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Algeria has knocked $2bn off the expected deficit in its final 2018 budget. But the final figure of AD1.914bn ($16.9bn at the budget exchange rate of $1=AD113.5; $16.6bn at the latest actual rate of $1=AD115) still represents a rise of over 70% on an expected 2017 deficit of $9.6bn.
Some scope for a surprise on the upside comes from the use of a conservative oil price of $50/B, level with the 2017 budget oil price and somewhat lower than the actual 2017 average price of $54/B for Algeria’s Saharan Blend crude, a light grade which trades at near-parity to Brent.
Of course oil prices have risen well above $50/B in recent months – Brent was testing $70/B as MEES went to press. Were Saharan Blend to achieve an average of $67/B for 2018, in line with current futures prices, the deficit would fall to $8.4bn (see table).
However, this presumes actual 2018 spending and non-oil revenue in line with the budget figures. In reality the budgeted figure of AD 3,938bn ($34.7bn) for non-hydrocarbon revenue, up almost 10% from 2017 in real terms, looks optimistic.
A $2.2bn hike in non-hydrocarbon revenue is the key change from the original 2018 budget published in October ( MEES, 13 October 2017 ). Given Algeria’s chronic inability to diversify its economy away from oil and gas – which provided 95% of export revenue for January-November 2017 – a more modest 2.8% real terms non-oil revenue rise as per the original budget looks more likely.
BALANCE AT $85/B
Again, presuming that actual spending and non-oil revenue are in line with the budget figures, MEES calculations indicate that Algeria would need an oil price of $85/B to balance its 2018 budget. Even this is likely on the low side given that it presumes a 100% linkage of gas revenues to those for oil. In reality this linkage has been eroded in recent years with Algeria’s key gas customers in Italy and Spain lobbying successfully for lower (or zero) oil-linkage in their gas purchase contracts.
And these adjustments for variant oil prices presume that Algeria’s original budget calculations are correct based on $50/B crude. But the hydrocarbon revenue numbers look fishy. Given that the 2018 budget oil price is level with that for 2017, it is unclear on what the Algerian finance ministry has based a budgeted 26% rise in oil and gas revenue. Apart from price, the other key variable is volumes; but, though gas volumes should edge higher in 2018, those of oil will likely be lower ( MEES, 22 December 2017 ).
Algeria's 2013-2018 Budgets
|2018 vs 2017 (%)||2018 vs 2016 (%)|
|REVENUE (AD BN)||6,714||+19.1||+14.1||+41.4||+28.4||5,636||4,748||4,952||4,218||3,820|
|Oil & Gas||2,776||+26.2||+20.9||+64.9||+49.8||2,200||1,683||1,723||1,578||1,616|
|SPENDING (AD BN)||8,628||+25.4||+20.1||+8.1||-1.9||6,883||7,984||7,588||7,656||6,880|
|Budget Oil Price ($/B)||50||+0.0||+35.1||50||37||37||37||37|
|Budget AD per $||113.5||+3.2||+15.8||110||98||98||80||76|
|DOLLAR TERMS (Budget oil price, exchange rate)|
|Oil & Gas||24.5||+22.3||+42.4||20.0||17.2||17.6||19.7||21.3|
|DOLLAR TERMS (Actual or latest estimate for oil price, exchange rate)^^|
|Oil & Gas||32.4||+51.7||+77.6||21.3||18.2||23.4||52.8||59.4|
|Actual Oil Price ($/B)*||67.0||+24.1||+51.3||54.0||44.28||52.79||99.86||108.35|
|Actual AD per $^||114.9||+3.2||+4.0||111.4||110.5||105.0||80.7||79.6|
*SAHARAN BLEND. ‘ACTUAL’ FIGURE FOR 2018 BASED ON BRENT FUTURES AS OF 12 JANUARY 2018. ^LATEST (11 JAN 2018) EXCHANGE RATE USED FOR 2018. **IMF ESTIMATES FOR 2017 & 2018. ^^PRESUMES spenDing and NON-HYDROCARBON REVENUE AS PER BUDGET.
OIL PRICE BOOST
All other things being equal, the 2017 deficit should come in at less than the budgeted figure due to the substantial rise in oil prices in the second half of the year. Saharan Blend averaged $54/B in 2017, some 8% higher than the budget presumption of $50/B. That said, some or possibly all of, these gains may have been canceled out by above-budget spending. The ultra-austere 2017 budget presumed an eye-watering 14% ($19bn) cut to spending. It is highly unlikely that this has been hit.
