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The Algerian government recently announced that it had repaid over half of its USD 763mn debt owed to Germany ahead of schedule. Algeria has concluded similar agreements with 15 other creditor nations, members of the Paris Club. Italy and France, Algeria's largest creditors, were among the countries repaid in full, getting back USD 1.7bn and USD 1.6bn respectively. Algeria has now reimbursed nearly 90% of its USD 7.9bn Paris Club debt.
Algeria's external debt has now fallen to less than USD 10bn as at end H1- 06 from USD 16.4bn at end 2005. The Finance Ministry even estimates that the level of external debt will be slashed to USD 5bn by the end of the year. We find this forecast to be credible given the government's visible commitment in paying down its debt, the absence of any new external borrowing since 2005, but especially due to the country's buoyant external liquidity.
Algeria's oil bonanza
Algeria's enviable external liquidity position is tightly intertwined with its thriving hydrocarbon sector. Algeria currently produces around 1.3m barrels of oil per day and has around 11.4bn barrels of proven oil reserves, the second largest in Africa behind Nigeria.
Algeria exports over 80% of its oil and gas and hydrocarbon revenues account for over 95% of the country's foreign reserves. Given the size of its oil reserves, the government has announced a production target of 2m barrels of oil per day and 85 cubic metres of gas per year by 2010. In May, oil revenues stood at USD 66bn at an annual rate from only USD 17bn in 2001 and FX reserves have increased to USD 66bn, equivalent to three years of import cover. The increase in hydrocarbon exports also accounted for Algeria's 15.3bn trade surplus in H1-06, up 41 %y/y.
Algeria's debt prepayment will go down well with international investors
In 2006, we expect the oil sector to boost output further, maintaining trend growth at over 5%. Growth will also benefit from the government's USD 80bn investment programme which is improving construction activity. Port activity, a bellwether for the country's economic performance, has grown over 250% in the last decade.
We expect this momentum to continue with port activity growing by over 20% in 2006 as exports continue to accelerate. Despite this increase in economic activity, policymakers will be pleased that price pressures remain tame. Although reported inflation in H1-06 came in at 1.0% y/y, we still expect strong demand to push consumer prices nearer to x4% in the medium term.
One area that is benefiting from the combination of strong external liquidity and an improving economy is the local currency. Earlier this year, the central bank suggested, uncharacteristically, that the value of the dinar could benefit from Algeria's strong balance of payments position.
Despite remaining fairly stable since the start of the year, the dinar has adopted a mild appreciating bias and could temporarily break past its year-to-date high of DZD68 to the USD before the end of the year. It is our view that although the dinar will benefit from Algeria's strong balance of payments position, longer term there will be a need for a more flexible currency.
Algeria's accession into the Association Agreement and the subsequent liberalisation of its economy to trade with European and Mediterranean countries should give rise to a more competitive position.
Another positive development on the currency market deriving from Algeria's improving economic profile is the narrowing of the spread between the parallel and the official exchange rate.
Monica Malik, Senior Economist, SCB
