37bn and $39bn from 2008 to 2010. However, imports surged to $46.9bn in 2011 and grew to $51.6bn in 2012. Preliminary figures suggest growth of nearly 18% in the first six months of 2013, to $28.35bn, though a good harvest may ensure that annual growth is less drastic, while merchandise trade remains in surplus for the six months, to the tune of $7.56bn (down from $13.94bn during the same period of the previous year).

IMPORTS: Imports are considerably more varied than exports. Refinery capacity mismatch and the demands of growing vehicle ownership have meant increasing energy imports ($4.7bn in 2012), but food imports have been significantly greater, at $9.2bn in 2011 and $8.5bn in 2012. Semi-finished products ($10bn in 2012) attest to the demands of Algeria’s industry – even if that industry’s activity is not much reflected in exports. Industrial equipment imports have been high for some years, consistently in the $12bn-16bn range between 2008 and 2011 – though falling back to a low point of $12.6bn in 2012 – contrasting with relatively low imports of agricultural machinery ($310m in 2012). Imports of non-food consumer goods have risen in the last couple of years, from $4.1bn in 2010 to $6.9bn in 2011 and just over $9.6bn in 2012.

Both consumer goods and equipment (industrial and agricultural) seem to have contributed to the 2013 surge, with imports up 15% and 18.6% respectively in the first six months of the year. Imports to support emergency investments in the country’s electricity sector have no doubt been a key factor in higher equipment imports. As for consumer goods, Algerians’ taste for cars seems to be a growing factor: vehicle imports exceeded 500,000 for the first time in 2012, with a total value of AD514.43bn (€4.73bn) against AD354.16bn (€3.26bn) in 2011. High import volumes continued into the first six months of 2013, with vehicles accounting for $1.33bn of the $5.47bn worth of non-food consumer goods imports.

Exports are directed mainly towards energy-consuming countries in Europe – above all, Italy (15.8% in 2012), Spain (10.2%) and France (8.9%) – and North America, with the US, despite its decreasing demand for Algerian oil, still the largest recipient of Algerian exports in 2012 at 16.1% of the total, with Canada accounting for 7.4%. In respect to imports, France (12.8%) occupied first place and China (12.6%) a close second in 2012 – masking a radical year-on-year shift in which French sales declined by 15.6% while Chinese rose by 24%. Italy (9.3%), Spain (8.7%) and Germany (5.5%) occupied third, fourth and fifth places.

INFLATION: The steady increase in imports is both directly and indirectly a response to the country’s growing levels of consumption (see analysis). Demand for goods is on the rise and, given that many manufactured goods and a large number of perishable goods are imported, the government has taken measures to dampen the growth of imports, for example banning consumer credit (which it did in 2009). Demand for services, such as utility provision, is also expanding. Electricity consumption has grown by double digits over the past 12 months and is expected to continue increasing at a similar rate in the years to come (see Energy chapter). This in turn has prompted a jump in current spending by the government on subsidies and public sector wages – something which is manageable given the government’s large savings, but which has knock-on effects.

As a result, inflation has been a significant challenge. The rate of inflation has been steadily increasing for a number of years and over the first three quarters of 2012, touched around 9%, according to the IMF, up significantly from 4.5% over the same period in 2011. The biggest contributor to this was food prices, which saw a jump of around 20% year-on-year. Subsidies have been maintained on key consumer staples including sugar, cooking oil and bread, which have reinforced this trend, although the headline inflation rate is expected to slow to 5% in 2013.

The high rates of inflation have prompted the central bank, the Banque Nationale d’Algérie, to take a number of contrary measures over the course of 2012, including increasing the absorption of liquidity and raising reserve requirement rates from 9% to 11%. The measures had a modest effect, but according to the Ministry of Finance, to take more aggressive action, the government will need to shift financing of the deficit away from the country’s oil receipts savings fund to the bond market, to help manage liquidity and stoke capital market development.

STRONG EXTERNAL POSITION: Despite rising import volumes, Algeria has – so far – been fairly responsible with the fruits of its hydrocarbons exports, rightfully mindful of price fluctuations and the uncertainties of the international environment. With a net deficit on services that, in recent years, has run in a range between $7.1bn and $8.8bn, and net transfers positive (given remittances from Algerians abroad), the country had, until 2013, consistently run a current account surplus – though this was as low as $402m in the crisis year of 2009 (following a massive $34.5bn in 2008). The less frenetic years of 2010, 2011 and 2012 yielded current account surpluses of $12.1bn, $17.8bn and $12.3bn, respectively. This has typically been supplemented by a capital account surplus of between $2.4bn and $3.5bn (mostly attributed to foreign direct investment), though the capital account moved into a slight deficit of $245m in 2012.

Algeria has been prudent about creating cushions for itself with these beneficial factors. Faced with the prospect of debt default in the mid-1990s, Algeria has used relatively high oil prices in the new millennium to reduce its external debt to insignificant levels: according to Minister of Finance, this had stood in 2001 at $18.1bn, or 33% of GDP, while by 2012 it had been reduced to just over $400m (or 0.2%).

More significantly, the country has built up its foreign exchange reserves to spectacular levels: these stood at a high of almost $190.7bn at end-2012 – representing coverage of 36.5 months – though they had fallen by roughly a billion dollars by mid-2013.

A specific mechanism of prudence has been a hydrocarbons fund, known as the Revenue Regulation Fund, into which revenues from oil and gas sales above a fixed price level have been paid: in dinar terms this has risen from AD171.5bn (€1.58bn) in 2001 (4% of GDP) to AD2.9trn (€26.7bn) in 2006 and AD5.6trn (€51.5bn) in 2012 – the latter representing 35% of GDP. Such has been the size of the country’s reserves that it was able to contribute $5bn to the IMF through the purchase of special drawing rights, placing the country in the intermediate level of fund donors.

It is a strong position in which to weather temporary difficulties – though it also creates temptations. Surging imports and flagging exports have meant that, in the first half of 2013, a current account deficit of $1.2bn was registered, against a $10bn surplus in the corresponding period of 2012.

BUSINESS ENVIRONMENT: Compared to neighbouring Morocco or Tunisia, Algeria’s business environment remains relatively constrained. The country is listed at 152nd out of 185 economies in the World Bank’s Doing Business ranking for 2013, down four spots from 2012, in part due to a more challenging system for tax payments and bureaucracy. While as previously mentioned a number of reforms have been instituted, including facilitating access to land in certain sectors, encouraging SME procurement and establishing industrial zones, the scope for further work is large. The country’s foreign direct investment framework can also be challenging. For example, foreign investors are limited to a maximum shareholding of 49% of all assets – an exception amongst the vast majority of African and Middle Eastern countries. Additional changes in specific sectors, such as the energy sector, where windfall taxes were rolled out, have also reduced investor interest, as evidenced by the limited response to recent bidding rounds.

OUTLOOK: Algeria has come a long way in terms of its economic clout and level of development. The prudent management of the country’s natural richesse, along with a recent push to improve diversification through regulatory reforms and a robust spending campaign, have helped Algeria avoid most of the global slowdown and should pave the way for sustainable growth rates in the medium to long term. While structural weaknesses will need to be addressed, the country has flexibility to maintain its upward trajectory over the next five years without serious concern.

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The Report: Algeria 2013

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