(BNP Paribas Team)
The economy of Algeria was already in a precarious position in 2020 when it had to cope with the double shock of the Covid-19 pandemic and lower hydrocarbon prices. Since then, the situation has improved thanks to the rise in global oil prices and strong demand for gas in Europe. For the first time since 2014, the country should be able to post current account surpluses in 2022-2023, and then accumulate FX reserves. The risk of a balance of payments crisis in the short term is receding. But macroeconomic stability remains fragile as prospects for recovery are modest and public finances are structurally in deficit. The implementation of reforms is a priority to prevent economic troubles in the event of a new oil shock.
After several years of low economic growth and macroeconomic imbalances (budgetary and current account deficits, inflation partly due to monetary factors), the outlook improves somewhat. The country benefits from high global oil prices and the strong demand for gas in Europe. Algeria is effectively seen as an obvious alternative to Europe’s waning dependence on Russian supply of fossil fuels thanks to its proximity to the continent and its vast untapped reserves. Hydrocarbon exports (which account for almost the totality of the country’s exports) are forecasted to reach more than USD50bn over the next two years, up from USD32bn in 2021 and just USD20bn in 2020 (chart 1). The last time oil & gas exports reached such a high level was in 2014. Fiscal pressure will also ease since hydrocarbon receipts account for more than 40% of government revenues. However, Algeria is expected to perform modestly compared with other hydrocarbon producers in the MENA region. Above all, the IMF still sees a bearish MLT outlook, underlining once again the necessity to launch structural reforms. But the ease in macroeconomic pressure could make them less urgent to implement.
A modest economic rebound in the short term
The growth outlook in 2022-2023 has been revised upward to take into account the planned rise in government expenditures (especially public investment) and a rebound in energy investment. Growth is now expected to be 3.4% in 2022 and 2.5% in 2023 against initial forecasts of 2.5% and 2% respectively. The economic expansion should slightly exceed the pre-Covid growth (+2.1% on average between 2015 and 2019). But this would remain below the growth rate of other hydrocarbon producers in the MENA region expected to be 5.4% on average in 2022 and 3% in 2023 (chart 2). Even on the non-hydrocarbon side, Algeria’s performance would be modest compared with its regional peers.
A weakened economy
The economy was in a poor position to cope with the double shocks of the pandemic and the slump in global oil prices in 2020. Low economic growth in 2017-19 caused real GDP per capita in PPP to return to its 2014 level. Since 2021, the recovery has been incomplete as it is driven mainly by the marked rise in the hydrocarbon GDP (+9%). Outside the hydrocarbon sector, growth reached 2.4% in 2021 after the 3.9% recession in 2020. According to the IMF, the unemployment rate stood at 13.4% in 2021, down from the peak of 14.7% reached in 2020 but still two points higher than its 2019 level. Strong inflationary pressures (see below) and the difficult situation on the labour market will inevitably weigh on households’ consumption (48% of GDP in 2020). Credit growth to the private sector is still subdued at 3% on average since the beginning of 2022, i.e. below non-food inflation (chart 3), despite accommodative measures put in place by the central bank. Unlike several countries in the world, Algeria has decided to keep the key policy rate at 3% after having cut it three times during the pandemic (from 3.75%). However, in a context of weak demand for credit, banks are also reluctant to lend due to the broad deterioration of their balance sheet and crowding out effect due to massive Treasury financing needs. Moreover, the gross investment rate has fallen by more than 10 points over the past 5 years (chart 4). At 37.3% in 2021, it even reached a level not seen since 2008. The fall includes government and non-government investment. In absence of investment, the knock-on effects of the expansionist fiscal policy are now weak.