Algeria's dangerous economic gamble

Algeria's dangerous economic gamble
Kamal Benkoussa , 10 September 2012
http://www.opendemocracy.net/kamal-benkoussa/algeria%E2%80%99s-dangerous-economic-gamble

So far, the Arab Awakening has effectively skirted Algeria's borders, leaving the regime unscathed, as well as Algeria's political, social and economic crises intact. But why?

Firstly, alongside the 200,000 lives claimed by the civil war of the 1990s, our social fabric was destroyed, causing ordinary people to think twice before taking to the streets to hanker for the sudden downfall of the Leviathan. Secondly, the grip of the Algerian regime is less iron, in public at least, than was Ben Ali's Tunisia or Mubarak's Egypt: it is possible to criticise government policies to a certain extent, within important limits. But thirdly, and much more importantly, Algeria is endowed with significant hydrocarbon resources. This has enabled the regime to increase spending on wages, subsidies and services, and to bank on the belief that expenditure can substitute for emancipation.

Yet even on its own terms, the government's strategy is a losing one. Indeed, the military regime holding sway in Algeria is making two dangerous economic gambles.

In the first place, the economy remains overwhelmingly reliant upon income from its oil and gas resources, which in 2011 comprised 98.6% of the country's export revenues. At the same time, and despite the government's clumsy attempts at economic diversification, exports of non-oil goods represent only 2.93% (source: Centre National de l'Informatique et des Statistiques des Douanes). Industry continues to account for no more than 5% of the economy. Thus, Algeria's budget is extremely vulnerable to oil price shocks, particularly given the high level of capital spending to which the regime has committed itself in order to stave off the Arab Awakening. Indeed, the government has launched a $286bn Public Investment Programme ($130bn for the completion of major projects and $156bn for the launch of new projects), financed from general government revenues over the period 2010-2014.

However, this deep dependence on hydrocarbons is fraught with long and short term risks. To begin with, Algeria's known oil reserves will last at current production levels for only 19.3 years. Moreover, any drop in oil prices in the coming year will have a dramatic effect on Algeria's external and fiscal balances. An oil price of at least $112/barrel is needed in order to balance the 2012 budget. This would only be possible with a sudden upturn in global oil prices in the coming months – that is to say, an unrealistic scenario, unless Israel were to launch a strike against Iran over its nuclear programme. More likely, the Algerian government will be forced to make substantial cuts to its capital expenditure in 2013.

Of course, a budget deficit can be covered in the short term through foreign exchange reserves (more than $200 billion) and the government's oil stabilisation fund (Fond de Regulation des Recettes). However, if sustained low oil prices compel the government to draw upon these funds,that will almost certainly prompt a re-think regarding its commitments under the five-year infrastructure development plan. That is, public spending – the pillar of the regime's strategy to `buy social peace' – will have to be cut.

Secondly, as a major importer of agricultural products, the Algerian economy is highly exposed to fluctuations in global food prices. In the first six months of 2012, the government spent $1.6bn on importing wheat alone. In the past few weeks, and owing to hot weather and drought in the US cereals belt, wheat prices have skyrocketed. Since 14 May, Chicago Mercantile Exchange Wheat Future prices have risen by 52% to $9/bu. Because of significant increases in the costs of importing food – mainly wheat, but also corn and soya bean – Algeria's year-on-year inflation rate is ever increasing (currently 8.2%).

By and large, Algerians cannot afford to eat beef, which is an imported luxury beyond the budget of the average household. Chicken is widely used as a substitute. Consequently, chicken farmers are highly dependent upon the corn used to feed their poultry. However, a corn supply shock is soon likely, with potential for prices to more than double from their current (already elevated) levels. This is because the US, which in recent years has exported more corn than the rest of the world put together, is set to deplete its corn stocks this year, which may well result in a reduction or outright ban on corn exports. Such developments would lead to a major event the likes of which have not been witnessed since the 1970s, when the price of corn reached the inflation adjusted equivalent today of $9/bu. Below is the inflation adjusted chart of corn, going back to the mid-1950s:

[graph deleted]

A reversion to 1970s corn prices – or higher – would not be impossible. Where will this leave Algeria, given that its consumer price index is heavily weighted to food at 43.1% (source: Office Nationale des Statistiques July 2012)? Recall that spikes in the prices of sugar and cooking oil led to protests and riots in January 2011, prompting (as it turned out, premature) speculation that the Arab Awakening had taken hold in Algeria. With inflation averaging around 9% in the first six months of 2012, a sudden rise in the cost of bread has the potential to spark more sustained political strife.

The regime's survival strategy in Algeria is its economic policy, and its economic policy is a gamble with awful odds. Our leaders may not be capable of understanding the challenges by which Algeria is confronted, let alone of devising targeted solutions. At the same time, the political system is closed to Algeria's citizens, who cannot choose their leadership. Combining these factors together, it should come as no surprise if plummeting government revenues and soaring food prices prompt wide scale unrest.

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Broad Thoughts on Algeria's New Cabinet
http://themoornextdoor.wordpress.com/2012/09/12/broad-thoughts-on-algerias-new-cabinet/

Some thoughts on recent appointments in Algeria. This is how things look from roughly 06/07 September to 11 September, to this observer at least. All impressions subject to change.

