Economic studies
Algeria

Algeria

Population 42.6 million
GDP per capita 4,081 US$
D
Country risk assessment
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 1.3 1.4 0.8 -2.0
Inflation (yearly average, %) 5.6 4.3 2.2 3.5
Budget balance (% GDP) -6.6 -6.9 -8.6 -7.9
Current account balance (% GDP) -13.1 -9.6 -12.5 -11.9
Public debt (% GDP) 27.3 38.3 46.1 49.2

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Major oil and gas reserves; significant potential for shale gas development
  • Potential in agriculture, renewable energies and tourism
  • Low external debt

WEAKNESSES

  • Highly dependent on hydrocarbon revenues
  • High youth unemployment rate
  • Overly large public sector
  • Acute political and social crisis triggered in 2019
  • Red tape, financial sector weaknesses and an uncertain business environment

RIsk AssessmenT

Political uncertainty and hydrocarbons are pulling growth down

Stymied by political uncertainty and persistent difficulties in the hydrocarbon sector, growth slowed in 2019. In 2020, it is expected to rebound, but will remain weak. Despite import restrictions, such as the cap on soft wheat purchases, the contribution from foreign trade is expected to continue to be affected by hydrocarbons. With oil prices facing an unfavourable outlook, the gradual decline in oil and gas production due to field depletion and ageing infrastructure coupled with growth in domestic consumption of natural gas are set to continue to affect the future path of export earnings. The adoption of a new hydrocarbon law and the repeal of the law capping foreign shareholdings in Algerian firms at 49% could encourage private investment in the sector, but investors may be hesitant in the face of public resistance to these laws, and the uncertain political climate more generally. In addition, local private sector activity will probably continue to be disrupted by the abrupt changes to business management following anti-corruption investigations. Public investment is set to remain hobbled by limited fiscal leeway, especially as the authorities are likely to focus on social measures in an effort to stem social discontent. While these measures may support consumption, high unemployment and low growth are expected to limit the resultant effects. The impact will likewise be cancelled out if delays in the payment of wages and businesses closures caused by protests continue in 2020.

 

Uncertainty over budget deficit financing

In 2020, the budget deficit is set to remain high. With more than one-third of revenues generated by the hydrocarbon sector, budgetary resources are expected to remain stretched by the sector’s difficulties. Despite tax hikes, including an increase in the bank domiciliation tax, weak growth is expected to have a negative impact on revenues. Any tax increases are also likely to be limited to avoid fuelling social discontent. In addition, despite plans to trim government spending, operating expenses, particularly the public sector wage bill, and social transfers should be preserved at the expense of capital investment spending. The deficit should continue to be mainly financed through domestic resources, but the use of non-standard financing (monetary creation) is expected to slow down in accordance with the 2020 Budget. With negligible external debt (less than 1% of GDP), external financing might be considered “if necessary and on a selective basis”.

 

Foreign exchange reserves in free fall

In 2020, the current account is expected to remain in deficit, owing to the large trade deficit, which may narrow slightly on soft domestic demand and import restrictions. Recent gas discoveries are not expected to reverse the decline in hydrocarbon export revenues in the short term. The surplus in the transfer balance, mainly driven by expatriate remittances, will not offset the larger income and services deficits. The country should continue to finance the deficit by drawing on foreign exchange reserves, which stood at 12 months of imports at the end of 2019 and which will thus continue their almost uninterrupted decline since 2014.

 

Despite elections, social tensions remain

Faced with large-scale protests, which began in February 2019 after he announced his candidacy for a fifth term, President Abdelaziz Bouteflika, who had been in power since 1999, was forced to resign on April 2, 2019, 16 days before the presidential election. Despite Mr Bouteflika’s departure and the army’s far-reaching “Clean Hands” anti-corruption campaign, regular demonstrations (know as the Hirak movement) continued, forcing two postponements of the presidential election. Although rejected by a large majority of protestors, who feel that the political, economic and military personnel remains dominated by personalities from Mr Bouteflika’s four terms in office, the election was finally held on December 12, spurred on by the army and General Ahmed Gaïd Salah, a central player in President Bouteflika’s regime and the transition. Nevertheless, the winner, Abdelmajid Tebboune, Abdelaziz Bouteflika’s Prime minister in 2017, may struggle with a lack of legitimacy among some segments of the population, a perception that may be further increased by the small number of approved candidates - five - and the low turnout (39.9%). As a result, this election looks unlikely to offer a definitive solution to Algeria’s political crisis; political and social tensions are likely to remain high. Widespread poverty, the lack of employment opportunities and the difficult economic context are also likely to fuel discontent. However, it may be that the army and the new government will increase security measures and adopt a less tolerant stance towards the unrest. The death on 23 December 2019 of General Ahmed Gaïd Salah, hitherto considered by the demonstrators as the true leader of the country, and replaced by General Said Chengriha, reinforces the uncertainties in terms of governance.

 

 

 

Last update: February 2020

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