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One OPEC State Muddles Through Oil Slump as History Deters Debt

  • Algerian officials say they don’t want to ‘mortgage’ future
  • History, politics preventing bond issuance, analysts say

The new realities of global oil markets are yet to convince economic policy makers in Algeria that it’s time for a radical rethink.

Unlike the rest of OPEC’s members -- with the exceptions of war-torn Libya and sanctioned Iran -- Algeria has steered clear of tapping global debt markets three years into the oil-price slump. Neither will it overhaul laws to attract more foreign investors. A cabal of aging leaders sitting at the top of the party that delivered independence more than half a century ago is united in its opposition to “mortgaging” the country’s future. 

Instead, the North African nation has run through almost half of the foreign reserves it accumulated during the oil boom in order to avoid cutting welfare benefits as a sensitive political transition looms. President Abdelaziz Bouteflika, 80 and who has rarely been seen in public since suffering a stroke in 2013, has no clear successor, meaning a period of jockeying is already under way.

The remaining $100 billion-plus can buy policy makers time, but delaying reforms risks inflicting a greater toll on an economy struggling with sluggish growth and one of the highest current-account deficits in the Middle East.

Authorities are not “taking into account the new realities associated with lower-for-longer oil prices,” given that the drop in reserves is “unlikely to reverse anytime soon,” said Jean-Paul Pigat, head of research at Dubai-based Lighthouse Research and Advisory.

“Economies across the region need to fundamentally adapt to a new model of economic development, and issuing international debt, and also deepening local capital markets, is a part of this process,” he said.

Sovereignty ‘Obsession’

Members of the Organization of Petroleum Exporting Countries have raised tens of billions of dollars from the sale of international bonds since 2014, capitalizing on low interest rates and increased investor interest in riskier assets.

Aversion to foreign debt is rooted in North Africa’s colonial past. In Algeria, national sovereignty has turned into an “obsession” due in most part to the seven-year war for independence from France that ended in 1962, said Riccardo Fabiani, a London-based analyst at Eurasia Group.

It can also be traced to a debt crisis during the 1990s when the government was forced to accept IMF-imposed austerity measures. Rising oil prices since then have allowed the nation to repay its obligations, cutting its external debt to less than 4 percent of economic output at the end of last year, according to IMF data.

Officials “will do anything to avoid borrowing money,” Fabiani said. “The problem is that they can do this for one or two years, but it’s clear that by 2020 this will not work.”

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To be sure, the oil slump hasn’t battered Algeria’s public finances in the same way that it has in Saudi Arabia, Kuwait or Venezuela. The budget deficit, forecast at 3 percent of GDP this year by the IMF, is under control. The fund, in a report issued in June, also welcomed plans to reduce the budget deficit and improve the business environment.

As far as issuing international debt, “for the moment, it is considered that there is no real urgency since the financing of the deficit can be ensured by mobilizing internal resources” such as selling domestic bonds and borrowing from institutions such as African Development Bank, said Alexander Kateb, an independent analyst and former adviser to ex-Prime Minister Abdelmalek Sellal. The nation tapped both avenues last year.

Aversion to Borrowing

But the Washington-based lender warned that the current-account deficit, which measures incoming and outgoing goods, services and transfers, was “significantly weaker than warranted by medium-term fundamentals.” It expects reserves to drop to below $40 billion by 2022, enough to cover eight months of imports. Aversion to international borrowing means that financing the deficit will be more difficult than in the past, and may drag economic growth down to 0.7 percent next year, the fund said.

Other recommendations included opening the economy to trade and foreign direct investment. Algeria ranks 156th on the World Bank’s Ease of Doing Business Index, below Niger as well as the West Bank and Gaza, the Palestinian territories stuck in a decades-long conflict with Israel

“Algeria has always been a slow reformer, it’s a rigid society,” said Garbis Iradian, chief economist for the Middle East and North Africa at the Washington-based Institute of International Finance.

Going forward, “you can expect a small currency depreciation, fiscal consolidation, but strong resistance to privatization. And things will have to get really bad, as in $40 oil and a large deficit, before authorities would move to implement other IMF-recommended reforms,” he said.

Abdeljadjid Tebboune, a bureaucrat who served as prime minister for three months this year, said in July he was under instructions from President Bouteflika not to resort to external borrowing “regardless of the situation.” He was replaced this month by Ahmed Ouyahia, a veteran politician now serving his fourth term as premier during the last two decades.

Sergey Dergachev, who helps oversee about $14 billion in assets as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt, said Algeria “would be a very interesting investment case and would attract good interest from investors should they issue bonds.”

The key risks “will be getting a transparent and fair picture about what is really happening economically and politically on the ground,” he said.

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