Algeria

Economic transition or more of the same?

Strengths & weaknesses

Economic overview

Hydrocarbon production props up the economy in the short run

The Algerian economy has already returned to pre-pandemic levels, with GDP per capita surpassing its 2011 peak and the current account reverting into a surplus in 2022 after eight years.

Hydrocarbons represent 96% of total exports and 40% of budget revenues. Under present conditions, the government is unlikely to pursue much-needed structural reforms and reduce a high import bill. Overall, hydrocarbons remain the largest source of hard currency with liquidity buffers replenished in 2022-2023 and international reserves remaining the largest on the continent with around USD70bn at end-2023.

The government is trying to diversify its export basket and signed several agreements with China to increase the production of phosphate and iron ore as well as solar, wind and hydrogen projects with European partners.

The transition to a more sustainable model is challenged by the economic cycle, bilateral relations and emergency measures

In 2023, international reserves recovered for the second year in a row, reaching around 1.5 years of import cover and representing a substantial buffer against external shocks, with foreign debt amounting to less than USD3bn. Financing remains unorthodox, consisting of a mix of funds from the Banque d'Algerie (the central bank) and state-owned banks through debt issuance and deposit drawdowns. If necessary, Algeria can also seek bilateral support from China and Russia.

Rising hydrocarbon production has eased Algeria's fiscal pressure over the last quarters, with the budget deficit estimated at 3% of GDP in 2023, widening to 4-5% of GDP in 2024. Trade surplus accumulated in 2022 was an exception, compared to an average annual deficit of USD15.8bn over 2017-2021. In 1994, with a debt-to-GDP ratio of more than 110%, Algeria had to turn to the International Monetary Fund, after which 13 consecutive years of public debt reduction followed, finally averaging 8.8% between 2008 and 2015. Public debt was on an upward trend between 2015 and 2021 but decreased in the past two years from 63% to 55%, underscoring the importance of investment flows, economic diversification and the reallocation of subsidies as means to further reduce solvency risk.

Recent diplomatic tensions, latent social unrest and the reconfiguration of energy supply chains may increase country risk

Algeria's prospects for government stability have improved since 2019-20, when it experienced weekly nationwide anti-government protests calling for sweeping changes to the political system. Three waves of the Covid-19 pandemic effectively neutralized the Hirak protest movement, which had served as the country's main opposition force for a decade.

The government is trying to open up to investors but significant obstacles remain, including capital controls. In a sign that President Tebboune's administration recognizes that the business environment needs to be liberalized, the government reversed some protectionist policies adopted since 2019. However, the implementation of such policies may pose additional threats. In September 2022, the government issued secondary legislation related to the Investment Law published in July, prescribing that the foreign investor must bear at least 25% of the overall cost of the investment in order to repatriate freely the invested capital and the income derived from it. After Algeria's application for BRICS membership in November 2022, the process has encountered some resistance from both sides and has not materialized yet. Overall, enhanced relationships with Southern European countries are likely to streamline administrative procedures for attracting investment and facilitating trade, including the transferability of funds and custom proceeds.

Bilateral relations and personal ties remain prevalent in setting the business framework, while the government continues its anti-corruption drive. Foreign companies are unlikely to be directly targeted as such actions primarily target individuals close to former President Abdelaziz Bouteflika and his inner circle. However, in June 2022, Algeria decided to suspend its friendship treaty with Spain after the Spanish Prime Minister voiced support for Morocco's Autonomy Plan for the Western Sahara. Following this, the Algerian association of banks ordered its members to freeze operations relating to trade with Spain. The decision was soon reversed but affected trade and investment prospects between the two countries. Transparency of counterparty data is also frequently cited among the causes of reduced credit limits among financial institutions and insurers.