Algeria’s finance sector breathes life into the economy

Algeria is facing a major economic challenge due to the fall in petrol prices in the last two years. Painful economic and social adjustments lie ahead as forecasts expect inflation to reach 4 percent. The Government is committed to breaking away from the oil-based economy over the next decade.

“The Government has taken a proactive approach to preserving macroeconomic balances,” said Hadji Baba Ammi, minister of finance.

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Hadji Baba Ammi, Minister of Finance

“Thanks to these efforts, and as a result of high levels of public savings, sound currency reserves and very low internal and external debt, the Algerian economy has proved resilient.” Baba Ammi is confident, but realistic, stating that “controlling public spending, particularly operating expenditure, calls for a review of current subsidy arrangements.”

In Algeria, social welfare spending amounts to more than 25 percent of the state’s budget, over 10 percent of GDP on average. The state’s policy influences the price of mainstream consumer products and supports access to housing, education, pensions and health care. State intervention is widespread and includes additional measures not accounted for in the budget. These cover fiscal advantages allowed by the state, land sales to deliver social housing programs and energy subsidies.

“These support measures amount to almost 20 percent of GDP and are focused on energy products which account for two-thirds of the total amount spent on indirect transfers,” said the finance minister.

Better targeted subsidies

Diminishing budgetary resources have pushed public officials to develop several measures in the 2017 budget that will target low-income groups to reduce public spending to a manageable level. The total amount of direct subsidies included in the state budget is rising, but its share of GDP dropped from 10.3 percent in 2010 to 9.5 percent in 2013. The aim is to bring it down below 9 percent by 2017, Baba Ammi said.

In 2015, energy subsidies amounted to 14 percent of GDP; in 2014 state support reached $15.568 billion. Domestic consumption of fuel has continued to increase by 6 percent per year between 2010 and 2015.

The 2016 budget introduced a review of indirect fiscal measures related to fuels, electricity and gas. Taxes on household consumption increased by 45 percent for gas and 35 percent for electricity. In 2016 prices rose by 37 percent for gas and oil and 36 percent on average for petrol compared to 2015. “These adjustments to energy prices will continue progressively,” Baba Ammi said.

Optimizing resources and controlling spending

The finance minister’s approach is “controlling operating expenditure, reducing imports and improving the performance of public investment schemes.”

The 2017 budget’s operating expenditure is estimated at $45.91 billion and capped at $68.832 billion. In 2016, the total was $70 billion. With regard to public investment, the priority is to complete projects already underway, within budget and time, and commercial projects funded by the private sector or through public-private partnership outside the budget’s balance sheet. This should translate into an 11 percent increase in non-fuel related revenues.

The role of the Bank of Algeria

Financing the public deficit for 2016 will be guaranteed by the country’s revenue regulation fund and through national debt using treasury bonds. According to Mohamed Loukal, the governor of the Bank of Algeria, this approach has yielded $5 billion. It was aimed at “mobilizing available resources tucked away in drawers.”

“With regard to the balance of payments, the aim is to reduce the current account deficit by reducing and better managing imports whilst supporting exports,” said Loukal, who  promises to launch “ambitious reforms” to enable and support exports other than fossil fuels by extending the period for currency repatriation—currently deemed too short for exporters—and by creating a market for currencies to “allow exporters to control costs and protect imports of raw materials against a potential depreciation of the dinar.”

Mohamed_Loukal

Mohamed Loukal, Governor, Bank of Algeria

Loukal urges for relaxation in currency control and promises measures to improve market operation. The dinar is stable and the Bank of Algeria expects this trend to continue. The 2017 budget projects an exchange rate of 108 dinar against the dollar.

“The dinar has depreciated against the American currency. This flexibility has allowed the exchange rate to act as a shock absorber and to limit the impact of external shocks on the balance of payments and public finances.” According to Loukal, the Bank of Algeria will remain a lender of last resort and will ensure the necessary resources are available to ensure the financial health of the economy.

