Economy Overview

“The following information is reproduced courtesy of Oxford Business Group(www.oxfordbusinessgroup.com). To purchase a copy of ‘The report: Algeria 2010′ please click here” (link to: http://www.oxfordbusinessgroup.com/shop/country/Algeria )

As a market of 35m people, with a hydrocarbons-driven economy and the strategic role of providing energy to Europe, Algeria has attracted companies from all over the world. It was largely insulated from the global financial crisis of 2008 and one of the first economies to rebound in the second half of 2009, due to the rally in global oil prices. Money from oil and gas has allowed Algeria to leave behind decades of economic hardship. Inflows have financed large-scale public works and vast social programs. The country has also paid off the bulk of its external debt, but over-reliance on energy exports crowds out the non-hydrocarbons sector.

Oil and gas account for 55% of GDP and 98% of export receipts, and structural reforms in recent years have been described by the IMF as “timid”. The way forward is to diversify the economic base. As part of its new five-year plan, the government hopes to create 200,000 new small and medium-sized enterprises (SMEs) by 2014, and a total of 139,441 new companies registered with the National Business Registry (Centre National du Registre du Commerce, CNRC) in 2008, up 4.2% over 2007. Retail was the fastest-growing segment, with 39.8% of new firms, then services, with 34.6%, and public works contractors, with 17.5%.

MACROECONOMIC PERFORMANCE: A World Bank report published in June 2009 ranked Algeria among the four leading nations in Africa in terms of its competitiveness and business environment. It is now part of a group of countries known informally as SANE (South Africa, Algeria, Nigeria and Egypt), which account for roughly two-thirds of the continent’s largest companies and 50 of its largest banks. In 2008 Algeria alone attracted €1.71bn in foreign direct investment (FDI).

The IMF expects non-hydrocarbons growth to reach 9% in 2009 as a result of a bumper grain harvest. The trend will be reinforced by the government’s public investment program, which has financed road construction and hundreds of infrastructure projects. However, the drop in aggregate demand for oil and gas repressed Algeria’s hydrocarbons output, reducing overall GDP growth to 2%. Algeria will post its first budget deficit in a decade, which according to the IMF may reach 8.4% of GDR from the 8.1% of GDP budget surplus in 2008. Meanwhile, official international reserves (OIRs) totaled €107bn at the end of September 2009.

The current account surplus eroded over the year, also due to low demand for oil and gas and the high level of imports. In the first four months of 2009 Algerian exports fell 46.62% to €10.03bn while imports grew by 5.9% to €9.65bn, according to the National Statistics Office (Office National des Statistiques, ONS). Thus the current account balance had a surplus of only €374m by May 2009, compared to €9.67bn in 2008.

“By 2017 we will have a free trade area with the EU. We could see imports grow by 60% while Algerian exports to Europe stagnate. Consumer prices are forecasted to rise by 5.8%. in 2009, driven mainly by food imports. Growth in non-food prices will remain low, at an estimated 1.4%, thanks to the inflation-targeting policies of the central bank.

“Despite a deteriorated international environment, Algeria has continued to post good economic performance. It is characterized by solid non-hydrocarbons growth, control of inflation and reduction of unemployment, which remains high among Algeria’s youth. Thanks to prudent financial policies and comfortable external reserves, fiscal savings have built up and external debt has been kept at a very low level, so macroeconomic performance will remain robust in 2009,” said Joёl Toujas-Bernaté, the head of an IMF mission to Algiers.

The subprime crisis in the US had a devastating impact on many emerging markets. But in the case of Algeria, exposure was limited because around 85% of bank assets are held by state-owned institutions. The high level of OIRs and the managed float of the dinar, the domestic currency, also helped buffer the economy. In addition, the strategy of eliminating external debt was key in stabilizing the balance of payments (BoP). By the end of 2008 external debt had dropped to €3.13bn, down from €15.64bn in 2004. Concerning FDI, opening the country’s market led to net inflows of €1.71bn in 2008, up from €1bn a year earlier.

TRADE LIBERALISATION:

Despite a rocky year and the recent volatility of oil prices, the government will not budge from its pursuit of economic liberalization. With the EU-Algeria Association Pact and the Arab Free Trade Zone (Zone Arabe de Libre Echange, ZALE) now in effect, there is no turning back. The terms of WTO membership will not be revisited either. “Algeria is 100% committed to a market economy. But free markets are not synonymous with the neglect of state-owned enterprises. Those that are successful will continue to underpin the economic system.

There have been many positive changes in the country’s investment framework, but market confidence suffered a blow when five executive decrees were issued in December 2008. Import companies were ordered to open 30% of their capital to Algerian partners, with non-compliant parties set to see their licenses revoked by the CNRC on December 31,2009. Concerns over the BoP and the fact that the authorities see no added value in foreign importing activities were at the root of the debate.

