Despite global financial turmoil and low oil prices, Algerian authorities are taking advantage of their relatively sheltered position to expedite economic reforms under a renewed presidential mandate.
Following the re-election of President Abdelaziz Bouteflika to a third term, the Algerian government looks set to continue its policy of increased spending, including a $166 billion development fund. While critics have lamented the slow pace of investment reforms during Bouteflika’s first two terms, few investors question that Algeria today is a much safer place to invest than before.
Heralding a stream of investment projects, the development fund, unveiled in December 2008, will be put in motion as the election excitement subsides. Abdelmalek Sellal, Bouteflika’s campaign manager, told local press that the “amount was calculated based on [Algeria’s] foreign exchange reserves… which will allow Algeria to fund upcoming investments with ease.”
The start of Bouteflika’s third mandate has given the government an opportunity to push through some economic reforms that had previously been put on hold as state coffers overflowed with oil revenues. Priorities for the coming months include an emphasis on clarifying the legal framework that regulates foreign ownership.
A stumbling start
In December 2008, Prime Minister Ahmed Ouyahia unveiled a set of guidelines establishing limits on foreign ownership, but vagaries in the text have led many investors to adopt a wait-and-see strategy before proceeding with new projects. Authorities have tried to provide additional guidance on the new ownership regulations, announcing that state-owned companies will have a majority stake in any new partnerships with foreign companies. Similarly, the Ministry of Commerce recently stated that local shareholders should hold at least a 30 percent stake in foreign-owned importers.
Algeria is better positioned than most to push through reforms. While the drop in barrel prices left Algeria’s revenues less robust, an IMF Staff Country Report released last month indicates that the Algerian economy is “insulated from the direct financial contagion” of the global financial crisis. This is in part due to the government’s fiscal and monetary policy, which limited the economy’s exposure to external factors, with the exception of global energy prices. Similarly, Algeria boasts a low rate of external debt, at three percent of gross domestic product, a prohibition on foreign portfolio investment and a highly liquid banking sector that is 90 percent state-owned.
The IMF reports that the central bank has managed foreign currency reserves prudently, with the large portion of these revenues invested in high-grade, fixed-income securities. Inflation also remains among the lowest in the region, which the report attributed to “stable domestic energy prices, high import content of domestic demand, subsidies on wheat and milk.”
Yet, Algeria’s steady performance in the face of the global credit crisis should not imply that economic restructuring is unnecessary. With some 95 percent of total exports and 75-80 percent of budget revenue still coming from hydrocarbons, GDP is highly dependent on volatile energy prices. Further fluctuation in European demand for energy will make development in the non-hydrocarbon sector even more pressing.
The public sector continues to drive the economy, something that will likely continue in the coming year as the development fund’s $166 billion in spending is implemented. The Minister of Energy and Mines, Chakib Khelil, said in March that the national energy company, Sonatrach, will carry out $68 billion of projects over the next five years alone.
Still, despite these hurdles, in the prevailing global economic climate, Algeria is able to provide a refuge for companies with an appetite for long-term investments. Election season’s end will bring clarity to the government’s medium-term plans and empower constructive steps in building a diversified economy.