In announcing the draft 2018 budget in October, Algeria abandoned this austerity. The new plan is to boost the economy by “non-conventional financing,” in effect printing money ( MEES, 29 September 2017 ). By restricting its fundraising to domestic sources only, Algeria expects to maintain its “external economic independence,” as President Abdelaziz Bouteflika declared in June.
This new Algerian policy of borrowing from the banking system, coupled with printing money, is inherently inflationary and could lead to a currency devaluation and a lack of financial stability. Finance Minister Abderrahmane Raouia told parliament during the 2018 budget debate that AD1,800bn ($15.7bn)-worth of “non-conventional financing” is planned for this year.
At least the planned boost to 2018 spending will likely provide a boost to GDP, albeit at the expense of the country’s long term prospects (in reality the only long term ‘plan’ appears to be to hope for higher oil prices).
“New government investment spending associated with the 2018 budget and a more expansionary fiscal stance than previously planned is expected to raise growth in the short-term,” the World Bank says in its latest flagship ‘Global Economic Prospects,’ released 9 January. The Bank forecasts 2018 growth of 3.6%, up from an estimated 2.2% for 2017 and its previous (June 2017) forecast of just 1.0% for 2018.
The lack of structural reform, however, means growth is forecast to fall back to 2.5% in 2019 and just 1.6% in 2020, the Word Bank forecasts.
Algeria is more bullish than the World Bank as regards the country’s prospects. The 2018 budget projects a GDP growth rate of 4% in 2018, with inflation falling from 5.5% in 2018 to 3.5% in 2020, with the monetary authorities implementing the necessary measures to keep inflation under control, Mr Raouia says. Together with the 2018 budget law, provisional budget figures for 2019 and 2020 show a reduction in total spending in these years and a trend to achieve a balanced budget by 2020.
The extent to which the 2018 budget is expansionary will ultimately depend on the extent to which the 2017 budget was hit. Budgeted spending of AD8,628bn ($76bn) for 2018 is up by a bumper 20% in real terms on 2017. However, leave aside 2017 and adjust for inflation, and spending is actually some 2% down on 2016.
Current spending remains constrained in the 2018 budget with the key boost coming to capital spending. At AD4,043bn ($35.2bn), this is up 69% in real terms from the 2017 budget.
One way that Algeria plans to increase revenue in 2018 is through hiking the subsidized prices of gasoline and diesel.
The third consecutive year of price hikes see gasoline raised by 17% to $0.34/liter and diesel by 12% to $0.20/liter. But these prices remain among the cheapest in the world: the gasoline price equates to just $54/B – well below the market price of $77/B on New York’s Nymex exchange as MEES went to press. In addition the year-on-year price rises are substantially less than the 23% rise in crude prices during 2017.
Tobacco taxes will rise by 10% and instant coffee by 25%, while other luxury goods are to be taxed more heavily. However, Mr Raouia claims the 2018 changes “will not include taxes that would burden people’s livelihood” with the purchasing power of Algerians unaffected. He ruled out a rise in the price of consumer goods and says that agricultural products will be subsidized to counter the rise in fuel prices.
Mr Raouia says Algeria will step up efforts to combat tax evasion.
Having seemingly looked to key Opec ally Venezuela for economic pointers with its late-2017 policy of printing money to plug chronic deficits, now it’s the turn of North Korea.
How to lessen a trade deficit that hit $10.7bn for January-November 2017 as the country’s foreign reserves fell to a 10-year low of $98bn? ( MEES, 5 January ). Ban imports of course!
The rules, announced 1 January are wide ranging and detailed: “no fresh fruit (except bananas), no fresh vegetables (except garlic).” In total the import of some 900 products is banned, including cellphones, household appliances and building materials – and a long list of processed foods (cheese, chocolate, pasta… ) as well as fresh foodstuffs.
Trade Minister Mohamed Benmeradi said last month that Algerian imports are projected to fall by 33% to around $30bn in 2018 ( MEES, 22 December 2017 ). Ban enough products and the target will be hit. Good luck with getting a signal on an Algerian cellphone though!
The import ban follows a 30% rise in taxes and customs duties imposed on some products as of the beginning of 2018 outlined in the budget law. The ministry also says that the import ban is limited in time and will be lifted gradually with or without taxes and other duties. But a policy of restricting imports on such a large scale and on a number of products is likely to lead to a black market, supply shortages and higher prices, cutting into people’s purchasing power. In turn the import ban will disrupt manufacturing industries, deter the inflow of foreign investment and delay the diversification of the economy. Algeria is in need of a comprehensive economic reform program to restructure key sectors of its economy rather than isolated random measures.