Emerging

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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Algeria  
Unconventional financing: a strategy under control  
In late 2017, the authorities decided to resort to direct financing of the Treasury by the central bank to stabilise a dangerously  
deteriorating macroeconomic situation. The injection of funds helped rebuild bank liquidity via the reimbursement of the debt of  
state-owned companies. In the absence of a real fiscal impulse, and thanks to prudent monetary policy, inflation remains under  
control. Without structural adjustments, however, the situation could become very risky.  
No inflationary shock  
1- Forecasts  
In late 2017, the government announced that the Treasury would  
resort to direct central bank financing to cover a 25% budget  
increase. The decision was prompted by the depletion of the oil  
stabilization fund. Consequently, the central bank massively injected  
money into the Treasury’s account: a total of DZD 4005 billion in  
September, the equivalent of 19% of GDP. Yet the much feared  
inflationary shock did not occur. In the first 11 months of 2018,  
inflation averaged only 4.4%, compared to 6.4% in 2016 and 5.6%  
in 2017. More significantly, non-food inflation decelerated sharply  
after peaking in late 2016 and early 2017. Two factors help explain  
part but not all of this trend: subsidies were maintained after a few  
cutbacks in 2016/17 (administered prices account for 26% of the  
consumption basket), and the dinar has held steady against the  
euro and the US dollar. In the end, a large part of the  
unconventional financing was allocated to state-owned companies,  
especially those in the energy sector (Sonatrach, Sonelgaz). These  
flows were sterilised by the central bank. Fiscal policy also proved to  
be more conservative than expected.  
2
017 2018e 2019e 2020e  
Real GDP growth (%)  
1.4  
5.6  
2.5  
4.4  
2.8  
5.0  
2.2  
5.0  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Central. Gov. debt/ GDP (%)  
Currentaccountbalance / GDP (%)  
External debt/ GDP (%)  
-6.4  
-5.2  
-7.7  
-7.0  
31.6  
12.4  
42.9  
-7.6  
47.9  
-10.9  
54.9  
-11.1  
-
2.6  
97  
2.3  
83  
2.6  
66  
2.8  
48  
Forex reserves (USD bn)  
Forex reserves, in months ofimports  
Exchange rate USDDZD (year end)  
19.7  
114.7  
16.2  
12.7  
9.2  
119.0  
121.7  
126.0  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Inflation  
Total  • • Food  Excluding food  
2
1
1
0
5
0
5
0
5
% yoy  
Fiscal policy aims for stability rather than growth  
According to our estimates, the fiscal deficit was two times smaller  
than the figure in the 2018 financing law. With Brent crude oil  
averaging USD 72 a barrel over the full year, compared to a budget  
assumption of USD 50 a barrel, the government benefited from a  
major increase in hydrocarbon revenues. Dividend transfers from  
the central bank to the budget remained sizeable, reaching for the  
first time DZD 1000 billion (about 5% of GDP). These dividends  
correspond to the exchange rate gains that the monetary institution  
has reported since 2016 following the sharp depreciation of the  
dinar against the US dollar between mid-2014 and year-end 2015.  
Although the sustainability of this source of revenue is questionable,  
for the moment it is making a significant contribution to the budget  
-
2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: ONS, BNP Paribas calculations  
Moreover, current spending, though elevated, is generally kept  
under tight control. All of this leads us to conclude that the  
authorities are seeking above all to stabilise a financial situation that  
deteriorated dangerously in 2017, instead of providing firm support  
for domestic demand. In other words, Algeria’s fiscal policy can  
hardly be called expansionist.  
(
a quarter of non-fiscal revenues since 2017).  
Yet several factors also suggest that there has been less pressure  
on spending. The bulk of the increase in the budget was attributed  
to higher capital spending (+76%), especially the “capital  
transactions item due to special allocations to the National Social  
Insurance Fund (CNAS) to absorb the losses of the National  
Pension Fund (CNR) and settle the arrears accumulated since  
Central bank vigilance  
The central bank’s cautious approach faced with the inflow of  
liquidity in the banking sector has also played a key role. The  
aggregate of liquidity withdrawals and sight deposits of banks at the  
central bank, which had dropped to a low of DZD 500 billion in  
2
017. Public investment was also expected to increase (+35%). Yet  
in the first 9 months of the year, imports of industrial capital goods  
declined 10%, which points to another fall in public investment.  