The 30% executive order was finally codified into law in June 2009. Contrary to expectations, it will not be applied retroactively. According to the CNRC, only eight of the 1846 foreign-owned importing companies had complied with the 30% provision by July 2009.

The decree that FDI projects can only be realized with a 51% capital share in the hands of an Algerian partner was codified into law on July 22, 2009. The government passed the Complementary Finance Law (CFL) via Ordinance No 09/01 and it was published in the Official Journal on July 26, replacing a previous ruling from 2001 (Ordinance No 01/03).

“Successful foreign investors in Algeria bring know-how into the domestic economy, transferring skills to the local population and improving product standards with internationally benchmarked quality. Algerian acceptance of such projects is often partially based on their support to reduce the high level of imports as well as to increase the growth opportunities for the labor force and domestic companies.

DOMESTIC BLISS: The CFL dictates that all new investment projects will be screened by a panel of experts at the National Investment Council. Foreign companies will need to prove their project offers a positive foreign exchange balance for the national economy. In addition to the 51% ownership by an Algerian counterpart, all financing for FDI projects will have to be carried out through the domestic banking system.

Security is no longer a major issue for foreign investors. According to the National Investment Promotion Agency (Agence Nationale de Développement de I’lnvestissement, ANDI), companies interested in Algeria have shown more concern for land ownership rights, fiscal incentives and access to credit.

US TRADE: Algeria’s substantial consumer market has drawn new interest from the US. With improved security, American firms have expressed increasing interest in environmental technology, water resources, civil engineering, agribusiness and ICT. Oil and gas, however, account for the bulk of bilateral trade.

“Algeria is emerging from a very difficult period. It is a large country, the main player in the region, and if we open our economy it is not only the tourists that will come,” Safia Kouiret, the research director at ANDI, told OBG. According to the US-Algeria Business Council (USBC), bilateral trade expanded to a record €16.1bn in 2008, most of it in hydrocarbons. Established in 2002 by a group of Fortune 500 companies, the USBC has more than 70 members and includes large oil companies such as ConocoPhillips, as well as up-and-coming Algerian conglomerates such as Cevital.

Algeria offers opportunities to US investors in sectors including foodstuffs, electrical machinery, medical equipment and infrastructure development. To respond to the new interest, the US Embassy in Algiers has appointed a commercial counsellor for the first time in 15 years. The official advice is to commit to Algeria for the long term. “

ITALY: At the International Export Fair in Algiers in June 2008, Italian suppliers of electrical equipment, agriculturaI machinery, construction equipment and food-stuffs had a high profile, with about 80 companies. Half of them were SMEs and attended the fair for the first time. Italy is Algeria’s second-largest commercial partner with bilateral trade at €11.87bn, up €1.42bn from 2007. Contractors brought the total volume of Ital-an exports and services upto€3.17bn in 2008.

Infrastructure specialists such as Astaldi are behind hydroelectric dam projects, highways and railroads. At the CNRC, Italian companies represent 4.35% of registered businesses.

FRANCE: FDI from France was close to €250m in 2008, a 50% increase over 2007. Patrick Cay, a financial advisor at the French Embassy in Algiers, told OBG that the figure confirms France as the leading foreign investor in Algeria’s non-hydrocarbons economy and second overall. after the US. France is also the top foreign employer, with 35,000 direct and 100,000 indirect jobs.

There were 430 French companies in Algeria in April 2009, which accounted for 19.17% of all foreign businesses registered with the CNRC, putting France at the top of that list. Bilateral trade grew to around €9.4bn in 2008, with most French subsidiaries reinvesting an average of 80% of their profits in the domestic economy. Exports to Algeria include industrial machinery, electrical equipment, foodstuffs and cereal grains, Hydrocarbons accounted for 96% of exports to France i 2008.

SPAIN: Spanish exports to Algeria doubled between 2006 and 2008, at the end of which they were valued at €2.11bn. The best performers were industrial machinery, automobiles and intermediate goods such as steel. Algerian hydrocarbons exports to Spain were valued at €6.53bn in 2008. Spain’s FDI in Algeria is increasingly varied because of state-led infra-structure projects. Acciona, FCC, DHL and Befesa are Spanish contractors involved in seven of Algeria’s macro-desalination plants in the north of the country. Abengoa, the Spanish renewable energy firm, is also largely responsible for the first solar energy facility in the south. A total of 136 Spanish firms are registered with the CNRC.

“In the housing and construction segment, Spain increasingly competes with China. However, there are many new infrastructure projects in the pipeline that will give Spanish companies a greater market share in 2010,.

