Algeria: Benefitting from higher oil prices

Algeria’s oil production over the first eight months of 2022 averaged 1.0mn b/d, representing a 12.3% increase on the corresponding period in 2021 (average 893,000 b/d) as OPEC+ production curbs were rolled back through the start of the year and global demand continued to recover from the pandemic crisis. The conflict in Ukraine has also played a role in boosting Algeria’s hydrocarbons sector, with European countries increasingly turning to Algeria as they look to secure alternative gas supplies as relations with Russia have soured. The visit by French President Emmanuel Macron in August underscored the importance EU leaders are now attaching to Algeria’s potential to increase exports to the continent. Italian major Eni signed a deal with Sonatrach in April that will see a ramp-up in volumes transported via the TransMed pipeline.

Real GDP, % y/y

Source: UN, Emirates NBD Research

With the petroleum and natural gas sector accounting for around 28% of GDP last year, the increase in production will underpin our headline growth forecast of 3.3% this year, which would be a slight slowdown from the 3.5% recorded in 2021 – many of the reopening gains from the -5.1% contraction in pandemic-ridden 2020 were already won last year. Our forecast is broadly in line with the 3.4% projection by finance minister Abderrahmane Raouia in June. Looking at the longer term, a number of new oil and gas discoveries in recent months should boost investment in the coming years and provide export growth further down the line.

Alongside the increase in production, Algeria has also enjoyed the surge in hydrocarbons prices this year as global conflict has upended commodities markets, providing some much-needed income following the negative impact of the pandemic on finances. The precipitous decline in FX reserves that has been in play since the oil price fell in 2014 has seen a marginal reversal in recent months for the first time. We forecast a current account surplus of 9.7% of GDP this year, which would be the first surplus since 2013.

Reserves, USDbn

Source: Bloomberg, Emirates NBD Research

The windfall from the hydrocarbons sector has given the Algerian authorities space to mitigate some of the global pressures on the economy this year, both on the fiscal and on the monetary front. Algerian households are facing the same pressures as the rest of the world in terms of accelerating prices, combined with the impact of the removal of key subsidies late last year as the government sought greater fiscal rectitude. Inflation hit 11.8% in June, before coming back slightly to 10.3% in July, and unemployment exceeds 12%. Now, the central bank appears to have reversed course in terms of its exchange rate targeting in a bid to soften the price shock. Having initially provided guidance for a EURDZD exchange rate of 149.3 in 2022 and 156.8 next year – which would have helped ease the government’s fiscal position – the currency has appreciated sharply in recent months from 160 to the current 140.6. Meanwhile, the government is providing support such as the pledge to pay benefits to unemployed youth between 16 and 40 made in February.

DZDEUR

Source: Bloomberg, Emirates NBD Research

Nevertheless, while the surge in hydrocarbons inflows has given the Algerian economy some much-needed breathing space, the IMF supports ongoing reform, not least the opening up of the economy to international investment. There has been progress in this regard as the revisions made to the investment law in 2019 allow for the complete ownership of Algerian companies, as opposed to the 49/51 rule in place previously. As ever with resource windfalls, the risk is that the uptick in inflows this year removes the reform impetus and embeds the status quo once more.