Emerging

Economic transition, the other challenge

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EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Algeria  
Economic transition, the other challenge  
With anaemic growth, strong pressure on hydrocarbon revenue and substantial twin deficits, the macroeconomic situation is  
worrying. For the time being, forex reserves remain at comfortable levels but the speed and scale of their contraction is a major  
source of vulnerability over the short to medium term. Meanwhile, although certain decisions suggest a change of tack in the  
government’s position after years of economic protectionism, this progress is still too hesitant given the challenges. It is also of  
limited effectiveness whilst the business climate has not yet stabilised.  
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019 ended with presidential elections, won in the first round by Mr  
1
- Forecasts  
Tebboune against a background of low turnout and continued mass  
demonstrations. Although they filled a constitutional vacuum, these  
elections have not brought to an end the transitional period into  
which Algeria plunged following the resignation of President  
Bouteflika on 22 February 2019, under pressure from the street. The  
authorities, in addition to reshape the political system, face another  
major task: restoring the sustainability of an economic model that  
has been undermined by the collapse in hydrocarbon revenue and a  
loss of investor confidence. The period that is now beginning will  
therefore be decisive and full of uncertainty.  
2018 2019e 2020e 2021e  
Real GDP growth (%)  
1.5  
4.3  
1.1  
2.0  
1.7  
3.5  
2.0  
4.0  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Central. Gov. debt/ GDP (%)  
Currentaccountbalance / GDP (%)  
External debt/ GDP (%)  
-8.1  
-9.9  
-10.8  
-10.0  
44.3  
51.5  
57.2  
61.2  
-
9.4  
2.4  
-11.5  
-11.7  
-11.3  
2.3  
61  
2.7  
42  
3.4  
25  
80  
Forex reserves (USD bn)  
Forex reserves, in months ofimports  
Exchange rate USDDZD (year end)  
16.1  
12.6  
8.7  
5.3  
The economy has stalled  
119.0  
121.9  
125.0  
130.5  
e: BNP Paribas Group Economic Research estimates and forecasts  
According to the ONS, economic growth reached only 1.2% in Q3  
019, having all but stagnated at 0.3% in Q2. This slight uptick  
2
2
- Non-hydrocarbon GDP growth, contribution by sector  
GDP, y/y in %, and contribution in percentage points  
Non-hydrocarbon GDP primary secondary tertiary  
came mainly from the 1.4% increase in hydrocarbon real GDP,  
which had previously seen eight successive quarters of contraction.  
At an average of 1.03 million barrels per day over the first nine  
months of the year, crude oil output had thus been at its lowest level  
since 2003, whilst gas output posted a 7.5% contraction compared  
to 2018. Given the fall in global oil prices, hydrocarbon nominal  
GDP thus declined by 18% in Q3 despite the dinar’s stability against  
the dollar. It is hard, therefore, to see the hydrocarbon sector  
providing much support at a time when whole sections of the  
economy are suffering from political uncertainty.  
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7
6
5
4
3
2
1
0
1
Non-hydrocarbon real GDP growth decelerated to 1.4% in Q3 2019,  
from 3.7% a year earlier (chart 2). All sectors have been affected  
with the exception of manufacturing activity, which has shown  
surprising resilience (+ 4.7% on average over the first nine months  
of the year) but which makes up only a small part of the economy  
-
2014  
2015  
2016  
2017  
2018  
2019  
(
5% of nominal GDP). For the rest, growth in construction (12% of  
Source: ONS, BNP Paribas  
GDP) was halved to 3%, whilst those in non-tradable services (15%)  
fell by nearly three-quarters, from 3.4% in Q3 2018 to 0.9% in  
Q3 2019. Despite inflation of just 2% over the year as a whole  
thanks to the significant role played by subsidised products (26% of  
the consumer basket) and the high level of imports, tradable-  
services were also hit by the marked slowdown in consumer  
spending (+0.3% in Q3 2019, from 3.1% a year earlier).  
thus only improve thanks to a slight increase in gas production, with  
non-hydrocarbon GDP growth barely exceeding 1.5%. But beyond  
the difficulties of reviving the economy, the deterioration of public  
finances and external accounts is a great cause for concern.  