There are superficial demographic similarities between this cabinet and previous ones, but Bouteflika's 'clan's' dominance specific is less emphatic than before. Boudjerra Soltani who heads the MSP (whose political fortunes have been in the dumps since the May election) describes the new 'technocratic' cabinet as 'punishment for the FLN'. There Prime Minister belongs to no political party, which Soltani seems to take as evidence of the 'breaking of all alliances' with the political parties and Bouteflika. Certainly the new cabinet looks somewhat like an effort at fronting something newer, younger and actionable (see the two charts below comparing the last Ouyahia cabinet to the recently appointed Sellal cabinet, note that Sellal's cabinet remains slightly smaller). If the rumours are true (which they well may not be), Bouteflika has been absent and sick and is preparing the ground for the end of his presidency. It is unlikely major changes will result from this cabinet, but it may increase confidence among some foreign investors and firms.

Continuity is the more likely outcome of the appointments at the moment, though. As per usual, though, rumours about the President's health over the summer and the last week point to physical incapacity and/or fatigue, including foreign travel for treatment, somewhat reminiscent of similar rumours in 2005 and 2006. The Foreign Ministry has officially denied these rumours and the press made a big to do when Bouteflika received foreign dignitaries, including the Prime Minister of Qatar, this week. (Each year rumours about Bouteflika's health or death are taken more and more seriously inside and outside Algeria, for obvious reasons.) It is quite likely that the long period of indecision leading up to the appointments reflects elite deadlock, especially given the president's 'condition' and the proximity to the municipal and 2014 presidential elections.

Sellal represents basic consensus and continuity. Abdelmalek Sellal is a longtime high-level technocrat linked to the clans loyal to the president. Sellal's credits include what some consider a successful stint at the Ministry of Water Resources, where TSA says he is 'using billions of dollars, largely solved the problem of water distribution in the major cities," without the scandals that rocked the other major industrial and infrastructure enterprises over the last decade (a reference to Public Works minister Amar Ghoul, who is still in the cabinet and recently broke with the MSP). Sellal is a heavyweight and a loyalist to Bouteflika, having run his 2004 reelection campaign and been long associated with the president's cadre of technocrats, though unlike many of Bouteflika closest associates, Sellal is from Constantine and from a Kabyle background (note also that Sellal was Interior Minister in 1999 and responsible for organising the presidential election in that year, which brought Bouteflika to power). His resume includes times as a wilaya and daira official in Guelma, Tamanrasset, Arzew and the Ministry of the the Interior; Wali in Boumerdes, Adrar, Sidi Bel Abbes, Oran and Laghouat; director general for resources at the Foreign Ministry and Ambassador to Hungry; and as a minister of the Interior, Environment, Public Works, Youth and Sports, Transportation before heading the Ministry of Water Resources. Sellal, 64, has been around the system as much as any high official in Algeria's recent past, superficially similar to Ouyahia (as a Kabyle alumni of the Ecole National d'Administration (ENA) though he is considers non-ideological and is less polarising). Nonetheless, Sellal's appointment does appear to be the result of a negotiated process (taking as long as it did) between the 'clans' that run Algeria's politics (Amar Ghoul was widely considered another candidate, likely rejected for any number of reasons) and he is likely represents the technocratic, transitional nature of the regime in Bouteflika's twilight years.

The departure of Ahmed Ouyahia, Boubekeur Benbouzid (education), Said Barakat (National Solidarity), Noureddine Zerhouni (advisor. former interior minister), Noureddine Moussa (environment), and Abdellah Khanafou (fisheries) are notable because these are big men with big roles; Ouyahia is obvious but nonetheless very important, and signals some change in direction given Ouyahia's high profile and association with rather unpopular economic policies. On top of this, one might also look at this as his positioning himself to run a presidential campaign and expand (or rebuilt or fortify) his support base.

The retention of Amar Ghoul at Public Works has him making money and friends and it will be interesting to see if perceptions of him as gunning over for a presidential run end up being true or if these rumours are true and the political environment actually facilitates some level of success. His new party, TAJ (which he has said is not an Islamist party has helped retain some of his fellow ex-MSP ministers, and it is likely their cabinet positions will help in any effort to build out their party over time.) The appointment of Belkacem Sahli (b. 1974) is also significant generationally speaking and points to elite circulation by bringing in people from later generations, something Algerians who care about cabinet appointments have sought for some time. The average birth year for ministers in the last cabinet was 1947; this cabinet will likely skew closer to 1950, with most ministers still having been born in the late 1940s and 1950s but with a few more born in the 1960s than in the past.

There are fewer FLN men and people closely associated with the traditional inner circles than in the previous cabinet. The big names are gone: Belkhadem (personal representative of the president), Zerhouni (Interior Minister until 2010, now out of government), Ouyahia, and so on. Men close to Bouteflika, like Abdelhamid Temmar (Forecasting and Statistics) are basically in place and there appears to be space made for any range of constituencies within the regime. This is a negotiated cabinet and one might think this put the FLN and RND on the back foot somewhat, though Belkhadem's own comments about the cabinet ("we support the government") and that Ouyahia's RND did not hold its usually summer school which is significant in both cases considering the November municipal elections are upcoming and will important in showing the strength of both parties' networks of patronage and their ability to mobilise supporters; Belkhadem especially (and Ouyahia perhaps only slightly less so) is likely to still be thinking about running for president in 2014. The new cabinet also includes fewer men from Tlemcen and western Algeria (unlike previous cabinets which where this ratio was much higher).

These appointments probably interest outside analysts and pouvoirologists (to steal the phrase recently invented by 7our) and the like more so than ordinary Algerians at the ground level, for whom they make only a minor difference.