Algeria and Libya Business Forecast Report Q1 2013

Core View – Algeria

We expect real GDP growth in Algeria to accelerate in 2013 andprivate consumption and fixed capital formation to grow stronglyin the near term, while the net export position is likely to worsen.Moreover, planned fiscal consolidation is likely to come up short ofthe government’s target.

Algeria is likely to maintain a healthy external position in 2012 and2013, although an increasing import bill will cause the current accountsurplus to narrow to 7.9% of GDP in 2012 and 4.4% in 2013,lower than 10.7% of GDP in 2011. That said, the expected approvalof a more business-friendly regulatory package for the hydrocarbonsector bodes well for attracting foreign investment over the comingquarters.

Major Forecast Changes

We have revised down our forecast for headline consumer priceinflation in Algeria, which we now expect to come in at 7.8% and5.9% at end-2012 and end-2013, up from our previous forecast of6.3% in 2012 and 4.8% in 2013. Expansionary policy in Algiers islikely to continue to filter through to consumer spending, which willadd to stronger growth in 2012 and 2013 compared to 2011.

Key Risks To Outlook

Risks that 2012 could see the emergence of large-scale politicalunrest in Algeria are low, even as the country shares similar political,economic and social characteristics as other countries thatexperienced revolutions during the Arab Spring. That said, partiessupporting the current government won a large majority of votes inlegislative elections held on May 10.

A sudden drop in global energy prices, prompted by a hard landingin China or a eurozone break-up, would pose downside risks to ourGDP and fiscal budget forecasts. It would also limit the government’sability to respond to future protests.

Core View – Libya

As a result of the intensity of the military campaign in Libya, a significantdegree of productive capacity (both physical and human)throughout the economy has been lost. Road, housing and utilityinfrastructure have suffered considerable damage and will take yearsto repair under even the most stable of political environments.

Libya’s political climate will remain volatile through 2013, as competingmilitias begin to compete for control over the country’s vastresource wealth. Frequent skirmishes involving light weaponry shouldbe expected.

A lack of institutional capacity will hamper reconstruction efforts.Even if we see significant inflows of multilateral aid over the comingyears, Libya lacks the institutions necessary to carry out much-neededinvestment projects (compared with Iraq, for example, which possessedunderlying structures to help with its post-war recovery). Asa result, technical assistance from multilateral development bankswill prove crucial to the economy’s long-term growth potential.

The economy’s growth potential will depend on three key variables:the speed and scale with which oil production can be brought backonline; the state of the underlying security environment; and thestate of the utilities sector – in particular, the provision of a stablesupply of electricity.

Major Forecast Changes

We have revised our medium-term budget projections to take accountof our view that authorities in Tripoli will likely be forced toaggressively ramp up spending over the coming years in a bid tosupport the non-oil economy. Our forecasts see the budget comingin surplus to the tune of 6.1% of GDP in 2013, before falling to 2.8%in 2014.

Although we have revised a host of our macroeconomic forecasts,we stress that data quality out of the country will be poor for theforeseeable future. We believe it will be several years before weunderstand the true impact of the war on the economy.

Key Risks To Outlook

Libya’s combination of oil wealth, tribal divisions, weak-to-non-existentinstitutions and security vacuum portend to significant instability andpotential for violent conflict over the coming years.

A failure to create sufficient employment opportunities within thenon-oil economy poses a clear risk to social stability given Libya’sburgeoning youth population.