Previous Quarterly Editions
Expropriation Risk: 69 69 70 73 ▲ Political Violence Risk: 48 48 48 48 ► Terrorism Risk: 52 50 52 50 ▼ Exchange Transfer and Trade Sanction Risk: 73 73 64 64 ► Sovereign Default Risk: 66 66 66 47 ▼
TREND ▼
Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Algeria is heavily exposed to climate risk. Changes to weather patterns, with rising temperatures and increased incidence of droughts, bring desertification to agricultural land while reducing the availability of water for irrigation and municipal and industrial use. As a significant producer of fossil fuels, Algeria is also a major contributor to global greenhouse gas emissions, and the country faces a difficult long-term challenge to adapt to decarbonisation.
The principal short-term risk is that, following successive years of below-average rainfall, the cereals harvest will be poor, meaning that Algeria will need to increase wheat imports in 2022 at a time when prices are being pushed up due to the Ukraine-Russia crisis. Algeria’s wheat harvest in the 2021-22 season is likely to be about 3.5 million tonnes. To meet domestic demand, this will require’ imports of about 8 million tonnes, putting Algeria not far behind the world’s largest importer, Egypt, whose annual imports total about 12 million tonnes.
Conversely, Algeria is benefiting financially from the surge in oil and gas prices. However, the country’s ability to capitalise on the opportunity to increase volumes of oil and gas to Europe has been compromised by years of under-investment in the hydrocarbons sector. Export capacity has also been reduced following the politically motivated decision to close the pipeline through Morocco to Spain in October 2021.
The Algerian government has drawn up climate risk strategies that are based mainly on enhancing water supply and increasing production of renewable energy, especially solar. In both respects, Algeria has some advantages. Most of the population lives in the coastal region and its close hinterland, while the large expanses of the Sahara Desert provide abundant opportunities for solar power and for tapping ancient aquifers. However, progress has been hampered by Algeria’s difficult investment environment.
There has also been little appetite for measures to moderate consumption of heavily subsidised water and electricity, while under-resourced municipalities lack the ability to invest in tackling chronic problems of water leakage.
Most of the government’s investment in water in recent years has been directed to increasing the capacity of retention dams in the mountainous area in the north and to building desalination plants. Algeria has the capacity to address the water scarcity challenge through enhancing the efficiency of urban water distribution, upgrading irrigation systems in agriculture (which accounts for about 70% of total use), and greater exploitation of the huge north-western Sahara aquifers, more than two-thirds of whose resources lie within Algeria.
TREND ▲
Government and oil industry circles recognise that closer co-operation with, and better commercial terms for, foreign companies is essential for investment. However, the rapid turnover of senior officials has made it difficult for companies to engage. There was a moderately positive development at the end of 2021 when Sonatrach, the national oil company, signed a $1.4bn gas development contract with Italy’s Eni, the first to be concluded under the new hydrocarbons law that was approved in 2019.
More broadly, the politicised, wide-ranging anti-graft campaign against Bouteflika-era officials and businesspeople has damaged Algeria’s already weak industrial sector and deterred new investment. In a gesture to foreign investors, the government has effectively abolished the rule that local partners must hold at least 51% equity in joint ventures, but there remains little clarity about how this change should occur. Businesses report that applications to form new ventures with majority foreign ownership are bogged down in bureaucracy.
There is also plenty of scope to reform the energy sector, to reduce Algeria’s own fossil fuel consumption growth, while cutting emissions, and to increase export volumes of natural gas in particular, which will continue to play a critical role in the global energy mix for at least the next two decades. The government has recently adjusted downwards its targets for solar energy capacity, after little progress was made over the past decade, with only about 500 megawatts (MW) now installed. It is now looking to have 4,000 MW in place by 2024, rising to 15,000 MW by 2035, part of which will be designated for export. A tender for the installation of 1,000 MW spread between eleven sites was issued at end-2021, with a closing date of April 30.
Hoping to attract a strong response, the government has specified that international developers will not be subject to the rule restricting foreign equity to 49%. Natural gas currently accounts for 97% of Algeria’s electricity production, and gas consumption increased by 75% during the past ten years, reaching about 45 billion cubic metres in 2021- roughly half of the country’s total production.
There is high official awareness of climate risk, and extensive research and policy proposals on effective responses. However, there is a poor record of policy implementation.
TREND ►
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.
The Hirak movement, which arose in early 2019 in protest at efforts by now-former President Abdelaziz Bouteflika to seek a fifth presidential term, staged a revival in the first half of 2021, as COVID-19 restrictions were eased. However, the movement was unable to prevent the June general election, and some figures associated with Hirak even stood as candidates. The fading of Hirak could open the way for more radical forms of protest, but as yet there is little sign of this.
President Abdelmadjid Tebboune in February announced a freeze on plans to level taxes on a wide range of foodstuffs, while announcing the launch of unemployment benefits. The measures appeared to be aimed at heading off potential protests at rising inflation and at cuts to subsidies on basic commodities.
The Kabyle issue remains a potent source of tension, though civil society could be a moderating factor. There is also the risk of armed conflict between Algeria and Morocco, but the prospects of such an escalation occurring remain slim. The main area of contention is the Western Sahara. There is also rivalry between the two neighbours with respect to Mali, where Algeria is seeking to play a more prominent political and security role following the withdrawal of French troops.
The security forces have largely succeeded in countering armed Islamist groups. In November 2020, Al-Qaida in the Islamic Maghreb (AQIM) announced that Abu Obeida Youssef el-Annabi had been appointed its new leader. El-Annabi is from western Algeria and fought alongside former leader Abdelmalek Droukdel (killed in a French-US operation in June 2020) in the 1990s civil war. The resort to a veteran to lead AQIM reflects the diminished appeal for extreme Islamism among younger Algerians.
Foreign exchange risk has diminished given the increase in Algeria’s oil and gas export revenue since mid-2021. This in turn has rendered the risk of further restrictions on trade to be minimal, in the short term at least. Algeria’s oil and gas revenue rose by 70% year-on-year in 2021, reaching about USD34.5 billion, thanks to both higher prices and increased volumes. The surge in oil and gas prices in early 2022 will provide a major windfall for Algeria, and it may encourage foreign companies to boost their investment.
The central bank has allowed a 10% exchange rate depreciation against the US dollar since early 2020. The gap between the official rate and the black-market rate has remained steady at about 25%. In June 2021, the government announced a scheme whereby the central bank will lend up to the equivalent of USD15 billion to refinance credit advanced to businesses by the banking sector. This is distinct from an earlier quantitative easing scheme, which was aimed at covering the government’s deficit and arrears, but it has a similar objective of pumping liquidity into the economy.
With external debt now near zero, the government does have some leeway for foreign borrowing, but the government has opted over the past few years to draw down reserves to cover its external deficit. Reserves peaked at almost USD200 billion in 2014, before falling rapidly to about USD50 billion by end-2020. Since mid-2021, reserves have stabilised at about USD45 billion, and they may increase in 2022 as a result of the surge in oil and gas revenue.
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