In many senses, Algeria finds itself in a strong economic position, particularly when compared with its regional neighbours. It holds the fourth-largest oil reserves and the second-largest natural gas reserves in Africa. After years of sustained high oil prices and a comparatively prudent fiscal policy – albeit balanced on a high breakeven price – it has built up considerable financial buffers, which will help the country to ride out the current decline in global commodity prices.
Beyond Oil
Foreign exchange reserves were worth €141.87bn by June 2014, according to the central bank, equal to more than three years of imports. Declining oil prices have also highlighted the government’s efforts to develop the non-hydrocarbons sector – something it has sought to do for several years, with varying levels of success. The importance of diversification is clear, in terms of job creation and private sector growth, and the authorities are working to channel capital into infrastructure building and other programmes to support new activity in industry, transport, agriculture, retail and tourism. The state continues to play a key role in the economy, through both regulatory tools and direct intervention via state-owned enterprises. Non-hydrocarbons GDP growth has been robust in recent years and is expected to rise to 4.25% in 2014 on the back of higher industrial output. According to the IMF, overall GDP is projected to jump 4% in 2014 to €167.5bn, up from 2.8% in 2013.
Macro Context
Algeria’s macro context presents a broadly favourable picture, although the country is having to navigate a few tricky issues.
The country is currently experiencing a population boom, which strengthens the long-term outlook for the labour force and household consumption. According to official statistics, mid-year population stood at just over 25m in 1990, at 30.4m in 2000 and at 37.9m at the start of 2013 – and is expected to move beyond 38m by the end of 2014. With 978,000 live births and 170,000 deaths in 2012, the population increase was 808,000, a striking natural growth of some 2.16%.
This has meant that GDP per capita growth has languished behind GDP growth, but the country has nonetheless benefitted from a steady improvement in living standards, thanks to its rich natural resources. Hydrocarbons still represent over 60% of annual budget revenue, which exposes the country to external price shocks. Algeria’s financial buffers will allow it to absorb low oil prices in the short term, but its capacity to sustain prolonged periods of low prices is limited. According to the IMF, the country has a breakeven oil price of $120. Oil prices lost about half of their value in the second half of 2014, dropping below $60 in December, and are projected to remain low through 2015, putting pressure on the government’s budget.
The challenge is heightened in part due to a slowdown in hydrocarbons production in the last five years as existing fields matured and new exploration slowed. The country has implemented several measures to encourage new investment in exploration, including a long-awaited revision to the Hydrocarbons Code in 2013, but it will take time before sustained increases are made (see Energy chapter). At the same time, public expenditure on imports, public services and social transfers has risen steadily. The IMF warned in February 2014 that if Algeria does not reduce is reliance on oil revenue, it will be unable to support its spending targets and could become a net debtor within 20 years.
This context has given new impetus to the government’s efforts to diversify the national economy. It will take time to develop non-hydrocarbons industries, but the policy priorities are clear, laid out in the government’s 2015-19 five-year development plan: to energise domestic industries, diversify export revenue, and further attract foreign trade and investment.
The public sector will drive most of new investment in the near term, given the structure of Algeria’s state-led economy, with a major push coming from the €192.6bn five-year investment plan, a large proportion of which will be directed towards transport and utilities infrastructure. However, soft infrastructure is equally important, and the government is looking to reduce bureaucracy, loosen investment regulations and curb the informal sector – all bottlenecks that have traditionally constrained private sector activity.
The regional instability of the past few years has also had an impact on Algeria’s short-term outlook. Following small-scale protests over wages and inflation, and in an effort to head off the sort of unrest that upended the Tunisian, Libyan and Egyptian economies, the government responded with a 25% uptick in annual public expenditure in 2011; public sector salaries were increased and greater allowances set aside for food and energy subsidies, social transfers, and financial support for small and medium-sized enterprises (SMEs). Overall current expenditure has increased from 16.5% of GDP in 2005 to a peak of 31.2% in 2012, and it is expected to settle at 30% of GDP in 2014-15.
GDP Breakdown
Overall GDP growth slowed to 2.8% in 2013, down from 3.3% in 2012, largely a result of lower oil output and reduced government expenditure. Private consumption, driven by a national population of 38m, and investment by public enterprises were the main pillars of economic growth. As per figures from the National Office of Statistics (Office National des Statistiques, ONS), hydrocarbons’ share of GDP has dropped in recent years, slipping from 45.3% in 2008 to 36.1% in 2011 and 32.9% in 2012, in part due to lower production. Nonetheless, oil and gas still accounted for 97% of export receipts and 60% of budget revenue in 2013.