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27  
EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
October 2017, compared to nearly DZD 3000 billion in mid-2014,  
returned to DZD 1500 billion in 2018 thanks to the payment of  
government debt due to state-owned companies (about 40% of total  
banking system deposits).  
3
- Liquidity in the banking system and interbank rate  
• • • Bank liquidity  Interbank rate (RHS)  Key policy rate (RHS)  
3
500 DZDbn  
000  
% 7  
At the same time, to ensure price stability the central bank has used  
three instruments to actively manage interbank liquidity. As of  
January 2018, it resumed liquidity withdrawal operations in the form  
of short-term deposit facilities. The reserve requirement ratio was  
also raised to 10%, from 4% in August 2017, at the height of the  
squeeze on domestic liquidity. Lastly, the central bank isolated part  
of the surplus liquidity furnished by Sonatrach, the national oil and  
gas company, which can use these funds according to its  
investment needs.  
3
6
5
4
3
2
1
0
2500  
000  
1500  
2
1
000  
500  
0
By doing so, the central bank has successfully anchored the  
interbank rate to its key policy rate. Monetary policy transmission  
channels had long been weakened by the excessive abundance of  
liquidity in the banking sector. Yet with the launch of open-market  
operations in early 2017, it was able to introduce a benchmark rate,  
set at 3.5%, which the central bank uses to steer the banks’ needs.  
For the moment, this system seems to be working. After peaking at  
2014  
2015  
2016  
2017  
2018  
Source: Bank of Algeria, IMF  
external position. The current account deficit is estimated to have  
reach USD 12 billion in 2018, and the 2019-2020 outlook is for a  
further widening due to downward pressure on global oil prices. The  
external position is hit not only by the downturn in hydrocarbon  
export volumes (down 9% in the first 9 months of 2018, after  
contracting 25% between 2005 and 2017), but also by the low level  
of capital inflows. The chances that this situation will improve are  
slim, at least in the short term, given Algeria’s rather unattractive  
business climate and the authority’s refusal to borrow externally. In  
this environment, foreign reserves are bound to erode further. They  
could reach less than USD 50 billion by year-end 2020 (9 months of  
imports of goods and services), compared to USD 195 billion at  
year-end 2013. Here too, Algeria enjoys comfortable manoeuvring  
room, but it is dwindling fast.  
4.2% in November 2017, the interbank rate has been fluctuating  
between 1.5% and 3.5% ever since. Moreover, the easing in the  
banks liquidity pressure helped maintain lending growth at a rather  
high level (+12.5% at the end of September 2018) without  
generating inflation.  
We must nonetheless add some nuance. Although the loan-to-  
deposit ratio is now fluctuating at around 95%, after having hit the  
100% threshold when unconventional financing was first launched, it  
is still 20 points above the level prior to the oil shock. Moreover, with  
bank loans outstanding equivalent to 47% of GDP (25% if we  
exclude loans to state-owned companies), compared to 80% for  
Morocco, the risks of overheating due to domestic factors generally  
seem limited.  
Algeria is running the risk of a painful medium-term macroeconomic  
adjustment, either via the exchange rate or the compression of  
imports. Given the weakness of the industrial base, both options  
would have a severe impact on inflation. One positive point is that  
the authorities have made statements showing that are fully aware  
of the situation. Yet we must wait until the presidential elections due  
to be held in April to know more about their reform intentions.  
Latent risks  
Although inflationary pressures have been contained so far, this  
strategy is not without risk. By turning to unconventional financing to  
cover the fiscal deficit, the authorities have bought some time  5  
years to be exact  to readjust the Algerian economic model to the  
new oil market situation. For the moment, however, the status quo  
seems to predominate.  
The 2019 budget follows along the same lines as that of 2018. The  
subsidy system was maintained and no new taxes are planned.  
Once again, public investment might serve as the adjustment  
variable. Brent crude oil prices would have to surpass USD 90 a  
barrel to balance public finances, a level that seems unreachable in  
the current context. According to our estimates, the budget deficit  
would be substantial at nearly 8% of GDP in 2019.  
The level of public debt offers some manoeuvring room, but it must  
be monitored closely, since government support to state-owned  
companies is driving public debt up rapidly. The dynamics of the  
external accounts is the main source of concern. Algeria is one of  
the region’s few hydrocarbon producers that has not rebalanced its  
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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