The banking sector in Algeria is dominated by six state banks and includes 14 private banks with foreign capital. The main challenge now for all Algerian banks is to help and support the diversification of the national economy. This will require business creation and development. Ninety percent of the Local Development Bank’s (BDL) portfolio is made of private-sector Algerian SMEs.

“We are helping businesses secure the imports needed to enable production growth. In 2016 the prospects for this bank were promising, on June 30, its turnover reached $160 million and profit already equaled that achieved in the previous year—$70 million. The BDL’s 2015 business plan clearly sets out the bank’s objectives and strategy to 2020.

Mohamed_Krim

Mohamed Krim, CEO, BDL

“In 2020, the BDL’s position will have improved on today, moving to second place or possibly becoming the leader in the financial and banking sector in Algeria,” said chief executive Mohamed Krim. He feels that it is essential to diversify financial instruments beyond the banking system and to stimulate other levers in the financial market as well as alternative financial products.

Insurance, a growth sector

The Algerian market is dominated by the public sector (almost 66 percent of the market). In 2015, total premiums amounted to $1.279 million, compared to $1.255 million in 2014, a 2 percent increase. However, the rate of growth is the lowest recorded by the insurance sector in the last 10 years, reflecting the country’s current economic context. The sector represents around 0.7 percent of GDP.

The insurance market’s outlook report shows total production of $367 million for the first quarter in 2016, a 7 percent year-on-year increase compared to 2015. It is a market with high growth potential but still under-represented given the size of the country’s population.

Growth has been strong anyway as illustrated by Alliance Assurances, the first private company floated on the Algiers Stock Exchange since 2011. It ranked second among private operators after only three years in operation and has remained there since at a 4 percent market share, 430 employees, five branches and a portfolio of 400,000 customers.

Hassan_Khelifa

Hassen Khelifati, CEO, Alliance

“We are a young and flexible company, responsive to our clients’ needs; we have a technological lead and every year we bring new products that match the needs of businesses and support their development,” said chief executive Hassane Khelifati. Alliance Assurances offers several products to businesses: “We have a re-insurance system which links us to international reinsurers. For businesses, we provide expert advice on their professional and operational cover.”

Khelifati is looking forward to the implementation of the reforms currently being considered by the finance ministry, particularly to put an end to dumping practices that threaten the sector’s solvency if left unchallenged.

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Nacer Saïs, CEO, SAA

“Monopolies tend to produce harmful behaviors. We still retain this attitude, even if efforts have been made to open the market over the last 20 years. With the market opening, only the best will be able to survive in the future,” said Nacer Sais, chief executive of Algerian Insurance Society (SAA). SAA is viewed as the engine of the insurance sector in Algeria with a market share of 24 percent.

In 2015, it recorded a turnover of $270 million and is the insurance sector’s leader in Algeria; it has recorded double-digit growth rates during the past 15 years. Like many, it has benefited from the boom in the car market. Algeria was importing 500,000-600,000 cars per year, which has had a very positive impact on the insurance market, especially on SAA, which is also the country’s second largest agricultural insurer. Today the company wants to diversify its portfolio, by developing the SME market segment.

The Algerian Insurance Company (CAAT) is also owned by the state. Until the late 1980s, it was an insurance company focused on transport but has now become a leader in insurance related to industrial and enterprise risks. It has an 18 percent market share and is ranked second in terms of turnover, which has grown steadily reaching $210 million in 2015.

Foreign companies operating in Algeria through investments, development or large infrastructure projects are familiar with CAAT because it has been involved in most of the major projects implemented in Algeria.

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Youcef Benmicia, CEO, CAAT

“We insure the main Algerian companies such as Sonelgaz or Sonatrach. But we are looking to the future. We believe that SMEs are the economic future of the country. Agriculture and tourism have huge potential,” said chief executive Youcef Benmicia, even though he predicts an economic slowdown with consequences on the insurance sector. He concluded, “I think that, even in 2016, growth will be relatively modest.”

 

 

 

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