Slow Response to Structural Slowdown in Algeria


Monday, October 24, 2016/ 1.03pm /BMI Research

BMI View: Algeria is facing several years of subdued growth and rising macroeconomic challenges in part as the government turns to austerity in response to much lower oil revenues. The country's remaining fiscal buffers will help to delay a more dramatic fiscal and economic adjustment. We forecast real growth to slow to 1.9% in 2016, down from an annualised 3.3% between 2010 and 2014.

Algerian economic activity will face headwinds over the coming years, primarily as a result of the continuing slump in global energy prices – the most influential determinant of the country's growth performance.

In contrast to the government's hesitant approach over 2015 – during which Algiers allowed the dinar to depreciate but kept fiscal policy on a largely unchanged footing – 2016 and beyond will mark a more extensive shift towards spending cuts and protectionism.

These trends will weigh on investment and consumption over the coming quarters, and a slowdown in economic growth is inevitable: we have cut our forecasts and see the Algerian economy expanding by only 1.9% in real terms over 2016, and 1.8% in 2017, the weakest rate since 2009.

The further turmoil in the global energy markets worsens the growth outlook for Algeria's hydrocarbon-dependent economy. As we anticipated, the government's 2016 budget heralds a shift to austerity – necessary in view of the collapse in the public finances – and protectionism.

Cuts in public spending, mainly affecting capital expenditure, and higher taxes and import duties will be negative for investment and consumption. While Algeria's remaining fiscal buffers will help to delay a more dramatic fiscal and economic adjustment, the next few years are likely to see subdued growth and rising macroeconomic challenges.

We have upgraded our oil price forecast this month with markets having priced in rebalancing earlier than we previously anticipated. We now forecast Brent to average USD46.5 per barrel (/bbl) and USD57.0/bbl in 2016 and 2017, respectively. However, this is still far below prices which averaged USD99.3/bbl in 2014.

The deterioration of Algeria's fiscal and current account position is laid bare in recent government data. Energy earnings dropped by 40.8% in 2015 according to Ministry of Finance figures, causing a trade deficit of USD13.7bn after a USD4.3bn surplus in the previous year.

Foreign exchange reserves have fallen to USD152.7bn as of September 2015, a 21.3% fall compared to the same month of 2014. With the hydrocarbons sector accounting for two-thirds of government revenue and continued crude oversupply set to keep oil prices even lower than last year, we project Algeria's 2016 budget deficit to reach 8.7% of GDP, even accounting for a more restrained fiscal policy.

The 2016 finance law, approved by parliament at the end of November 2015, represents the government's first real plan at dealing with the crisis.

It aims for a reduction in overall spending of 9.9%, largely through tried-and-tested policies: on the revenue side, import duties will go up for goods including fruits, computers, and vehicles, while the government plans to raise the value-added tax for 3G internet services and will double the tax on telecoms operators.

As tends to be the case in Algeria during more challenging economic times, the government has also approved plans to restrict goods imports, particularly for higher-value consumer items and construction materials.

Imports of vehicles are restricted to only 152,000 units this year, approximately a third of the 439,000 units purchased from abroad in 2014. Cement and steel imports will also face new restrictions.

On the spending side, we expect cuts to primarily affect investment, as has been the case in previous crises. While some infrastructure projects will still continue, particularly if they represent a political and social priority for Algiers – the construction of new housing units is likely to be firewalled – the government's cost-cutting drive and the restrictions to construction materials are bound to impact investment activity across segments such as transportation, power, and energy.

Article 71 in the budget bill moreover allows the finance ministry the power to amend spending decisions by decree (thus not requiring the approval of parliament) throughout the year, adding another point of uncertainty to any large public project.

The parliament has also endorsed a modest increase in subsidised diesel, gasoline and electricity prices. While the steps announced so far are too minor to represent a real overhaul of the country's large-scale network of universal subsidies, they could in theory pave the way for more tangible subsidy reform in the coming years.

However, the need to ward off social unrest ahead of the succession to ailing President Abdelaziz Bouteflika, the regime's highly factionalised state, and the financial resources still available at its disposal make such a major step unlikely for now.

Similarly, a recruiting freeze for the public sector will be maintained, but the government will remain wary of taking more energetic steps to trim down the bureaucracy and cut back on benefits.

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