Previous Quarterly Editions
Expropriation Risk: 68 68 68 68 ►Political Violence Risk:51 48 48 48 ►Terrorism Risk:48 42 42 38 ►Exchange Transfer and Trade Sanction Risk: 63 63 63 63 ►Sovereign Default Risk:56 56 56 56 ►
TREND ►
Protest intensity to date* 2022 2023 Low Low Unrest risk in 2024**Cost of living: MediumAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
Algeria’s public finances are in a strong position thanks to the surge in oil and gas export revenue since mid-2021; however, the government’s heavy reliance on hydrocarbons — which make up about 95% of export earnings and up to 60% of budget revenue — means that its financial position can change dramatically when oil and gas prices fall. After the oil price crash in 2014, Algeria’s public debt increased ninefold in six years, foreign exchange reserves fell from almost US$200 billion to US$60 billion, its oil stabilization fund was used up, and the government resorted to borrowing US$50 billion from the central bank.
Gross public debt reached 62.8% of GDP in 2021 (excluding guarantees to state-owned enterprises, which made up a further 10% of GDP). The debt has since come down to about 50%, thanks to the increase in nominal GDP as oil and gas revenue has risen and reflecting the substantial fiscal surplus in 2022. The government has also been able to replenish the oil stabilization fund (the FRR), which is set to reach about US$14 billion by the end of 2023. Oil revenue earned at above US$60 per barrel accrues to the fund, which can be drawn down to finance any fiscal deficit. Oil prices are now over US$90 per barrel following Saudi Arabian cutbacks, and they are likely to remain above US$80 per barrel in 2024. Natural gas prices have fallen. The large increase in both
current and capital spending in 2023, which is likely to be carried through into 2024, will limit the growth in the FRR.
The government’s debt service costs are only about 1% of GDP. This reflects both the soft terms on the earlier borrowing from the central bank (which started in 2017 and was discontinued in late 2019) and the low-interest-rate regime. Debt service costs could increase rapidly if the central bank were to tighten monetary policy. Its base interest rate is just 3%, whereas inflation has been stuck at almost 10% since mid-2021. According to the International Monetary Fund, a shock to real interest rates would push government debt to 70% of GDP and servicing costs to 13% by 2027. Public debt would also
climb rapidly in the event of a slump in oil and gas revenue. Any such shocks would also affect the large stock of debt wrapped up in the pension system and in state-owned enterprises.
Algeria’s comfortable financial position has allowed the government to soften the impact of rising inflation through increasing wages and subsidies. If export revenue starts to decline, however,
the government’s ability to continue with such poorly targeted interventions will come into question. The government has long-standing plans to reform the subsidy system and to iron out distortions in monetary and exchange rate policy, but carrying out such structural changes would entail adjustments that would increase hardship in the short term. This, in turn, would risk triggering social unrest.
Within government and oil industry circles, it is recognized that closer cooperation with, and better commercial terms for, foreign companies is essential for investment. The positive turnaround in Algeria’s financial position because of the surge in energy prices following Russia’s invasion of Ukraine in February 2022 provides added incentive to lock in new investment, in oil and gas and in sectors geared toward economic diversification.
To this end, a new investment law was passed in July 2022, with the implementing regulations published in September 2022. The law reaffirms previous guarantees allowing the transfer of invested capital and income — although such guarantees have not always been respected in the past. The law also provides a range of incentives in the form of tax breaks, oriented toward certain sectors and regions of the country.
The law has created a new dedicated investment agency — the Algerian Investment Promotion Agency (AAPI) — which reports to the prime minister (the previous iteration of the body operated under the umbrella of the industry ministry). One of the first major deals announced by the AAPI was an agreement with the Italian-French-U.S. Stellantis Group to produce Fiat vehicles in Oran.
Spanish companies are facing increased difficulty operating in Algeria, owing to the perception that Spain’s policy on the Western Sahara dispute has tilted in favor of Morocco. Relations have worsened since Spain has started providing electricity and gas to Morocco to compensate for the closure since October 2021 of the pipeline running to Spain via Morocco.
Political tensions will remain high, reflecting deep-seated economic grievances, widespread resentment at the nature of Algeria’s power structure and the Kabyle minority’s frustrations; however, the political violence risk is mitigated by the government and opposition’s wish to avoid returning to Algeria’s bloody 1990s conflict.
Meanwhile, the risk of tensions with Morocco escalating into armed conflict remains, although international diplomatic intervention would most likely prevent the outbreak of war. Algerian politicians and generals have grown increasingly frustrated at the political gains that Morocco has made in advancing its interests in the Western Sahara. The United Nations envoy on Western Sahara, Staffan de Mistura, is seeking to convene a round of talks on the issue, including Moroccan and Algerian officials and representatives of the Polisario Front.
Of more immediate concern is the situation in the Sahel region, along Algeria’s southern border, following a series of coups against governments that were supported by France. The most recent was in Niger in July. Algeria registered its opposition to the coup, but it has worked to prevent any military response, either from France or the Economic Community of West African States. The Niger crisis has pushed the Western Sahara issue into the background while creating some common interest between Algeria and Morocco, both of which want to avoid any escalation in the Sahel.
The security forces have largely succeeded in countering armed Islamist groups. Extreme Islamism also has diminished appeal for younger Algerians today. Together, these point to a low risk of terrorism within and facing Algeria.
Foreign exchange risk has diminished because of the increase in Algeria’s oil and gas export revenue since mid-2021. This has made minimal the risk of further restrictions on trade, in the short term at least. Algeria’s oil and gas revenue rose 70% year on year in 2021, reaching about US$34.5 billion, thanks to higher prices and increased volumes. There was a further increase of about 60% in 2022, despite lower volumes of natural gas sales.
The government has also issued an adjusted budget for 2023, pushing up the expenditure allocation in view of the likely overshoot of revenue on the back of higher-than-expected oil prices and increased export volumes. Consequently, the government is now expecting a trade surplus of US$11.3 billion (up from US$9.4 billion in the original budget). The balance of payments surplus is forecast to be US$7.1 billion, which would push foreign exchange reserves over US$70 billion.
The central bank in September approved plans to allow bureaux de change to operate, which has important implications for the foreign exchange market and should improve conditions for foreign companies. For years, Algeria has operated a dual system, with a 25% – 30% gap between an overvalued official rate and a highly development parallel market, fed largely by transfers from Algerians abroad. Setting up a regulated system of foreign exchange trading houses could eventually spell the end of the parallel market. The timing is propitious, given Algeria’s strong balance of payments position. The official rate has appreciated by about 7.5% since mid-2022. The first bureaux de change are set to start operating in the final quarter of 2023.
TREND ►With external debt now near zero, the government has some leeway for foreign borrowing, but it has opted over the past few years to draw down reserves to cover its external deficit.
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