Given the size of the civil service and the number of state-owned enterprises, much of this is in the public sector. After energy, public administration is the second-highest contributor to the economy. Its share of GDP rose from 10% in 2008 to 18% in 2012, apace with rising public expenditure and employment. This will continue in the near-term; the government has increased spending on public sector salaries by 6.5% year-on-year (y-o-y) under the most recent budget to AD2.1trn (€19.53bn), accounting for almost one-quarter of government expenditure for 2015. Wholesale and retail commerce is the next highest contributor after the administration, with 12.2% of GDP in 2012. The 38m-strong population provides a large consumer base; both employment and turnover in the retail sector are considerable, but it is difficult to assess the actual market size given the large informal economy.
Agriculture and construction each contribute roughly 10% of GDP today (see Agriculture and Construction chapters). The government is working to reduce costly food imports and aims to produce 70% of its needs on the domestic market in the near term. Algeria has made important strides to organise the sector, encourage aggregation and make machinery and irrigation equipment available to farmers, which should support higher production in the coming years.
Industry represents just 5% of GDP today, less than a third of its contribution 30 years ago (see Industry chapter). The government has placed “reindustrialisation” at the core of its economic policy for the next five years. Despite a wave of privatisation in the 1980s, state-owned enterprises still dominate industrial activity, and the state is continuing to invest heavily in order to boost its production capacity.
Enhancing Attractiveness
According to press reports, officials have indicated that incentives will be offered to boost foreign investment and partnership in industry; for example, investment in industrial research and development was exempted from Customs duties and taxes under the 2015 Finance Law.
While the investment environment is restrictive, the country has attracted a spate of greenfield manufacturing projects in recent months. French automobile manufacturer Renault inaugurated an assembly plant in Oran in November 2014 that will produce 25,000 cars per year in the near term, which a view to increase this to 75,000 vehicles per year. French drugmaker Sanofi Aventis is finalising construction of its €70m plant near Algiers, which will be its largest facility in Africa. In addition, Algeria’s state-owned pharmaceutical manufacturer, SAIDAL, is also building three generic production plants in Algiers, Constantine and Cherchell for a total investment of €100m.
Inflation
Algeria’s rate of inflation – a perennial problem in North Africa where consumer products are often reliant on imports – is relatively low. Inflation spiked to 8.9% in 2012, exacerbated by a poor agricultural harvest and greater reliance on costly food imports. The central bank introduced several measures to absorb excess liquidity, including six-month loans at a rate of 1.5%, and gradually raised the minimum reserve requirement from 9% in 2012 to 12% by May 2013. These measures, combined with prudent fiscal consolidation and efforts to control the supply of food and other consumer goods, helped to bring inflation back down to a pre-2012 rate of 3.3% in 2013. According to the ONS, the annualised inflation rate was 1.6% in September and is set to remain below 2% for 2014.
Employment
Despite its economic weight, the oil industry only accounts for 2% of employment, so diversification will be critical to foster sustainable growth and job creation in the future. In 2011, the most recent data available from the World Bank, 10.8% of Algeria’s labour force was employed in agriculture, down from 13.1% two years before; another 30.9% were employed in industry and 58.4% in the services sector.
Algeria’s rising youth population – 48% of the population is under the age of 25 – highlights the importance of diversifying the economy and strengthening the private sector. The government has implemented a number of programmes meant to support youth employment and small business creation, including the provision of subsidised loans from the National Youth Employment Supporting Agency (see analysis). Official unemployment numbers fell slightly from 10% in 2012 to 9.8% in 2013, though conservative estimates for youth unemployment are upwards of 22%.
2015 Budget
The government has proposed a significant uptick in both operational and investment spending in order to help stimulate new job creation and encourage growth in non-oil sectors. The current five-year development plan outlines a total of €192.6bn in public investment between 2015 and 2019, down from €210.2bn allocated for 2010 to 2014.
Investment under the 2015-19 plan will focus on supporting SMEs, encouraging new energy exploration, developing non-hydrocarbons industries and advancing current infrastructure projects, primarily in transport and social housing.
