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Abu Dhabi, UAEThursday 20 September 2018

Algeria’s lacklustre austerity weakens GDP outlook

The country has no clear direction for life outside of oil, creating uncertainty for investors

A traffic jam in Algiers, Algeria. Economic growth is forecast to slow. Anis Belghoul / AP
A traffic jam in Algiers, Algeria. Economic growth is forecast to slow. Anis Belghoul / AP

Algeria’s economy is expected to slow as the commodities crunch tightens and the government rolls back spending.

Fitch’s BMI Research forecasts GDP growth this year to drop 15 per cent to 2.9 per cent, and by as much as 30 per cent next year compared with the four-year annual average of 3.4 per cent.

“Production cuts will weigh more heavily on the hydrocarbons sector, while government’s austerity measures will constrain government and private consumption, as well as public investment, which will have damaging effects over the longer run,” the company said in a report.

Algeria, like other oil-dependent nations, has grappled with the three-year low oil price environment. The Opec member has committed to production cuts of 50,000 barrels per day (bpd), but the lack of economic diversification will weigh on its economy.

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While the government is, in some ways, making an effort to curb spending, it has had a knock-on impact on the non-oil sector’s growth. The IMF said in June that the non-hydrocarbon sector slowed to 2.9 per cent last year as a result of the spending cuts, while inflation increased to 7.7 per cent year-on-year in February.

Algeria is in a difficult position, walking a tightrope to keep social stability despite the necessity to curb spending and diversify its economy.

“The government has backtracked on some cost-cutting plans, boosting pensions for the second year running in June,” BMI said. However, the impact of lower subsidies and higher taxes will combat consumption to 2 per cent this year, compared to the earlier five-year 4.2 per cent average.

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The country’s president, Abdelaziz Bouteflika, replaced key cabinet members in May, bringing on new energy, finance and foreign ministers while also creating a new ministerial role to oversee the renewable energy sector.

This reshuffle meant that many items on the agenda went back to the drawing board, as is the case with the renewable energy sector that has been waiting in the wings to get off the ground. Renewable energy projects could help to decrease domestic hydrocarbon use in the country’s power generation sector, freeing up more oil and gas for export to Europe.

The shake-up was more than anyone expected, said Adel Baba-Aissa, the director for the boutique advisory and project development firm, Renewable Energy Partner (REP). The company has been operating in Algeria’s renewables sector since 2013, but the latest government changes have also signalled REP to revamp its country strategy.

“We came in as a project developer under the previous renewable energy feed-in tariff legislation. Now that’s dead and we needed to revise our expectations and business model,” he said.

REP has started placing more emphasis on advice, tapping its country knowledge, for the growing demand coming from international companies and development financial institutions.

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But for a country that continues to thrive off of its energy sector, clearly defined roles between the energy and renewables ministries need clarification.

Algeria must also revamp its investment regulations in order to appeal to foreign and private companies. The country’s previous method was to provide the majority of funding for projects, but the government does not have the means to continue that practice, Mr Baba-Aissa said. “That’s one of the reform packages that Algeria has been working on: modernising the economic and finance sector to be more open to business,” he said.

“There was a defacto block on any external debt financing, but that’s one of the issues that has to change if the government wants the renewables market to really take off.”

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