Economic Analysis - Political Considerations To Prevent Austerity - JUNE 2017


BMI View: Algeria ' s movement towards relative austerity will be severely limited by political considerations. Facing an era of much lower oil prices , Algiers is slowly shifting towards both protectionism and a slightly tighter fiscal stance, with investment spending set to be particularly affected. Tighter curbs on public spending will weigh on economic growth, while the continued slump in global oil prices means that the country's budget deficit will remain wide , at 9 . 4 % of GDP in 201 7 . Reserves will be used to finance the deficit.

Algeria's slow reaction to the sustained drop in oil prices will ensure consistent and large fiscal deficits over the coming years despite a gradual shift towards both protectionism and a tighter fiscal stance. Algeria's budget deficit will remain sizable in the years ahead as political sensitivities limit the pace and extent of the government's fiscal consolidation efforts. Indeed, we view Algiers' proposed revenue-raising measures for 2017 - including a two percentage point (pp) VAT increase, moderate fuel price hikes and higher taxes on selected goods (including tobacco, alcohol and electric appliances) - as too limited to substantially improve Algeria's fiscal position over the coming quarters. We also question the government's willingness to carry out the full set of cuts amid growing protest action; its decision to hike electricity prices in southern desert areas has already been reversed on the back of mass demonstrations.

With oil prices set to remain weak relative to pre-H214 slump levels - our Oil & Gas team forecast Brent to average USD57 per barrel (/bbl) in 2017 and USD60/bbl in 2018, compared with an average of USD102/bbl over 2010-2014 - Algeria's overreliance on the energy sector will result in persistent fiscal pressures on the economy in the years ahead. Hydrocarbons earnings make up around 94% of exports and 60% of public revenue. We forecast the fiscal deficit to average 6.9% of GDP over the next five years.

Set To Stay In The Red
Algeria - Budget Balance, %
e/f = BMI estimate/forecast. Source: Ministry of Finance, BMI

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