Algeria: The risk of destabilizing succession is rising

09 July 2018

The risk of a destabilizing succession is rising in Algeria, whilst terrorism risks will remain elevated. Algeria’s economy will benefit from an uptick in global prices, although government borrowing is forecasted to rise in the medium term. The investment environment will remain challenging for investors, despite piecemeal efforts to attract more foreign investment.

Security Environment

81-year old President Abdelaziz Bouteflika has been in poor health for a number of years, and the risks of a destabilizing transition of power are rising. There is reportedly a lack of consensus among the country’s ruling elites as to who should succeed Bouteflika, raising the likelihood that he will run for a fifth term in 2019. In April 2018, the Secretary General of the ruling Front de Libération Nationale (FLN) indicated that the party would support Bouteflika, if he were to run in the election. However, this will only ensure political stability in the short-term and when Bouteflika does leave office a power struggle may emerge in the ruling elite.

Terrorism risks are elevated in Algeria, although the country’s counter-terrorism operations have disrupted the capabilities of Islamist groups such as al-Qaeda and Islamic State (IS). Such actors likely lack the ability to target commercial assets in major cities, and instead will prioritize small arms attacks on security forces in the country. However, Algeria’s porous borders mean that projects close to the Libyan and Malian borders will face an elevated risk of cross-border attack. Energy facilities will be priority targets, although security has been strengthened at such assets since the January 2016 attack on the Krechba gas facility. Al-Qaeda claimed the rocket attack, although no casualties were reported. Incidents will likely involve roadside improvised explosive devices and small arms.

Trading Environment

Algeria’s economy will be supported by an uptick in global oil prices and growing gas production in the medium term outlook. New gas is expected to come online at the Touat, Reggane North, Tinhert and Timimoun fields in the coming 2 years, driving gas production growth of 3.0% in 2018. Growth in the hydrocarbons sector will also drive demand in the non-oil economy, supporting real GDP growth of 3.5% in 2018. Higher oil and gas revenues will have a positive impact on Algeria’s fiscal and current account positions. The fiscal deficit is forecasted to fall from an estimated 8.0% of GDP in 2017 to 6.7% in 2019. The current account deficit is expected to fall to 5.5% of GDP in 2018, from 11.2% the previous year.

Bouteflika has limited foreign borrowing during his presidency, meaning that external debt has fallen from 63.8% of GDP in 1998 to 3.5% in 2017. However, this figure is likely to rise gradually in the coming years. To date, the government has drawn down on foreign reserves to finance its budget deficits, with reserves falling from USD 195 million in 2014 to USD 97 million in December 2017. This is unsustainable in the long-run and the government is expected to increasingly turn to foreign creditors for support. Despite this, sovereign credit risks will remain manageable, and the government will be willing and able to meet any increased debt obligations.

Investment Environment

Bouteflika has worked to enhance investor confidence in Algeria in response to a period of suppressed global oil prices. For example, the 2015 Finance Law eased a requirement that foreign firms reinvest 100% of tax exemptions in Algeria.

The 2016 Investment Law also abolished an obligation on investors to demonstrate a foreign exchange surplus throughout the life of the investment, which effectively prevented investors repatriating profits in full. However, the investment environment in Algeria remains challenging for foreign firms. Algeria retains the restrictive 2009 Complementary Finance Law, which requires that new foreign investments in both public and private projects must have 51% Algerian ownership. Expropriation is also a risk in Algeria, where the government has the right to acquire businesses below market prices. For example, in 2015 AcelorMittal ceded its stake in ArcelorMittal Algeria, following a dispute over the firm’s alleged failure to meet expected investment expectations.

Algeria: The risk of destabilising succession is rising

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