Financial reforms conducted over the past two decades have left the Algerian banking sector well poised to bounce back from the global financial crisis, according to the World Economic Forum’s Africa Competitiveness Report 2009. The report said Algeria was one of four African economies whose “competitive banking systems” and “functional regulatory systems” meant they were more likely to rebound positively. In particular, the report noted that while Algeria is “a slow reformer,” the country benefited from a financial system that “still demonstrates remarkable intermediation.”
The WEF’s blessing is good news for the sector, which in recent years has witnessed stalled efforts towards privatization, due in large part to the onset of the financial crisis in developed markets. Initial attempts to partly privatize Algeria’s biggest bank, Crédit Populaire d’Algérie, scheduled for early 2008, were delayed and eventually shelved when the subprime crisis began to take hold. Of six international banks permitted by the government to bid, three withdrew from the process, including Spain’s Banco Santander and troubled US giant Citigroup, leaving the planned privatization on shaky ground.
Since then, efforts to reduce the state’s role in the banking system have been put on the back-burner while the government focuses on its $150 billion infrastructure investment strategy and developing non-banking sources of capital. In 2002, the government diversified access to non-bank capital by creating a government debt market, through which the state’s large public enterprises were later encouraged to issue their own bonds. The result has been, in the words of the International Monetary Fund, a corporate bond market in Algeria “significantly larger than in other countries at the periphery of the European Union.” With the groundwork for non-bank capital already laid, and the beginnings of a medium to long-term yield curve developing in state bonds, the government appears to be focused on using the National Investment Program to deepen local capital markets further, as opposed to bank-based finance.
The judiciousness of this strategy, and indeed the slow pace of reform in the banking sector, has been supported by the need to absorb the relatively high structural liquidity surplus within Algeria’s banking system, which is the legacy of an export economy dominated by hydrocarbons. The IMF commended the Algerian government’s “prudent” monetary policy for successfully absorbing this liquidity, as well as bringing down foreign debt and keeping inflation stable. However, with export demand from Europe likely to remain weak for some time, Algeria’s banking sector will have an increasingly important role to play in domestic demand.
It is in this spirit that the IMF in its 2009 consultation described financial sector reform in Algeria as “key” to improving productivity, developing the economy and sustaining non-hydrocarbon growth. In particular, access to loans for small and medium-sized enterprises (SMEs) remains a challenge, with 20 percent of respondents to the Africa Competitiveness Report describing this as currently the most problematic aspect of doing business in Algeria.
Although foreign banks such as BNP Paribas, Société Générale and Citigroup have managed to gain a foothold in the system, state banks still account for approximately 95 percent of Algeria’s total bank assets and loan portfolios. While the government remains committed to prioritizing major state corporations for its growth strategy, the development of SMEs to service both these corporations and the wider domestic economy has been identified as a significant opportunity for further growth.
To truly thrive though, successful enterprises will need access to capital. In the long run, it is likely that once the current financial crisis has abated, the government will look once again towards the privatization of some banks as a means of securing easier access to capital for SMEs.
Sam Inglis is Executive’s Mediterranean correspondent, based in Istanbul
