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Expropriation Risk: 68 68 69 70 ▲ Political Violence Risk: 51 48 48 48 ► Terrorism Risk: 54 52 50 52 ▲ Exchange Transfer and Trade Sanction Risk: 73 73 73 64 ▼ Sovereign Default Risk: 66 66 66 66 ►
TREND ▼
Tensions between Algeria and Morocco have escalated; military confrontation is possible. Relations have been strained for years, including over the Western Sahara issue. The current crisis with Morocco could help to rally nationalist sentiment behind the Algerian authorities, but it would be a risky strategy. The crisis relates to forest fires in the Kabylia region during August’s heat wave.
That month, Jamal Ben Ismail, a young man who had been active in the Hirak protest movement, was killed by a lynch mob after having been arrested on suspicion of arson. The murder came after 33 Algerian soldiers had died trying to control the fires. Ismail was thought to have been volunteering in fire-fighting efforts. He was not a member of the Kabyle/Berber minority prevalent in this region. His father made a statement urging people not to exploit his son’s death to stir up inter-communal tensions.
The incident took on political overtones. The mob included members of a Kabyle self-determination movement (MAK) and of Rachad, an Islamist group in exile. They alleged that members of these groups had sought refuge in Morocco, and that they had set the fires as part of a plot in which Morocco and Israel were implicated. Morocco’s response included a statement from a senior diplomat in support of Kabyle rights in Algeria.
Pinning the blame on Morocco for the fires and their gruesome aftermath was a useful means for the Algerian authorities to evade responsibility, although the allegations are far-fetched. MAK is based in France and Rachad’s leaders have lived in London for many years, and there is no independent evidence that they are present in Morocco. Neither movement has any history of armed activity.
Algeria has nevertheless pressed its claims, and in August broke off relations with Morocco. The crisis will likely see the closure of the natural gas pipeline that runs through Morocco to Spain. The 25-year agreement covering the pipeline’s operation will expire in October; it is doubtful whether it will be renewed.
Although the closure of the pipeline would not have a major impact on either country’s energy interests, it would compound the ill-will between the two governments. If the Algerian military took the dispute further through inciting the Polisario Front to step up military operations in the Western Sahara, there could easily be rapid military escalation.
Domestically, the successor regime to former President Abdelaziz Bouteflika is dominated by septuagenarians, President Abdelmadjid Tebboune and the army commander, Saïd Chengriha. Tebboune has sought to wear down the Hirak protest movement through a constitutional process aimed at consolidating the presidency’s power. This included the June election, which, with record-low turnout, produced a new parliament in which the main establishment party the FLN took the largest number of seats, although its tally fell from 155 to 98, out of 407.
The main gainers were independents, with 84 seats and a cluster of Islamist parties. The largest Islamist party, the MSP, declined to join the government coalition, and its leader, Abderrazak Makri, has criticised the recent anti-Moroccan moves. There were few changes in the government formed after the election.
Reports of new COVID-19 cases rose sharply in July, reaching 2,000 per day towards the end of the month, but they have since fallen to about 500. Vaccination commenced in January, but it has made slow progress, with only about 2% of the population fully vaccinated by late August.
TREND ▲
Algeria’s authorities have sought to improve the foreign investor environment by passing a new hydrocarbons law in 2019. However, the reform’s credibility has been compromised by the turmoil atop 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, 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 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.
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 sprang up in early 2019 in protest at efforts by 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 there is little sign of this.
The Kabyle issue remains a potent source of tension, as evidenced by the incidents surrounding the August forest fires, though civil society could be a moderating factor. As noted above, these incidents and their aftermath have flagged up the risk of armed conflict between Algeria and Morocco, but the prospects of such an escalation occurring remain slim.
The security forces have largely succeeded in countering armed Islamist groups. In November 2020, Al-Qaeda in the Islamic Maghreb (AQIM) announced that Abu Obeida Youssef al-Annabi had been appointed its new leader. al-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. Nevertheless, Al-Qaida and the Islamic State have penetrated deep into the Sahel region, and their wider cause has been given a fillip by the Taliban’s victory in Afghanistan.
Algeria’s economy was hit hard by the slump in oil and gas prices in early 2020, but it has benefited from the recovery in prices since the third quarter of 2020, and from the surge in natural gas prices during 2021. The government has continued to bear down on import costs as it seeks to preserve its foreign exchange reserves. The most recent measure, in effect since August, has entailed a ban on imports of finished goods.
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 an about 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 USD15bn to refinance credit advanced to businesses by the banking sector. This is distinct from the earlier scheme, which was aimed at covering the government’s deficit and arrears, but it has a similar objective of pumping liquidity into the economy.
Despite the legacy concerns about International Monetary Fund (IMF) conditionalities, Algeria may eventually have need IMF support. 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.
Foreign exchange reserves fell by about USD14bn in 2020 to USD49bn by end-2020. Reserves had previously reached a peak of almost USD200bn in 2014. A tight squeeze on imports has limited the extent of the drop in reserves, and Algeria has received a windfall in 2021 from the recovery in oil prices and the surge in natural gas prices. If oil prices remain at USD60-70/barrel and European gas prices stay above USD10/MMBtu, Algeria will be able to avoid foreign borrowing, while trying to develop its non-hydrocarbons exports.
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