MENA Country Report - Algeria

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02 7 2015

Algeria’s current account deficit is forecast to increase to more than 11% of GDP in 2015 as oil revenues decline and imports become more expensive due to a weaker dinar exchange rate.

Middle East and North Africa economies

Atradius STAR Political Risk Rating*:

Algeria: 6 (Moderate-High Risk) - Positive

Egypt: 6 (Moderate-High Risk) - Negative

Jordan: 5 (Moderate Risk) - Negative

Kuwait: 3 (Moderate-Low Risk) - Stable

Morocco: 5 (Moderate Risk) - Positive

Saudi Arabia: 3 (Moderate-Low Risk) - Negative

Tunisia: 5 (Moderate Risk) - Negative

United Arab Emirates: 3 (Moderate-Low Risk) - Positive

 

* The STAR rating runs on a scale from 1 to 10, where 1 represents the lowest risk and 10 the highest risk.

The 10 rating steps are aggregated into five broad categories to facilitate their interpretation in terms of credit quality. Starting from the most benign part of the quality spectrum, these categories range from ‘Low Risk’, ‘Moderate-Low Risk’, ‘Moderate Risk’, ‘Moderate-High Risk’ to ‘High Risk’, with a separate grade reserved for ‘Very High Risk.’

In addition to the 10-point scale, rating modifiers are associated with each scale step: ‘Positive’, ‘Stable’, and ‘Negative’. These rating modifiers allow further granularity and differentiate more finely between countries in terms of risk.

 

For further information about the Atradius STAR rating, please click here.

 

Algeria

Political situation

Head of state: President Abdelaziz Bouteflika (since April 1999)

Form of government: Democratically elected government, but military has strong political influence.

Population: 38.7 million (est.)

Currently stable situation, but risks remain

In Algeria, political power rests mainly with President Bouteflika, who is widely  credited with restoring peace to the country after a year-long civil war between the government and militant Islamists in the 1990s, having won overwhelming endorsement for a reconciliation plan in 2005.

 

President Bouteflika is now in his late seventies and not in particularly good health and it remains uncertain whether he will serve his whole term until 2019. There is no obvious successor at hand and it cannot be ruled out that tensions within the political elite could increase if Bouteflika would unexpectedly step down.

 

Currently the internal security situation is still stable, but the risk of terrorist attacks has increased due to political turmoil in neighbouring Libya and Mali. Endemic ‘cronyism’, the high unemployment rate and a lack of affordable housing could fuel social unrest and lead to increasing support for militant Islam, especially among younger people. While the government tries to diversify the economy, success has been limited so far. The government is challenged with creating enough jobs to reduce the very high youth unemployment.

 

Economic situation

Government budget hit by lower oil price

Algeria’s economy is underpinned by the oil and gas sector, which accounts for more than 95% of export revenues. GDP growth is expected to slow down modestly to 2.6% in 2015, followed by 3.1% in 2016. Given its dependency on oil exports, the currently lower oil price will have a negative impact on the economy; mainly on government budget and external finances. In 2015 the budget deficit is forecast to increase to 10.0% of GDP, as the administration has not yet taken measures to curb spending: investments in infrastructure and social spending on wages and subsidies remain high to prevent social unrest.

 

That said, running a deficit for a few more years should be manageable as government debt is very low (approx. 11% of GDP in 2014) and foreign debt amounts to just around 2% of GDP. Algeria would also be able to sustain a longer period of lower oil prices due to its large foreign reserves, which amounted to USD 179 billion at the end of 2014. In 2015 and 2016 those reserves are expected to decline, but remain sizeable. If the oil price remains subdued for a longer term, the Algerian government would be forced to reduce some of its spending.

 

The economy needs to diversify further

The current account deficit is forecast to increase to more than 11% of GDP in 2015 as oil revenues decline and imports become more expensive due to a weaker dinar exchange rate. However, expectations of a rebound in the oil price in the future and new gas production coming on stream, a reduction in the deficit is forecast for the coming years. Imports are also expected to increase due to higher capital imports related to the development of gas projects and ambitious public investment programmes.

 

Algeria is trying to move towards a market economy but, because of its massive oil and gas reserves, its socialist history and many years of civil war, the government still exercises tight control over the economy (it is estimated that 90% of Algeria’s GDP is still controlled by the state). The economy is still too dependent on the oil sector and needs to diversify further. Growth in other sectors has been insufficient to create new jobs so far. Government intervention, an underperforming banking sector, red tape and corruption still hamper foreign investment and private enterprise initiatives.

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