Previous Quarterly Editions
Expropriation Risk: 68 68 68 69 Political Violence Risk: 51 51 48 48 Terrorism Risk: 54 54 52 50 Exchange Transfer and Trade Sanction Risk: 73 73 73 73 Sovereign Default Risk: 66 66 66 66
TREND ►
President Abdelmadjid Tebboune’s administration is preparing for a June 12 general election amid a resurgence of popular protests, which had subsided during 2020 because of COVID-19-related social lockdowns. With the easing of restrictions, regular street protests to press demands for deep political reforms have resumed, but without any serious violence.
Reports of new COVID-19 cases peaked in November 2020 at over 1,000 per day, but they have since fallen to about 100. Vaccination commenced in January, but Algeria has only received about 665,000 doses. Algeria was also hit hard by the oil and natural gas prices slump in 2020, but its export revenue has been bolstered by the subsequent recovery in prices.
Tebboune sought to grasp the political initiative in mid-February before February 22, which was the date that marked the anniversary of when the Hirak movement was launched, a movement which ended the 20-year presidency of Abdelaziz Bouteflika. The first step entailed releasing dozens of detained Hirak activists. Tebboune then announced his decision to dissolve parliament and call early elections, as part of the reform process set out in the new constitution approved in a November 2020 referendum (in which only 24% of the electorate took part).
Hirak rejected the constitution and supports an election boycott. Election turnout is likely to be low, and the main establishment parties - the National Liberation Front (FLN) and Democratic National Rally (RND) - have struggled to relaunch themselves after many of their principals were put on trial for corruption during the post-Bouteflika judicial purge. Nevertheless, Tebboune will seek to capitalise on Hirak’s lack of a clear strategy for realising its goal of a fundamental political change, starting with the neutralisation of the military establishment’s influence.
As there wasn’t any new organised force prepared to engage in the formal political process, the trimmed-down 407-seat parliament is likely to be FLN and RND-dominated. This demonstrates use of well-entrenched patronage networks and shows a reasonably strong cluster of Islamist parties with establishment connections.
The other initiative Tebboune took ahead of the February demonstrations was reshuffling his cabinet. Most of the top-tier posts, including Prime Minister Abdelaziz Djerad, remained unchanged. One exception was energy, where Mohamed Arkab was restored to a mining and energy portfolio, after having since mid-2020 relinquished this joint portfolio to be mining minister alone. This was the latest in a long series of changes in the energy sector; the lack of continuity has adversely affected investment.
The replacement of the industry minister in the reshuffle also reflected internal policy struggles. The outgoing minister, Ferhat Ait Ali, had been criticised for authorising car imports while local assembly plants remained closed, owing to Bouteflika-era controversies. The new minister, Mohamed Bacha, has withdrawn some of the car import licences and has indicated that he will draw up new terms and conditions for the resumption of the local assembly of cars and other products, including electronics.
One of the side-effects of the incoherence of import and industrial policy has been a sharp fall in Algeria’s imports in 2020. This has helped to mitigate COVID-19’s impact on the balance of payments and on foreign exchange reserves, but it has also depressed economic activity. The government has indicated that it estimates that real gross domestic product contracted by 4.6% in 2020; the International Monetary Fund (IMF) has said that it estimates the contraction to have been 6%, forecasting a relatively weak recovery to 2.8% growth in 2021. Government trade data shows that exports fell by one-third in 2020 to USD23.8bn, while imports decreased by 18% to USD34.4bn.
Oil and gas make up about 95% of Algeria’s export revenue and provide the largest contribution to the state budget. The recovery of oil prices to about USD60/barrel on average in the first quarter of 2021, compared with USD42 on average in 2020, has been beneficial. Export revenue has also been boosted by the recent surge in natural gas prices in the European and Asian markets. Natural gas makes up about one-third of Algeria’s hydrocarbon export income.
Algeria’s authorities have sought to improve the foreign investor environment by passing a new hydrocarbons law in 2019. However, the reforms’ credibility has been compromised by the turmoil within Algeria’s oil and gas sector and the vindictive judicial pursuit of Bouteflika-era ministers and business leaders.
There is a recognition within government and oil industry circles 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. Moreover, the government’s May 2020 confirmation that it will prevent Total from acquiring Anadarko's assets in Algeria indicates that it intends to keep close control over the sector.
More broadly, the politicised and wide-ranging anti-graft campaign against Bouteflika-era officials and businessmen 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 a lack of clarity about how this change should occur. Businesses report that applications to form new ventures with majority foreign ownership are bogged down in bureaucracy.
Algerians have largely accepted the need for social isolation as part of the moves to combat COVID-19 and the Hirak movement which was initially abided by the ban of demonstrations as a social distancing measure. However, as protests resumed in June 2020 there were met with large-scale arrests. Increased tensions have also been reported in the Kabyle region to the east of Algiers, as well as in some remote communities in the Sahara Desert. With economic conditions worsening and political grievances remaining unresolved, there is a significant risk that the face-off between the state and civil society could develop over the coming months into widespread rioting that would trigger a heavy security crackdown that then starts a new cycle of violence.
TREND ▼
The security forces have largely succeeded in countering the threat posed by 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.
The government and central bank have given no sign of considering capital controls or implementing new trade restrictions. However, as foreign exchange reserves dwindle, such measures cannot be ruled out.
Critical issues facing the government include how to manage the exchange rate in the context of falling reserves and a rising current account deficit, and whether to revive the quantitative easing programme which raised the equivalent of USD55bn through the central bank subscribing to government bonds in 2017-19.
The central bank has allowed a modest depreciation of the exchange rate by about 10% against the US dollar since early 2020. The gap between the official rate and the black market rate has remained steady at about 25%.
Despite the legacy concerns about IMF conditionalities, Algeria has little choice but to turn to the IMF at some stage. With external debt now near zero, the government does have some leeway for foreign borrowing, but this is rapidly being reduced by the additional impact of COVID-19 on what’s already considered to be weak energy prices.
Foreign exchange reserves fell by about USD14bn in 2020 to USD49bn by end-2020. A tight squeeze on imports limited the extent of the drop in reserves, but there is little prospect of this declining trend stopping unless Algeria can secure significant capital inflows. Reserves had previously reached a peak of almost USD200bn in 2014.
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