Algeria and Libya Country Risk Report Q1 2016
Algeria's economic growth will slow markedly over 2016. Under the pressure of lower oil prices, the government will adopt a greater shift towards spending cuts and protectionism. These trends will weigh on investment and consumption over the coming quarters, and we forecast the economy to grow by only 1.9% in real terms - the weakest rate since 2009.
The Algerian dinar will continue to gradually weaken against the US dollar throughout 2016, albeit at a slower pace. Oil prices are not set for a quick recovery, and the trade fundamentals of Algeria's economy remain bleak – factors that will weigh on the currency.
However, the government will be reluctant to permit too great a slide of the dinar as pressures on households rise.
While lower oil prices will put further pressure on the Algerian regime over the coming years, we do not expect a return to the unrest of the late 1980s. The ruling elite will remain successfully in control for the time being, despite the sclerotic state of the economy.
Algerian President Abdelaziz Bouteflika's fragile state of health will intensify the regime's internal divisions, with rival factions competing against each other in the battle for succession. This will nurture policy paralysis and weaken Algeria's already-limited pace of political and economic reform. However, whoever ultimately emerges as the next president is highly unlikely to change the structure of the regime or improve the system of governance.
Although the Algerian government has called for more foreign investment into the country, we expect FDI inflows to remain sparse in the years ahead. Foreign investors will remain deterred by numerous restrictions and Algeria's weak business climate, and we do not anticipate any comprehensive liberalisation of the economy.
Algeria is set to move into an even more protectionist direction in response to the fall in international oil prices. However, renewed steps to limit imports and strengthen the domestic production base will have highly limited success
Core Views As a result of ongoing political violence, a significant degree of productive capacity (both physical and human) throughout the Libyan economy has been lost. Road, housing and utility infrastructure have suffered considerable damage and will take years to repair under even the most stable of political environments. Moreover, given the importance of the hydrocarbon industry, damage to oil production and refining infrastructure will pose significant long-term challenges. Libya's political and security climate will remain volatile through 2016, as competing militias compete for control over the country's vast resource wealth. A lack of institutional capacity will hamper reconstruction efforts. Libya lacks the institutions necessary to carry out much-needed investment projects. Low oil prices, coupled with protracted political instability, will result in minimal new investment in the oil sector over the coming years. The economy's growth potential will depend on three key variables: the speed and scale of oil production; the state of the underlying security environment; and the state of the utilities sector – in particular, the provision of a stable supply of electricity. Rapid growth rates in 2016 result from base effects, and mask key structural weaknesses in the country.
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