Like its energy-rich neighbours, Algeria’s efforts to diversify its economy have been stunted. Sofia Lotto Persio reports.
It had been another turbulent year for OPEC when, in September, Algeria took the reins and hosted a meeting for member nations in its capital Algiers. It was there that a production cap was finally agreed, a long-awaited breakthrough in the effort to stabilise the price of oil.
Based on the 2017 state budget, around US$50 per barrel is the oil price Algeria needs to ensure stability. The budget, approved in October, is one designed to steady Algeria’s finances. While exact details of the budget had not been released at the time of writing, it should see a 14% cut in government spending, the introduction of new taxes and a 7% increase in value added tax (VAT).
The most significant measure would allow foreign investors to buy controlling stakes in state banks, revising a law that requires the state to retain 51% of shares in partnerships with foreign firms. This would mean a seismic change in a country whose economy has, until now, relied predominantly on state control and oil export revenues.
An oil-dependent economy
Oil and gas accounts for 95% of Algeria’s export revenues and 60% of the state budget. Until the fall in commodity prices began in 2014, Algeria was awash with liquidity – so much so that not only did it pay back its loans to the International Monetary Fund (IMF) in 2007, it actually started lending money to the organisation too.
“Until recently, financing was not an issue for Algeria. With the decrease in the price of oil, the situation is becoming more difficult,” says Rachid Sekak, a consultant and the former CEO of HSBC in Algeria. “The country will have to diversify from hydrocarbons, because it is too dependent on their price and this is not sustainable,” he tells GTR.
The fall in commodity prices has forced the government to review its spending. Infrastructure projects have been delayed and economic diversification has slowly become not only desirable, but necessary. “They are very keen to diversify the economy; they know they have to move away from oil and gas,” says Lady Olga Maitland, chairman of the Algeria British Business Council.
Oil and gas will remain an important asset, even at a lower price. “They need to produce more to compensate for the low prices, hence the reduction in revenues,” says Khaled Mamour, UK representative for the Algerian Forum de Chefs d’Entreprise – an organisation promoting the interests of local entrepreneurs – and business development director at energy consultancy Amec Foster Wheeler.
He says the sector needs investment in new field exploration, to create partnerships and share costs and risks. “They already have reservoirs, but they need to replenish them and they need new discoveries. They need to explore more,” he says.
Recent news concerning Sonatrach, the state-owned petroleum company, suggests it is moving in that direction, having signed a memorandum of understanding with Pertamina, the Indonesian state-owned oil and gas company, to join forces in increasing production. Additionally, the Russian energy minister Alexander Novak announced in September that the two countries are co-operating on energy.
The diversification imperative
One of Sonatrach’s latest deals is evidence that energy diversification is possible: the company has started working with Italian oil and gas giant Eni on the implementation of renewable energy projects in Algeria. The first project will be the construction of a 10MW photovoltaic plant, where the two companies aim to start activities before the end of 2016.
Eni’s CEO, Claudio Descalzi, emphasises the significance of the deal: “In the early 1970s, Eni was the first foreign company to sign an agreement with the Algerian state, for the construction of the Transmed gas pipeline, and, in 1987, the first oil and gas company to sign an upstream contract in Algeria. Today Eni is the first oil and gas company to reach a strategic agreement in the field of solar energy in Algeria, a country with an important potential.”
Algeria has some ambitious targets for renewables, aiming to create 22GW of clean energy capacity by 2035. This includes wind energy, but it is solar power that offers the greatest opportunities.
Gille Bonafi, a consultant at the UN’s Intergovernmental Committee of Experts, says that Algeria has “an extraordinary potential” that could see it becoming a top exporter of solar-based power to Europe and Africa.
Another area which the government is targeting for diversification is agribusiness, as the country is dependent on food imports to meet domestic demand. In 2014, the government announced plans to spend AD300bn (roughly €2.8bn) each year on agriculture as part of the public investment programme to 2019.
The parched Algerian land requires increased irrigation, use of fertilisers and new farming techniques. This, too, is an attractive area for foreign investors. Last year, the American International Agricultural Group and the Groupe Lacheb signed a US$100mn joint venture agreement to provide the advanced agricultural technologies needed to integrate US production models in Algeria.
But diversification will take more than just investment. Speaking at a briefing on Algeria organised by Menas Associates in September, Jeremy Keenan, a professor at the School of Oriental and African Studies (SOAS) in London and a recognised expert on the Sahara-Sahel region and Algeria, said: “Algeria does not need cash, they need more than that, something more sophisticated. They want partnerships. This reduces the risk,” he said.
Banking sector limitations
Algeria’s financial environment needs improvement. “Anything that will lead to import substitution is good for the country and an opportunity for investors. But for sure, Algeria needs to change the business climate to generate investment from local and international investors. The financial sector in Algeria is almost non-existent,” says Sekak.
Algeria ranks at the lower end of the World Bank’s Doing Business ranking, even with respect to the Mena region. Banks operate under strict regulations, the local stock market is scarcely populated and credit card use is very limited. Foreign banks in the country are not allowed to bank the local population and can only offer corporate services, one of them being trade finance.
According to Sekak, trade finance has been a lucrative business for banks in the country. “Trade finance was some kind of free lunch because all imports had to be financed by documentary trade,” he tells GTR. But trade finance too has been affected by the fall in oil prices and banks will need to look for alternative revenues. “They need to diversify out of trade finance and manage the liquidity concerns,” he advises.