The most recent budget outlines total government expenditure of AD8.86trn (€82.4bn) for 2015, an uptick of 15.7% y-o-y. Investment spending will see the most significant increase, rising 32% y-o-y to AD3.89trn (€36.2bn). Operating expenditure is slated to rise a more modest 5.5% y-o-y to AD4.97trn (€46.22bn), driven largely by a 6.5% jump in spending for public sector salaries. Spending on subsidies and other social transfers is also set to increase 6% y-o-y to AD1.7trn (€15.81bn), which is equivalent to 9.1% of GDP.
Building New Assets
Years of underinvestment – a result of the strong performance of the oil and gas industry – together with so-called Dutch Disease, have contributed to limited competitiveness and productivity in the non-hydrocarbons industrial sector, which contributes less than 5% to GDP. To counter this, the government has sought to provide a selection of incentives to help stimulate capital expenditure, including extending lease terms for foreign investors from 20-year to 33-year renewable contracts, and providing breaks on Customs and registration fees. Acquiring industrial land – long one of the thorniest issues facing investors – was improved through the 2008 establishment of the National Agency for Intermediation and Land Regulation, which is in charge of a project to create 42 new industrial zones, covering a total of 9.57 ha across 34 wilayas (provinces).
Although the broader business climate can be complex by comparison to other markets in the region, particularly in terms of heavy regulations and limited investor protections, Algeria benefits from cheap inputs such as competitive energy costs, as well as a large consumer market and rising levels of consumption.
The impact of the reforms has been noticeable. According to the ONS, the industrial production index over the first six months of 2013 saw double-digit growth of 12.5% in a number of segments, including the steel, metal, mechanical and electronic industries, as well as a 7.5% rise in chemical and plastic industries.
Budget Balance
Rising expenditure, combined with stagnant oil revenue and a decline in international prices, has weakened Algeria’s financial position. With a net deficit on services that, in recent years, has run between €5.22bn and €6.47bn, and net transfers positive (given remittances from Algerians abroad), the country had until 2014 consistently run a current account surplus – though this was as low as €295.5m during the global economic downturn in 2009. That was following €25.36bn in 2008.
The less frenetic years of 2010, 2011 and 2012 yielded current account surpluses of €8.89bn, €13.08bn and €9.04bn, respectively. This has typically been supplemented by a capital account surplus of between €1.76bn and €2.57bn (mostly attributed to foreign direct investment), though the capital account moved into a slight deficit of €180.1m in 2012.
Algeria’s traditional current account surplus eroded from 5.9% of GDP in 2012 to 1.2% in 2013 as expenditure rapidly outpaced income. The Bank of Algeria announced in September that the country would shift to a current account deficit in 2014 for the first time in nearly 15 years. The current deficit widened from €257.3m to €1.69bn by June 2014. The country’s overall balance of payments also entered the negative in 2014, falling from a surplus of €95.6m at year-end 2013 to a deficit of €970m in June 2014.
The government also predicts that its budget deficit will widen to AD4.17trn (€38.8bn) in 2015, equivalent to 22% of GDP. Algeria has amassed considerable financial reserves thanks to years of high oil prices, which should allow it to fill the gap over the coming fiscal year, but several years of heavy deficits could erode the country’s financial buffers quickly (see analysis).
Foreign Trade
Given its reliance on oil and gas, as well as its location just south of the eurozone market, Algeria has a robust trade profile. The country has traditionally maintained a strong trade surplus, though it narrowed from a peak of €29.26bn in 2008 to just €8.09bn in 2013, as declining oil and gas revenue has been unable to offset increasing reliance on imports.
The volume of hydrocarbons exports has dropped steadily in the last five years as production slowed and domestic demand for energy products increases, but annual revenue fluctuated along with global oil prices. Foreign exchange receipts from hydrocarbons jumped to a peak of €56.9bn on the back of high prices in 2008, before falling to a trough of €32.4bn in 2009 as the impact of the global economic downturn hit home. Revenue recovered to €52.5bn in 2011, but has declined since. Exports amounted to €34.7bn in the first nine months of 2014, up 0.44% y-o-y, but lower global oil prices in the second half of the year will push revenue down for 2014 overall.