Worrying deterioration of forex reserves  
According to the IMF, Algeria will need a Brent at USD106/barrel to  
balance its current account in 2020. Not only is this unattainable in  
the current climate, but it is also a much higher figure than for other  
oil exporters in the region. There are many reasons for this, starting  
with the difficulty in reducing the country’s import bill. Imports have  
been relatively stable since 2016, at USD 46 bn, and customs  
Most importantly, investment has been sluggish over the period  
(
+0.9% in Q2 and +0.7% in Q3), preventing any prospect of  
recovery until the business climate stabilises. All the more so the  
020 budget includes significant cuts in public investment (see  
below). At 1.7% in 2020 from 1.1% in 2019, economic growth will  
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EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
statistics do not suggest any change of trend in 2019, despite the  
3
- Gas sector performance  
16% fall in imports of industrial capital goods. More significantly,  
exports have also come under pressure. Exports, more than 90% of  
which are hydrocarbons, contracted by 12.5% in the first 10 months  
of 2019 due to the combined effect of falling hydrocarbon price and  
lower volume exported especially for gas (saturation of European  
market, strong domestic demand). For the first time in decades,  
therefore, Algeria probably consumed more gas at home in 2019  
than it sold abroad (chart 3).  
Billion cubic meters  
production exports domestic consumption  
100  
90  
80  
70  
60  
50  
40  
30  
20  
10  
0
With a current account deficit of around USD 20 bn (11% of GDP)  
and no significant capital flows (net foreign direct investment  
fluctuates around USD 1 bn), external liquidity will continue to erode  
rapidly. FX reserves fell from a peak of USD 195 bn at the end of  
2013 to USD 60 billion at the end of 2019. They are still comfortable,  
covering 12.6 months of imports of goods and services. However,  
they could just reach USD 25 bn at end-2021, which would be a  
worrying development given the Algerian economy’s dependence  
on imports.  
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Source: JODI, MEES  
hydrocarbon law has just been approved to increase the  
attractiveness of the sector. After years of protectionist policies this  
seems like a change of direction.  
Public finances remain under pressure  
Public finances are hardly in a more comfortable situation. With a  
fiscal ‘break-even pointestimated at USD 109/barrel for 2020 (IMF),  
Algeria compares unfavourably to regional peers despite the fiscal  
consolidation measures included in the budget. The authorities plan  
a 9% cut in spending this year driven entirely by a 20% cut in capital  
spending. Current spending will remain fairly stable (down 1.2%),  
which creates a number of problems.  
However, the scope of these measures is limited given the number  
of constraints that still weigh on the attractiveness of Algeria and,  
more generally, the development of the private sector. Most  
importantly, challenges linked to macroeconomic stabilization are far  
from being addressed. The reform of the subsidy system,  
particularly for energy, is a priority but one that is difficult to carry out  
in the current climate. In the absence of any lasting solution, the  
authorities could thus be obliged to reduce imports through the  
introduction of tariffs measures, or even through tighter capital  
controls. A depreciation of the dinar would be another option to limit  
the erosion of external liquidity and increase hydrocarbon revenues  
in local currency, but would bring considerable inflation risks. In any  
event, decisions need to be made in order to protect Algeria from a  
severe macroeconomic adjustment over the short to medium term.  
With the fiscal adjustment only supported by public investment, the  
adverse impact on the economy is expected to be significant.  
Moreover, even after these measures the budgetary deficit will  
remain high, at 10% of GDP, due to downward pressure on  
hydrocarbon revenues. Thus the question of how the deficit is to be  
financed will soon rear its head, particularly as the authorities have  
indicated that they will not reactivate its non-conventional financing  
policy introduced at the end of 2017. Of the USD 55 bn injected by  
the central bank, less than half was truly spent. Of the remaining  
USD 26 bn, the Treasury has a creditor account of USD 8 bn at the  
central bank, half of the expected budget deficit for 2020, whilst the  
lack of depth in the Algerian capital market raises doubts about its  
ability to absorb significant financing needs.  
Last but not least, government debt looks set to continue its rapid  
growth and could rise above 60% of GDP in 2021, from just 7% in  
2
014. Debt servicing costs remain manageable thanks to the very  
favourable conditions enjoyed by the government under the “non-  
conventional financing” programme and the negligible level of  
external debt. But the current debt dynamic is yet another reminder  
that an overhaul of the Algerian economic model is crucial.  
Reforms making progress, but timidly  
The government appears to have woken up to the dangers of the  
situation. Red lines are moving. From this year, the government  
could borrow abroad to finance key projects. The “51/49” rule  
limiting foreign investors to a minority position in any investment  
project has also been relaxed for non-strategic sectors, and a new  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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