Among all North African countries, Algeria continues to have the best excuses for the state of its economy. Under foreign control until 1956, the country faced nationalization schemes for several decades before conflict reemerged within its own borders during a civil war between Islamists and the secular government. Recent years saw a return to at least a semblance of normality, but the obstacles on the macroeconomic level are also apparent across domestic industries, most notably the country’s banking sector. While its troubled past might serve as an excuse for delayed development it does not free Algeria from following its own regulations and standards, however new or developing.
While much of Algeria’s industry remains in the hands of the state, new liberalization and privatization schemes, buoyed by strong macroeconomic growth from increased prices in natural resource commodities, will encourage and necessitate a strong industry and market of financial intermediaries, including banks able to offer several dynamic services, enabling clients and lenders to share information, while further regulations can nurture gains made.
Kamil Sari, a financial expert on Maghreb banking reforms, accuses Algeria of dillydallying with foreign firms entering the country’s domestic market, officially justified as “market reorganization.” While some firms have successfully launched branches and product offerings in Algeria, restrictions remain tight and will affect the ability of many firms to gain a foothold in a potential very lucrative market.
In addition to domestic impediments governing foreign firm entry/expansion in Algeria, a number of problems are occurring with the slew of privatization plans, most obviously seen in the problems associated with the continued delay in privatizing Algeria’s own state-owned bank Credit Populaire d’Algerie (CPA). Opinions and feelings are mixed on the deal and the numerous delays holding up its passage, but it is clear that something more than just hard line money and banking theory is involved.
Presidential lambasting
Other critics have singled out Algerian banks, blaming them for not offering enough capital to business development, sitting on their hands with comfortable, state-run growth, instead of the entrepreneurial impetus inherent to developing a free-market system. Even Algeria’s President Abdelaziz Bouteflika has staunchly cited examples of banks, including Bank of Algeria, the country’s central bank, of keeping more-than-necessary reserves in safe coffers offering excessively high interest rates nearing eight percent.
While interest rates have been pushed down, bank complacency has been a source of discontent for business leaders looking to finance expansion plans or new endeavors while the government is looking to develop stable, market-based industries in diverse fields with a slew of privatizations set.
And even though banking is just one sector being liberalized and privatized, Algerian banks will be the key to growth for privatized companies in other financial and service industries. It is for this reason that the Algerian president railed against lazy banks in the past, noting that “since 1999, one hears talk of banking reforms” but that all the talk is really about the mismanagement of such reforms. In 2006 he had already stated that “delay is no longer acceptable in this sector,” and emphasized the necessity to make capital grow through investment and reinvestment, duties of financial intermediaries, whether held by the government or privately run.
Unpopular plans for a popular deal
CPA’s stalled privatization is the sine qua non example of the challenges remaining for Algerian bankers, but shares many of the characteristics harming all of North Africa. The $1.5 billion deal was stalled in November 2007 with the government citing subprime concerns. Watchers hold that it the reason was nervousness by those involved but press reports affirm the steadfastness of the deal partners, which include such market giants as Spain’s Banco Santander, America’s Citigroup, France’s Banque Populaire Group, BNP Paribas and Societe Generale, all of whom have established presences in other North African states and whose earnings are buoyed by operations in diverse developed and developing markets.
However stable these firms may be internationally, some may lose the sales momentum if there are further postponements. As it is, CPA’s privatization is unlikely to take place before a presidential election in 2009. Lamri Haltalli, representative of the British Arab Commerce Bank in Algeria, noticed that if indeed the subprime crisis was the reason for stalling the process, further delays are expected as global financial markets continue to be affected by the crisis, its effects continuing to turn up on the balance sheets of banks ever since the warnings occurred in 2006. Algeria’s Minister Delegate for Financial Reform Fatiha Mentari maintained that after July 2008 existing bids will be invalid, leading to a fresh launching of the privatization process which first began in 2005. It is unlikely that firms will wait much longer for the process to truly begin.
Yet Algeria’s despondency with the CPA privatization is not holding up continued progress in banking privatization, although the CPA deal does not bode well in the business news feed. Algiers is also pressing ahead with other privatizations, opening negotiations to sell off a 30% stake in Banque de Développement Locale (BDL). CEO of Citigroup Algeria Kamal Driss noted that Algeria’s high bar for the CPA deal, screening only those with AAA credit ratings and having four hundred branches in one country will not apply as criteria for the BDL sale, “so smaller regional banks will have much more opportunity to show interests.” It will be interesting to see how the BDL privatization works and if it will beat CPA to the punch.
Finding a structure and sticking to it will inevitably take up time before it can be used to amend procedural policy. All decisions in the country pass through several committees, requiring one’s approval before moving to the next committee, delaying decisions by months in some cases.
