Algeria will experience frequent, small scale protests and strikes in 2017, driven by economic underperformance. The government’s desire to maintain social stability will inhibit any substantial reform of the country’s costly subsidy system, despite some attempts at fiscal consolidation in the current low oil price environment. There is likely to be a gradual liberalisation of the business environment, although in the near term conditions will remain challenging for investors.
There is an elevated risk of strikes, riots and civil commotion in Algeria over the next 12 months. The standard of living in Algeria has been negatively affected by the prolonged low oil price environment, and the government’s inability to improve the situation by addressing structural economic weaknesses will drive protests.
Civil unrest will primarily be motivated by high youth unemployment rates, poor public service provision and social housing allocations. Whilst protests can become violent and cause business interruption, they are often disorganised, attract fewer than 100 participants and are easily contained by the security forces. For example, in June 2017, protestors in Bouira blocked the RN 8 and RN 18 roads, as they burnt tyres and trees in protest against the non-allocation of social housing.
President Abdelaziz Bouteflika has been in poor health for a number of years, and it is increasingly likely that he will not be willing or able to seek re-election in 2019. As a result, Bouteflika has positioned allies in key positions to ensure policy continuity. This will likely ensure that the government continues to prioritise social stability through the maintenance of most subsidies.
This should limit the emergence of co-ordinated, nationwide protests.
Algeria’s economy will continue to underperform in the medium term, as low global energy prices inhibit economic activity. The government has slowly begun to implement austerity policies in response to reduced energy revenues. Newly appointed Prime Minister Abdelmajid Tebboune stated in May 2017 that his government would focus on fiscal austerity, although it would not freeze housing and food subsidies. As a result, fiscal consolidation will primarily focus on revenue raising measures, including a small hike in diesel and electricity prices, a doubling of tax on telecoms operators and a two percentage point increase in value added tax.
However, the government is also keen to ensure social stability, making it unwilling to substantially adjust fiscal policy and reform the country’s universal subsidies, which account for around one fifth of GDP. For example, in December 2016, a decision to increase electricity prices in southern Algeria was abandoned following demonstrations. As a result, Algeria will experience consistent fiscal deficits in the coming years.
The deficit is forecasted at 9.4% of GDP in 2017, and is expected to average 6.9% over the next five years. Despite this, sovereign credit risks will remain low. Public debt is manageable at 8.7% of GDP, and the government remains able to finance the deficit through substantial foreign exchange reserves, which are forecasted at USD 106 billion in 2017.
The government will make some attempts to liberalise the business environment in 2017, although reforms are likely to be piecemeal and insufficient to substantially raise foreign investment in Algeria. In recent years, Bouteflika has tried to enhance investor confidence through the 2015 Finance Law, which eased a requirement that foreign firms reinvest 100% of tax exemptions in Algeria.
Similarly, the 2016 Investment Law abolished an obligation on investors to demonstrate a foreign exchange surplus throughout the life of the investment, which effectively prevented investors repatriating profits and dividends in full.
Despite these changes, conditions for foreign investors will remain challenging. Algeria will maintain the restrictive 2009 Complementary Finance Law, which requires that new foreign investments in both public and private projects must have 51% Algerian ownership. There is also an elevated risk of contract alterations by state-owned companies, and firms may struggle to have contracts enforced. For example, in 2014 the government cancelled a contract with COJAAL, a Japanese consortium contracted to construct part of the East West Highway, claiming that COJAAL had not met its obligations.
COJAAL attempted to take Algeria to international arbitration to resolve the dispute, although this was rejected by the Algerian government.
* Assuming the counterparty is National Bank of Egypt. Pricing would likely be 1.5% – 2.0% p.a. higher if it is Egyptian Natural Gas Holding Company or Egypt General Petroleum Corporation.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Mongolia, Algeria, Vietnam and Madagascar, all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org
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