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Expropriation Risk: 54 58 63 66 Political Violence Risk: 60 64 67 64 Terrorism Risk: 59 58 58 54 Exchange Transfer and Trade Sanction Risk: 53 54 57 60 Sovereign Default Risk: 48 50 52 56
TREND ▲ OUTLOOK ▲
The new administration of President Abdelmadjid Tebboune had only a few weeks to settle in following the December 2019 elections before the country was struck by the COVID-19 pandemic. Along with the public health challenge, the virus has triggered a severe economic crisis for Algeria as its oil and gas revenue has been cut by more than half as a result of the collapse in world prices. The trajectory of the outbreak has been similar to that in neighbouring North African countries, but less severe than in southern Europe. The government imposed a general clampdown, with the closure of schools and universities and the suspension of travel. These restrictions extended to the Hirak protests that started in February 2019 with demands for then-president Abdelaziz Bouteflika to step down and which have continued to challenge the legitimacy of the current regime. Banning the protests had an element of opportunism, but Hirak leaders accepted that there was a clear public health argument that took precedence. Tebboune has taken a firm and personal grip on the crisis, working through the supreme security council, which includes army and intelligence commanders, and felt strong enough to remove the head of the internal security agency in April 2020. In a televised address at the end of March 2020, he told the country that it had sufficient stores of vital food and medicine to last six months. However, Algeria remains hostage to oil and gas sales, which account for more than 90% of exports and 50-60% of budget income. Roughly two-thirds of Algeria’s hydrocarbons revenue derives from oil exports, with the remainder coming from sales of natural gas. Prices of natural gas have been depressed since mid-2019, although until recently Algeria had a measure of protection as most of its pipeline gas contracts are indexed to the oil price. However, the dispute between Saudi Arabia and Russia about output cuts resulted in oil prices falling to 25 USD a barrel in late March 2020, compared with 64 USD on average in January and February 2020. Annual revenue had already fallen by 15% in 2019, and 2020 could see it fall by a further 40%. The value of imports also fell in 2019, but only by 9.5% as a good harvest reduced grain imports and there were fewer imports for the auto sector. There is limited scope for any further fall in imports, Algeria will have to draw down at least 20 billion USD from reserves this year unless the government can achieve significant savings or else secure new sources of finance. However, prospective creditors are likely to insist on the involvement of the IMF. This is a highly sensitive issue for Algeria, given powerful folk memories of the country being driven into crisis as a result of austerity measures imposed by the IMF in the late 1980s. Given the damaging impact on oil revenue from the fall off in demand stemming from the virus crisis, Algeria would have a strong case for compensatory financing from the IMF. However, there would be fierce opposition both from nationalist elements in the army and from the Hirak movement, and the Tebboune administration may not feel strong enough to cope with both simultaneously.
The Algerian oil and gas sector has been in turmoil for many years, but the past few months have been exceptional. The interim government in November 2019 rushed through a new hydrocarbons law that had been welcomed by international companies as it provides a potentially much improved investment framework. However, at the same time, the chief executive of Sonatrach, the national oil company, was replaced. Rachid Hachichi had only been in the post for six months and his removal appears to be the result of powerful army figures looking to safeguard their interests ahead of the presidential election. Yet his successor was himself replaced in February 2020 in an apparent assertion of authority by Tebboune. For international companies, this rapid turnover has been unsettling, and there have been reports of BP seeking to divest its stake in the significant In Amenas gas project. For the time being, foreign companies are likely to remain in place but, with Sonatrach ordered to cut capital spending by 50%, prospects for new upstream investment are bleak.
TREND ▼ OUTLOOK ▲
There has been remarkably little violence in Algeria despite continuing anti-government demonstrations since early 2019. This reflects self-discipline among the protesters and a measure of restraint on the part of the security services. Algerians have by and large accepted the need for social isolation as part of the moves to combat COVID-19 and the Hirak movement did not object to President Tebboune’s ban on demonstrations as a social distancing measure. However, there remains a risk that protests could resume as patience with the economic disruption wears thin. Although Tebboune has promised not to reduce public sector salaries despite pledging to cut current budget spending by 30%, this will be hard and pay cuts or job losses could produce new demonstrations later in the year.
TREND ▼ OUTLOOK ▼
The leaders of the country’s Islamist parties remain prepared to work with the military establishment that underpins the new regime, allowing the parties to act as a buffer between the state and Islamist extremism. Although there remains a risk that marginal elements will gravitate towards violence, the security forces have largely succeeded in countering the threat posed by armed Islamist groups since the assault on the In Amenas gas complex in 2013.
Abderrahmane Raouya has returned as finance minister, having held the post in 2017-19. He is working on a supplementary budget law to respond to the virus crisis and lower oil prices, and this could include some trade and capital restrictions. The new central bank governor has close ties to the finance ministry, which will help with policy coordination as pressure on the economy grows. The government will be increasingly tempted to revert to borrowing from the central bank, from which it obtained 55 billion USD between September 2017 and the suspension of the scheme in January 2019.
Algeria’s foreign exchange reserves have dwindled to around 60 billion USD from almost 200 billion USD in 2014 due to the gap between a politically motivated surge in public spending and falling energy revenue. Ultimately, Algeria will have little option but to resort to external borrowing, most likely via a conditional programme with the IMF, despite the deep and widely shared aversion to the likely conditions. With external debt now close to zero, Algeria does have some leeway for foreign borrowing, but it may find credit constrained as a consequence of the virus.
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