Market entry from foreign banks
Europe is not the only foreign partner. The Algerian Gulf Bank, owned by KIPCO Group of Kuwait and United Gulf Bank, recently entered the coastal governorate of Oran. Since 2005, when the firm began in-country operations, AGB has aimed high, setting out to establish twenty branches in Algeria before the end of 2008. In 2006, AGB recorded $4.5 million in profits, which by 2007 had grown to $7.8 million. The path of organically growing a bank in Algeria might take root if the privatization path continues to see delays. The relatively low competition and ease with which foreign firms can introduce efficiency might well make for further moves of this sort instead of large multinationals taking the privatization route.
AGB is not alone in developing organic business in Algeria. Al Salam Bank acquired a license to launch Islamic banking services in Algeria, after paying up capital of $100 million. The wide range of Islamic finance products offered will appeal to a strong segment of the population who, similar to Moroccans, opt for sharia-compliant products from the underlying idea of Islamic finance and financing structure. For Al Salam’s Deputy Head of the Founder’s Committee Hussein Mohammed Al Meeza, “Algeria is pursuing a very aggressive role in modernizing the economy and supports the initiatives of both the private sector and foreign investors.”
Putting pillars in place
Encouraging further market entry by private firms is necessary to restructure the banking dynamics in Algeria. Several ideas toward structural improvements are offered by the International Monetary Fund’s (IMF) Juls Erik J. Vrijer, a division chief of the IMF, who explained the necessary ingredients for relaxing the public-private banking partnership. The first is ending the practice of public banks to finance loss-making public enterprises followed by enhancing transparency, intensifying efforts to strengthen banking supervision, and formulating privatization action plan, which, ironically, Algeria attempted to follow in bringing in partners with know-how into a large part of the market.
These policies, as outlined by the IMF, should increase the proper functioning of banks and the efficacy they offer. With a public set of banks dominating aggregate share of assets and considerable amounts of non-performing loans to public companies, reforms are needed now.
Enacting a series of regulations and sticking to them is perhaps the only way Algeria can firmly establish the structure necessary to wean public banks from state funds. A few measures, like refusing to recapitalize failing banks could force managers to adopt more stringent credit policies and a firm system for regaining receivables.
An IMF Financial System Stability Assessment notes that “because of hydrocarbon funded state support to borrowers and lenders alike, the financial system appears stable, although this kind of stability has been costly for taxpayers. However the way this ‘stability’ is achieved distorts right pricing and governance and leads to unsound banking.” In the period 1991-2002, an average of 4% of GDP has been spent on repeated recapitalizations, making banking and financial stability a “hostage to hydrocarbon-induced liquidity and credit cycles.” With a volatility ranking second among other petro-states such as Nigeria, Gabon, Venezuela, Ecuador, and Indonesia, Algerian stability is something of a fairy tale.
Further international support is aimed at properly valuating banking operations to “reveal intrinsic value to current and prospective shareholders” before privatizations. What makes matters worse is that half of public reports on banks and their operations are filled with unavailable details, doubtlessly because public banks are ill-incentivized to keep one solid set of accurate records.
According to data assembled by the Financial Standards Foundation, Algeria scored a low 9.17 out of 100 in its Standards Compliance Index. For Algerian banking, there was insufficient data to rate the state’s compliance level, but on the categories data, monetary, insolvency, accounting, and auditing standards – some of the most important to ensure a smooth functioning economy if not a strong banking climate, the country was coded as to have no compliance. Subscribing to a general data dissemination system would prove wise, but the Financial Standards Foundation noted the poor progress of the state in moving forward with important reforms as “Algeria not only does not subscribe to the IMF’s Special Data Dissemination Standard, but is deteriorating in its statistics reporting.”
Inability to tighten operations and increase supervision and reporting will keep domestic Algerian banks shunned on international financial markets, maintaining the the government as the continued patron of Algerian banking, rather than international credit markets and overseas lending lines, both of which are important for a sector focused on growth and stability.
As it is, data presented by the Bank of Algeria is outdated by eight months and lists only the most essential variables in the context of a limited timeframe, rather than a full display of year-to-year figures. What little data is available shows a near stagnation of many economic indicators, but with a horizon of only one year, it is hard for investors or bankers to properly analyze monetary policy and Algeria’s economic situation.
A weak governmental will to move forward with privatizations, coupled with weak internal standards, do not make Algeria’s current banking situation one of particular strength. However, the system’s weaknesses coupled with a low market penetration by international banks make the country a target for much improvement down the line. In the next year, Algeria will demonstrate if it has the will to privatize properly, welcome foreign firms, and enforce stricter standards as part of its continued drive toward the global trading order.
If the country finds itself with more efficient banking and better access to credit for the general population, then Algeria need not worry so much about its development situation as entrepreneurs will take root within the possibilities and constraints of the market to grow new businesses within new industries unrelated to the country’s hydrocarbons sector, which currently accounts for 97% of GDP.