As with other major African producers like Nigeria, higher shale production in the US, combined with decreased demand from Europe, has chipped away at Algeria’s key export markets, in particular exports to the US. The EU remains the single largest consumer of Algerian exports, absorbing nearly 65% in 2013, up from 55% of exports in 2012. Italy has long been the single largest export market, but it was surpassed by Spain in 2013; while Italy’s demand for oil and gas dropped steadily in recent years, including a 21% fall in 2013 alone, demand from Spain jumped by one-third y-o-y to €7.57bn. Along with the UK, France and the US, Algeria’s top-five export destinations accounted for almost 60% of total exports in 2013.
Following years of muted demand in the US and Europe, however, Algeria is looking to stoke growth in non-traditional markets. Brazil, Turkey and China are all now among Algeria’s top-10 export destinations, and the state-owned energy firm Sonatrach is working to increase its export capacity to Asia. To this end, the government signed a new 10-year gas export contract with Turkey in November 2014 that will boost Ankara’s imports to 4.4bn cu metres of liquefied natural gas (LNG) per year from 4bn cu metres at present. Egypt also altered its annual contract for LNG exports from five to six shipments in 2015, opening new avenues in the Maghreb.
Non-Oil Exports
Revenue from non-hydrocarbons exports has increased steadily in the last decade, nearly doubling from €810m in 2005 to €1.48bn in 2013. However their contribution remains marginal, at less than 5% of overall export revenue. In the short term, the government plans to boost industrial production primarily to reduce Algeria’s import bill and meet consumer demand locally, especially for agricultural products, machinery and other industrial inputs. Farther down the road, authorities hope that Algeria will direct surplus production to export and eventually reduce its reliance on global commodity prices.
Today, products derived from oil and gas still represent the majority of non-hydrocarbons exports. In 2013 oil derivatives produced by the state-owned energy firm Sonatrach and fertilisers produced from natural gas provided 65% of non-hydrocarbons receipts. Fertilisers in particular have emerged as a high-potential export product, generating foreign sales of €228.6m in 2013. Cheaper domestic gas production allows Algeria to benefit from a comparative advantage in this field; while this does little to reduce the economy’s reliance on energy, fertilisers nonetheless provide an important source of value-added activity.
Agro-industry represents the majority of remaining non-hydrocarbons exports, including refined sugar, beverages, dates and processed wheat products such as pasta and couscous. Together, these products generated €270.5m in foreign receipts in 2013, up from just €53.7m in 2009. The beverages sector has become increasingly organised in recent years, which will help producers to reach out to foreign markets in the future.
Challenges
External pressures in 2014, however, have left the agricultural sector more exposed than usual, which presents a perennial challenge given the size of the country’s import bill. More worryingly, 2014 has also seen a comparatively poor cereal harvest. According to provisional figures released in late July, cereal production for the 2013/14 harvest fell by more than one-third to about 3m tonnes, a five-year low. The early onset of hot, dry conditions in April had a particularly dramatic impact on the eastern provinces, which represent a large portion of national production, with 12 ha of cereal acreage destroyed by more than 20 crop fires in the Sétif region alone. The decline in output highlighted the variability of cereal production given the sector’s heavy reliance on rainfall. Only 3% of local production is based on irrigation. Given local consumption of around 8m tonnes of cereals per annum, the reduced harvest is set to substantially push up an already-high wheat import bill, which averages around €4bn a year. This has led to Algeria becoming one of the largest overall wheat importers – and the biggest importer on a per capita basis – in the world.
Over the long term, however, the country’s cereal output has increased, from an annual average of around 2.7m tonnes over the past two decades to roughly 5m tonnes in the five years to 2012/13. Productivity is also on the rise – the number of farmers achieving output of more than 5 tonnes per hectare grew from 16 in 2010 to 279 in 2013. Irrigation is another key issue. The government plans to boost the amount of land benefitting from irrigation to 1m ha by 2019, which it is hoped will help lift yields. The Algerian Cereals Office announced it had distributed 900 irrigation systems to local farmers in 2014, expanding the irrigated surface area of cereal plantations to 600,000 ha by April.
Imports
While annual export revenue has fluctuated, import spending increased every year over the last decade. Imports doubled from €14.7bn in 2005 to €29.8bn in 2010, and have risen by another 35% in the three years since to €40.3bn in 2013. Industrial equipment and non-food consumer goods, the two largest sources, accounted for 29.5% and 20% of spending in 2013, respectively.
The uptick in industrial equipment, as well as a 53% y-o-y increase in spending on agricultural equipment (though less than 1% of overall spending), will go to support Algeria’s long-term goal of self-sufficiency.
