Algeria's economic growth will slow down in the quarters ahead asfiscal consolidation, elevated inflation and unemployment weighon investment and consumption. The government's reluctance toimplement politically sensitive spending cuts will prevent a moredrastic adjustment.
Fiscal deficits will remain wide over the coming quarters as weakenergy prices and political sensitivities limit efforts to raise governmentrevenues and cut spending. Foreign reserves will continue to declinerapidly and Algeria's reliance on borrowing will grow. Nevertheless,public debt levels are still low and will stay manageable.
Algeria will remain relatively politically stable over the medium term,as the government avoids drastic austerity measures, appetite forviolence stays low, and security forces continue to crack down onprotesters. Beyond this time frame, potential for unrest is significantlyhigher, as difficult economic conditions may eventually force authoritiesto remove subsidies and public sector jobs. 0 Although the Algerian government has called for more foreign investmentinto the country, we expect FDI inflows to remain sparsein the years ahead. Foreign investors will continue to be deterredby numerous restrictions and a weak business climate, and we donot anticipate any comprehensive liberalisation of the economy.
General Khalifa Haftar's apparent strategy shift towards politicalcooperation with the Government of National Accord creates roomfor progress in the national reconciliation process, and we expect are-negotiation of the country's existing peace deal over the comingmonths. Risks of any such deal collapsing will nevertheless remainhigh for years to come – especially given various Western militias'persistent opposition to placing Haftar in a position of power.
Political instability, soaring inflation, currency weakness and highunemployment will continue to weigh on consumption and investmentover the quarters ahead, preventing a sustained economic recovery.
We maintain our view that the Libyan economy will not surpass itsnominal 2012 levels for at least another six to seven years.
Libya's budget balance will remain in deficit over the years ahead,as elevated instability prevent oil output from reaching the levelsneeded to cover still-large public sector wage and subsidy bills. Withfew other options available, authorities will continue to fund fiscalshortfalls through the issuance of domestic debt and depletion ofinternational reserves.
As a result of the ongoing conflict, a significant degree of productivecapacity (both physical and human) throughout the Libyan economyhas been lost. Road, housing and utility infrastructure have sufferedconsiderable damage and will take years to repair under even themost stable of political environments.