EDA: Declining oil prices pose threat to Algerian economy

EDA: Declining oil prices pose threat to Algerian economy

EXTERNAL DEPENDENCIES ANALYSISIn view of declining oil prices further dependence on the hydrocarbon sector may lead Algeria to face economic and political tremors in the long term. 

One of the first countries to take part in the Arab Spring, massive demonstrations in Algeria failed to oust President Bouteflika’s regime. This year, incumbent President Boutefilka, in power since 1999, won a fourth term with 81.5% of the vote in April.

Despite promises for political and economic reforms, made prior to the elections, macroeconomic indicators show the reality has fallen short. Political stability has helped the Algerian economy perform solidly throughout 2013, but declining oil prices and low consumption growth in Europe, Algeria’s primary energy importer, have weakened the country’s external position.

An OPEC member, Algeria has the second largest oil reserves on the African continent. It is strongly reliant on its hydrocarbon sector which accounts for almost 40% of GDP and 90% of exports.

Europe has traditionally been Algeria’s greatest energy market. This economic interdependence along with reasons of geographical proximity and cultural affinities may well explain the maintenance of strong ties between the former French colony (Algeria) and the EU. Amongst EU countries, Spain, Italy, UK and France are Algeria’s greatest export markets.

Spain is the most important destination for exports of Algerian oil, mineral fuels and inorganic chemicals. This trade relationship is both reciprocal and enduring. Mineral fuels exported to Spain account for 15.7% of Algeria’s total export flows and 13.4% of Spain’s total import flows.

Exports to the UK are also noteworthy. Although relations between the two countries were historically limited, bilateral trade has increased dramatically since 2011, rendering the UK Algeria’s third largest export destination. UK Prime Minister David Cameron’s visit to Algeria in January 2013 further showed intentions to promote economic cooperation.

Economic ties between Algeria and France have traditionally been strong, despite ambiguous sentiment amongst Algerians concerning their former colonizers. Today, France is the second largest supplier of goods to Algeria, and its fourth largest importer. However trade with France, has started to lose momentum as the country recently lost its leading position as Algeria’s main supplier.

In spite of efforts made by French President Francois Hollande to restore ties, increased engagement of emerging countries in African markets has left little room to maneuver. In the case of China, bilateral trade between Algeria and China has increased significantly over the past decade making the country Algeria’s leading supplier – a relationship  of strategic importance for both sides given that Algeria is China’s top trade partner in the Maghreb region.

The recently established ‘Comprehensive strategic partnership’ between the two countries reveals a clear intention towards reinforcement of economic cooperation. Yet, trade balance tilts considerably in favor of China as Algeria’s export capacity is significantly restricted in the hydrocarbon sector. Any efforts made towards the diversification of the economy have not been particularly successful.

In light of the continuing slump in global oil prices, the need for Algeria to invest in the development of competitive and diversified export activities appears more imperative than ever. According to the World Bank, although the country has continued to record current account surpluses, forecast demonstrates a clear downward trend which will reach negative levels from 2015 onwards. Investment potential though is limited due to restrictive laws, corruption and underdevelopment of the private sector.

But opportunities do exist. Several international car manufacturers that look to set up assembly lines in Algeria, the existence of substantial unexplored shale gas resources and plans to develop the renewable energy industry may give a boost to different sectors.

The implementation of structural reforms and policies for the prevention of reversals are crucial for improving the Algerian economy.

The External Dependencies Analysis (EDA) project makes country vulnerabilities stemming from their main trading relations explicit, and shows to what extent these might impact their current and future behaviour. With the EDA, GRI provides a new comprehensive tool for businesses, analysts and investors to grasp dynamics that are key to political risk analysis.

Note: Trade Data comes from GRI’s External Dependency Analysis based on data derived from the International Trade Center.

About Author

Evita Souri

Evita previously worked with the European Commission, dealing with EU external relations as well as with other governmental institutions. Her expertise is in European Union affairs and the former Soviet Union countries. Evita graduated with an MSc European Political Economy from the London School of Economics (LSE). She also holds a 1st - class honours Master's degree in Economics from the Aristotle University of Thessaloniki where she also completed her undergraduate studies in Economic Science.