In its latest annual report on the country, the Oxford Business Group expects Islamic banking to grow despite the lack of appropriate legal framework. Several banks have launched their own shariah-compliant products in the past year, and according to the study, while about half of Islamic bank Al Baraka’s deposits in Algeria come from retail clients, demand is also strong from corporate customers, particularly SMEs.
Algeria’s hesitation in relaxing banking laws and rules on foreign investment is understandable, considering the change that more financial independence would represent for an economy that has been tightly controlled. “They will get there, they are quite sincere about moving on, but it is just very slow,” says Maitland.
Whether the government will be successful in achieving the targets it has set itself to diversify the economy remains to be seen, particularly as lower oil and gas revenues could make it difficult to direct spending towards that goal, and infighting is delaying key decisions on the foreign investment rule.
Keenan claims the diversification policy is being implemented, but in the worst possible conditions, as the state of the economy requires the imposition of austerity measures to rein in government spending. “This is tough medicine,” he says, adding that “the fear of social unrest is real”.
But Keenan concedes there are also reasons to remain optimistic about the country’s prospects of stability. “The sentiment is moving in the right direction, and there is huge international pressure on the government,” he says.
President Abdelaziz Bouteflika has led the country since 1999, facilitating the process of national reconciliation after the civil war that pitted government against Islamists in the 1990s and is estimated to have killed up to 200,000 people. He was most recently re-elected for a fourth term in 2014, although the voter turnout was only 51.7% and he lost almost 5 million votes in comparison to the 2009 election.
Bouteflika is almost 80 years old. He suffered a stroke in 2013, did not personally campaign and turned up to vote in a wheelchair. Rumours about his ailing health concern analysts, who anticipate a political struggle for his succession.
Yet, for those who deal with Algeria on a regular basis, the country’s experience of the civil war will prevent further infighting. “They have no appetite to return to a civil war. The system around the presidency is very carefully structured. In the short term, it will be managed. They have a great fear of instability,” says Maitland.
Sekak agrees: “Instability is not yet on the table. The country is still quite rich, but the money will have to go to the poor and only to the poor. If that is the case
I don’t see any social unrest in the next five years.”
Despite sharing a border with war-torn Libya, the possibility that the conflict could spill over to Algeria seems remote. A Menas Associate bulletin on the country says the risk of IS fighters arriving in the country is low: “We do not think these IS elements will make their way towards the Algerian border.”
Rumours about political instability are, according to Mamour, exaggerated. “There is a deficit of communication and information and because of that it fuels all sorts of rumours,” he tells GTR.
According to him, what can be trusted is that, slowly but surely, the reforms will happen. “Changes are happening and they make sense,” he adds.
While the political processes involved in reforming the country have been slow, those who best know the business environment are all in agreement: Algeria offers huge opportunities for those who are willing to commit for the long term.
According to Keenan, in a decade the Maghreb may become one of the few major growth regions in the world. “The growth potential for the region is absolutely staggering,” he said in his speech.
He highlighted the fact that while intra-regional trade is still pretty minimal, especially between Morocco and Algeria, there have been signs of recent progress. This would add to the manufacturing and tourism potential of the country and region. What needs to happen, he said, is a cultural and regime change: “Turning Algeria around could take 10 years. The timeframe depends on Bouteflika’s departure.”
Maitland seems positive about Algeria’s prospects. “Algeria has been overlooked; it is time to make amends. It has made a lot of progress. Even today, with the low oil price, it is interesting to see how the private sector has really developed and moved on,” she says.
But she warns that patience is of the essence, as those who go into the country cannot expect quick returns. “There are companies who want to go in, get an incredible amount of support, and then they go on retreat because there are investors who say they want results now, they do not want to wait five years,” she says.
Mamour also shares the optimism and invites people interested in the country’s opportunities to go see it for themselves: “Take time to go there and know the people and the opportunities will be huge.”
The spread of corruption in Algeria is a key issue in the economic crisis affecting the country – even more so than the fall in the oil price, according to some. “That crisis was really self-made as a result of the regime insisting on maintaining a rentier economy and corruption,” said professor Jeremy Keenan, of the School of Oriental and African Studies (SOAS) in London.
In Transparency International’s 2015 Corruption Perception Index, Algeria was ranked right in the middle: 88th out of 167 countries, a position shared with Indonesia and Egypt.
The state-owned oil company Sonatrach has been involved in lawsuits and corruption scandals. In February, an Algerian court jailed six former Sonatrach employees, including a former vice-president and an ex-state bank chief, in a corruption case involving equipment supplies.
As part of the same trial, Saipem Contracting Algérie, part of Italy’s Saipem group, was fined €34,000 for inflating prices on a gas pipeline contract and “taking advantage of the authority or influence of [its] representatives”. The fine related to a bid procedure for a US$580mn deal struck with Sonatrach in 2009.
In July, Total and Repsol made an arbitration referral against Sonatrach over the introduction of a “tax on exceptional profits”.
President Abdelaziz Bouteflika appointed a national board for the prevention of, and fight against, corruption in September, but it is unclear yet whether the body will be effective in denouncing and preventing corruption at all levels of society.