EU-Algeria Energy Summit - Challenges and opportunities in Algeria

Algeria is in a tight spot. Last year, a $5bn trade surplus turned into a $14bn deficit. Hydrocarbon revenues account for around 95 per cent of exports and the government needs an oil price of well over $100 to balance its current budget. Domestic consumption continues to rise, eating up around half of total production, and some economists have questioned whether domestic capital markets will be able to fund a budget deficit of the scale and duration predicted. The country faces a triple challenge: it needs to boost energy efficiency, speed-up infrastructure investment and diversify its economy.

That’s the bad news. The good news is that the government appears to be heeding Churchill’s advice never to let a good crisis go to waste. It is being candid with the public about the scale of the challenge and is coming forward with a range of measures, the sum of which could lead to a genuine improvement in the business climate, as even the IMF noted in a recent trip to Africa’s largest country (and Europe’s second-largest supplier of natural gas).Clearly, deficits growing at this rate are unsustainable in the long run but Algeria has a fair bit of wriggle room. External debt is very low, the Bank of Algiers still has over $150bn of reserves and public sector net debt is tiny by European standards. One of the obvious first steps is gradually to reduce the domestic subsidies that make up a large part of public spending.

But the government has to tread very carefully, as the country has experience of making wholesale market reforms in the face of a global oil glut and these years (from 1986 to the early-1990s) are not remembered fondly. But the situation looks different now and the country is in a stronger position to introduce careful reform.

Many suggest that there is now public understanding among Algerians that price rises for various everyday items are inevitable in the medium-term. That’s easier said than done. Nonetheless, the government does seem to have started. First to come in was an “austerity” budget which met with parliamentary opposition and which aims to bear down on certain subsidies and import privileges.

Prices have already started climbing sharply, especially for energy of all sorts. An updated, draft investment code, the details of which have emerged recently, aims to increase the ease with which foreign investors can find partners and raise capital, especially in non-oil and gas sectors like renewable energy, professional services and healthcare.

While extensions to tax incentives for foreign investors look certain, questions remain as to whether tight rules on foreign lending and majority-Algerian ownership of all ventures will be relaxed, but the process is just getting underway and the Prime Minister, Abdelmalek Sellal, has been making positive noises.

Roberto Deplano, Managing Director of NAEWA Advisory, an investment consultancy specialising in the Mediterranean, is upbeat. “The government feels enough pressure to act but not so much to do so in a hurry and at any cost. This is the right moment for Algeria, not in spite of the oil crisis, but thanks to it.”

Rachid Sekak, an economist who played a leading role in the reforms of the 1980s and 90s and who used to head up HSBC in Algeria, is a little more circumspect but agrees with the general prognosis. “The problem is not the price of oil, it’s the economic model of Algeria…but this difficult environment also offers an excellent opportunity for bold moves”.

In a wide-ranging recent paper Sekak sets out four areas where reform could make the biggest difference: 1) incentivising both domestic and foreign investment over current spending, 2) focusing hard on human resources and developing skills, 3) working to bring the large informal economy into the formal so it can get better access to credit and 4) focusing extra help on start-ups and innovation. This last one especially, Sekak believes, will require a more responsive governing philosophy.

This is all set against a backdrop of deepening multilateral ties between the EU and Algeria with a major business forum planned for late May and a recent visit by the EU High Representative to discuss, among other things, heightened cooperation on infrastructure investment and security, as well as revisions to the EU-Algeria Association Agreement which Algeria thinks is too one-sided. If all the reforms go the right way this could be a very interesting few years for Algeria.