Algeria: Unorthodox Financing Plan Will Raise Political Risk


Monday, November 13, 2017 9:45 AM / BMI Research


BMI View: The reappointment of Ahmed Ouyahia as prime minister of Algeria, and the launch of a new economic plan, signal that that the government will strive harder to cut spending in a bid to narrow its costly budget deficit. Plans to borrow directly from the central bank will help keep debt levels manageable, but is not a long-term solution, and carries with it other risks in terms of political discontentment.


Despite having published a new economic plan, we do not expect that the government of Algerian Prime Minister Ahmed Ouyahia will successfully balance its budget by 2022, as it has set out to do. The reappointment of Ouyahia will give greater momentum to efforts to curb spending, but political considerations will hamper progress. Meanwhile, lower-for-longer oil prices will weigh on revenues.


Debt levels will continue to tick up, although the pace of debt accumulation will be slowed by plans announced in the new growth strategy to borrow directly from the central bank. This will bring with it its own particular issues, however, with more rapid depreciation of the local currency, higher inflation, and greater political risk, are some likely outcomes.


Greater Commitment To Austerity

Prime Minister Ouyahia will likely enact more rigorous cost-cutting than his recent predecessors, having presided over similar periods of tough economic measures previously. Ouyahia has been prime minister three times before, and while we believe that the primary reason for the dismissal of last the Prime Minister Abdelmajid Tebboune, was the latter's anti-graft campaign riling the establishment (see 'New Prime Minister Reinforces The Status Quo', September 4), bringing in Ouyahia will help push through austerity measures.


In the new economic plan, announced on September 17, the government frankly acknowledged the parlous state of the Algerian economy, and of government finances, in particular, laying the ground for making tough economic decisions. In the 1990s, Ouyahia was responsible for policies which improved government finances, but, in doing so, thousands of Algerians lost their jobs as public firms were dismantled, taxes rose, and pensions fell.


In light of Ouyahia's appointment, and implied greater commitment to austerity measures, we have made a modest adjustment to our budget deficit forecasts. Where, previously, we had projected a shortfall equivalent to 9.6% of GDP in 2017, and 7.1% in 2018, we now forecast 9.2% and 6.7%, respectively.


On the spending side, Ouyahia's appointment will give renewed impetus to cost-cutting, but there will be limits to how swiftly the government can enact this without stirring up major public discontentment.


The government has already rolled back on planned hikes to electricity prices in the southern desert, following mass demonstrations there, and in June, President Abdelaziz Bouteflika announced that there would be a 2.5% rise in pensions, following a similar hike the year before.


Further, oil prices will remain low, preventing a more rapid balancing of the budget. We forecast that Brent crude will average USD54.0 per barrel (/bbl) in 2017, rising only modestly to USD55.0/bbl in 2018 and USD61.0/bbl in 2019. This marks a vast improvement on 2016's USD45.1/bbl, but remains far off the pre-2014 highs, and revenues are held back further this year by production cuts as part of an OPEC, non-OPEC agreement aimed at boosting prices.


Oil still accounts for over a third of government revenues, and while the new economic plan talks about renewing a drive to develop fracking, even if this comes to fruition, it will take some years before the state coffers see the benefit.


Unorthodox Plan Carries Risk

With the budget set to remain in deficit, the Algerian government will need to finance the shortfall, and its proposed unorthodox plan could well lead to greater problems than what it solves. Rather than seeking financing abroad, as has been advised by the IMF, the government will borrow from the central bank under an amendment to the Money and Credit Act which will enable 'nonconventional financing'.


Algerian public debt is, comparatively, low at 20.5% in 2016, but this is up from just 8.7% in 2015, and we forecast it will climb to 31.4% in 2017, even if the government adopts this strategy of seeking to avoid borrowing from private lenders.


Borrowing from international debt markets is especially unlikely, as successive Algerian governments have spoken out against a strategy they see as undermining national sovereignty. While it is a positive that the non-conventional financing policy will be for a limited transitional period of five years in the first instance, we, nevertheless, do not agree with the government's postulation that higher inflation – which generally follows from such a policy – will be successfully avoided.


The Algerian dinar has been largely stable through the year, but we expect that central bank financing of the budget deficit will prompt a renewed sell-off of the currency, with attendant price pressures. The liquidity injection will help stoke the economy, but it will come at a cost that will hit lower-income brackets hardest, at a time when the government is seeking to push through austerity.


Political Risks Rising

We have made a modest downgrade to our proprietary Short-Term Political Risk score for Algeria, from 60.8 (scores out of 100, with 100 being most stable) to 57.3. Driving through austerity while borrowing from the central bank, pushes price growth higher, will squeeze the population from both sides, and will likely lead to growing discontentment and higher potential for street protests. With presidential elections scheduled for 2019, the authorities will likely seek to clamp down on these as far as possible, raising the risk of violence.


This risk will be greater still, if there is a perception that planned privatisations as part of the new economic plan will benefit only a small number of oligarchs close to the political elite.


While voter apathy and the association of President Bouteflika and the ruling Front de Libération National (FLN) with the comparative stability and prosperity following the end of Algeria's civil war in the 1990s will prevent any major challenge to the status quo, there is a rapidly growing youth population that has grown up under the present regime and cannot remember the years of conflict.


As such, if lower-income citizens take the brunt of Algeria's economic readjustment once again, the government could start to lose significant support.

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