Food imports weigh heavily on public expenditure, reaching approximately €7.04bn in 2013, 17.5% of total import spending. Algeria is particularly reliant on imports of staples such as wheat– the country is one of the largest wheat importers in the world – and powdered milk, both of whose prices can vary drastically depending on global production.
Food imports increased by 18% in the first nine months of 2014, driven up by instability in Ukraine, which led to high wheat prices and a spike in global milk prices early in the year. The country also imports some refined energy products due to insufficient capacity or mismatches in refinery output, as well as rising vehicle ownership.
Energy imports decreased by some 12% in the first nine months of 2014 to €2.32bn, but this still represented approximately 8% of total import spending. In the next five years, the government’s focus will be to reduce its reliance on imports by supplanting them with enhanced levels of domestic production.
Trade Agreements
However, at the same time that Algeria is working to reduce imports and support local producers, the government is also working to join the World Trade Organisation (WTO), which would require unprecedented openness.
Stronger ties to foreign markets would help Algeria to develop its non-hydrocarbons exports, but lowering trade and investment barriers also risks undermining the country’s industrialisation efforts. WTO officials have indicated in press reports that Algeria is unlikely to accede until it revises its 51:49 investment law, which is not expected to happen before 2020.
As a member of the Greater Arab Free Trade Area (GAFTA) since 2009, which confers tariff-free trade rights among all 17 members, Algeria has seen its trade with the group grow, with non-oil exports ( mainly sugar and glass) rising 21% to €196.3m in 2012, or 12% of its total exports. Yet the country still imports far more from the zone, with imports accounting for 88.3% of Algeria-GAFTA trade in 2012, according to the National Centre of Data Processing and Statistics.
Algeria has shown more caution in implementing the European Neighbourhood Policy. Although the country signed an association agreement with the EU in 2008 with the vision of a free trade zone for industrial goods by 2017, with removal of tariffs on 82 products due to be completed by September 2012, it decided to delay full implementation until 2020.
Business Environment
While Algeria’s ample liquidity and heavy spending programmes have proven extremely attractive for foreign investors, the country’s business environment can be complicated, with investors facing difficulties related to land access, bank financing, and the constraints of cumbersome bureaucratic procedures. The government has instituted several programmes meant to ease access to industrial land and offer financial support to SMEs, which have helped to make progress in recent years (see analysis). Nonetheless, Algeria dropped another seven places in the World Bank’s “2015 Ease of Doing Business Report”, slipping to 154 out of a total 183 economies, down from 147 in 2014.
Although the state has created a commission tasked with improving the country’s “Doing Business” ranking – which is plagued by low marks in Customs and trade regulation, access to credit and fiscal terms – much work remains to be done. The authorities signed a one-year partnership with the World Bank in November to provide technical assistance in Algeria’s effort to improve the business environment.
The country also keeps tight control of its national currency, the Algerian dinar (AD), in an effort to keep capital – especially oil rent – on the domestic market. The dinar is on a managed float, but the government caps the amount that can be exchanged for foreign currency each year. All foreign exchange transactions must pass through official public banks, which can create delays, and revenue generated outside of Algeria must be repatriated within 180 days at the risk of legal action. Until now, Algerian firms have been prohibited from investing directly outside of the country, but the central bank indicated in November 2014 that it may soon ease these restrictions (see analysis).
Another obstacle for manufacturing and other industrial companies is the need to bring local production standards in line with global norms. Production standards and certifications exist but are rarely enforced, which limits the potential market for Algerian goods. According to Sofiane Chaib Setti, CEO of the public industrial machinery firm ENCC, “80% of the metal-based infrastructure used in the gas sector in the country is imported as Algerian production has not yet met international quality standards,” he told OBG.
Outlook
Algeria’s economic fundamentals remain strong compared to both the broader Maghreb and the European markets. Solid financial reserves and rising domestic demand will help it to ride out commodity price volatility in the short term. Finance minister Mohamed Djellab has stated that falling oil prices will not impact the government’s ability to meet its spending targets in 2015, though they will undoubtedly eat into the country’s financial reserves.
The country’s external position will continue to face pressure as import spending rises; efforts to attract new investment in oil and gas exploration will be critical to boost fiscal and export revenue in the near term. However, the country’s economic future relies on diversification, primarily to reduce unemployment and strengthen the private sector. Most production and investment is still driven by the public sector, but efforts to extend credit to the private sector and support business creation are beginning to show positive results.
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