CHINA: In 2008 China exported goods worth €2.91bn to Algeria, while in 2007 alone Chinese exports increased seven times year-on-year (y-o-y). With 10.2% of the market, the country is quickly catching up with second-placed Italy, with 11.1%. Chinese firms are often hired for public works, including housing and transportation infrastructure projects. The CNRC had registered 567 Chinese companies by the end of 2008, accounting for 11.4% of all foreign companies. In 2009 new technical agreements were signed with Chinese consortiums working on the East-West Highway project. Citic-CRCC, the group behind the new €1.9bn airport in Algiers, has expressed interest in a new opera house for the city.

“China will play a long-term role in the development of Algeria’s economy; its successful business track record in the country emphasizes its potential as a strategic business partner for emerging partners, providing an excellent price/quality ratio.

The Chinese presence is hard to miss. High-rise apartment buildings and large tracts of the East-West High-way are being built by Chinese firms with their own crews. In 2008 Citic-CRCC sent 70 Algerian engineers for training in Beijing. Brisk trade with China could prompt Air Algérie to open a new flight connection with Beijing and Shanghai. “The Chinese are increasingly competing with Western firms for contracts in civil engineering and infrastructure.

THE UK: British investment in Algeria tends to be masked by the large investments of British Petroleum (BP). However, a total of 69 British-based firms were granted licenses by the CNRC by the end of 2008, representing 1.38% of all foreign registrants. According to the British Embassy in Algiers, real investment by energy and mining giants such as BR Shell, British Gas and BHP Billiton could surpass €11bn. The Algerian Customs service, however, puts bilateral trade at €2.13bn.

“Algeria has been changing rapidly since 2005, opening its market to the world and opening doors to investors. In four years things have changed completely.

LOGISTICS:

Clearing the port of backlogged cargo was done to prepare for the takeover of management by DP World. The Dubai-based operator will be in charge of one of the four cargo terminals in Algiers.

BUDGET 2010: Total income for the year has been estimated at €32.6bn, a drop of 3% com-pared to 2009. Expenditure is expected to be around €61bn, of which €29.6bn will go to the operating budget and €31.4bn to the capital and investment fund. These numbers represent an increase of 6.6% and 7.4%, respectively, compared to 2009. GDP is expected to grow by 4% economy-wide and by 5.5% in non-energy segments. Inflation for 2010 has been forecasted at 3.5%.

The draft law is characterized by the desire to improve both the culture of free enterprise and the overall quality of life by reducing taxes and facilitating investment in domestic and foreign projects. It is hoped this can be accomplished through an increase in the quality and rigor of management and supervision.

The operating budget of €29.6bn is a 6.6% increase y-o-y. With funds of around €16.7bn, the lion’s share will be allocated to the operation of state services. This includes a total of €9.63bn on salary expenditure while €2.39bn has been set aside for a projected increase in the minimum wage along with new benefits for state officials. Close to €10.5bn will go to the state’s social policy. This is broken down into public expenses such as grants to hospitals, pension payments, subsidies for basic necessities (cereal, milk and water), allowances for students and interns, and compensation of victims of terrorism and national tragedies. Another €1.4bn has been reserved for the fight against unemployment.

The capital budget and investment funds have been forecast at €31.4bn, an increase of 7.4% on 2009. A total of €12bn has been allocated for the construction of roads, railways, ports and administrative infrastructure. Meanwhile, nearly €10.5bn will go to the development of housing, health facilities, water supply, electricity and gas, improvements in urban transportation and the environment. Another €2bn will be spent on education and research facilities, and €2.6bn will be invest-ed in job creation for the country’s youth in areas such as agricultural and industrial investment.

A third pillar of the act concerns the fiscal and legislative environment. A new financial accounting sys-tem will be implemented, and funding will go towards value-added tax exemptions on various agricultural activities and start-ups. Funds will also be diverted into renewable energy development, the film industry and interest rate exemptions on financing of housing.

OUTLOOK: Substantial international reserves and shrewd monetary policy shielded the Algerian economy from the brunt of the global financial crisis, though the drop in oil prices and reduced exports presented some difficulties. A rebound of international markets could help to reactivate the economy in 2010, turning Algeria’s hydrocarbons industries into the nation’s main growth engine once again. The country’s primary trade partners continue to be the US, Italy, France and Spain, although China is quickly catching up. Construction and infrastructure will likely absorb the majority of inward flowing FDI, as a result of the €110bn set aside for public works. Algerian exports abroad continue to remain limited to energy products, a situation that is crowding out opportunities for non-hydrocarbons goods. The government envisions a dense network of export-oriented SMEs as part of the solution, however, it may still be too soon for the private sector to fully take over the leading role in economic locomotion.