Proshare - Facebook Proshare - Twitter Proshare - Google+ Proshare - Linked In Proshare - RSS Feed

Algeria – Slow Response to Structural Slowdown

Proshare

Wednesday, July 05, 2017 13:35 PM / 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 2.8% this year, down from an annualised 4.3% for 2012-2016.

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 2016 – during which Algiers allowed the dinar to depreciate but kept fiscal policy on a largely unchanged footing – 2017 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 2.8% in real terms over2017, and 2.7% in 2018, 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 2017 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 forecast Brent to average USD57per barrel (/bbl) and USD60.0/bbl in 2017 and 2018, respectively.

However, this is still far below prices which averaged USD99.3/bbl in 2014. The 2016 finance law 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 (VAT) 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.

 

Related News  
1.       Sudan - High Inflation Will Cloud Otherwise Bright Outlook
2.      Congo DRC - New Cabinet Reinforces Likelihood of an Election Delay
3.      Kenya - Ongoing Drought Will Result In Growth Slowdown In 2017
4.      Tanzania - Development Expenditure To Widen After Downturn
5.      Uganda - Shilling Set For Long-Term Depreciatory Trend
6.      Sub Saharan Africa – Regional Favourites Facing Headwinds
7.       Pressure Builds on Eurozone Banks to Tackle High NPLs
8.     Government Cuts Will Weigh On Growth in Congo-Brazzaville
9.      Nana Akufo-Addo of Ghana to Launch Series of Reforms
10.  Increased Gold and Oil Exports to Boost Growth in Ghana
11.   Federal Reserve Releases Results of Comprehensive Capital Analysis and Review (CCAR)
12.  Investment and Export Opportunities Advantageous To Cameroon’s External Position
13.  Higher Price Competition for China's Private Auto Brands

READ MORE:
Related News