An FSG On the Ground Insight: Zeynep Kosereisoglu, CEE/MENA analyst at Frontier Strategy Group, is currently on a research trip through Northern Africa. Follow her insights on twitter @izeynepk.
Multinational corporations are showing increased interest in Algeria due to the country’s favorable demographics and high government expenditure. Because global oil prices fell by around 50 percent since mid-2014, however, the outlook for both consumer and government spending is uncertain.
The impact of the fall in oil prices on Algeria’s outlook was a looming question in the minds of all executives, politicians and citizens I met in Algiers. How the government reacts to the fall in oil prices will be the main determinant of Algeria’s economic trajectory. Therefore, understanding the factors behind the government’s decision making process will be important for companies that are trying to succeed in the Algerian market.
As the main source of public revenue declines due to lower oil prices, the Algerian government must restructure its expenditures to prevent a higher budget deficit and increasing public debt. The outcome of this restructuring can significantly impact multinationals’ opportunities in the market. In 2015, we expect the government to maintain spending in key areas such as healthcare, subsidies and security. However, we also expect the government to delay numerous large investment projects and attempt to reduce imports. The government’s approach is based on a desire to avoid igniting social unrest and stoking a significant security threat from within and along its borders.
The government will maintain subsidies to prevent social unrest
The government expenditure on social spending and subsidy payments amount to a third of the country’s GDP annually. Cutting down on this spending would significantly ease pressures on the budget, but the government fears igniting widespread social unrest. This is because the Algerian population is already showing discontent regarding a number of sensitive issues:
1. Continuous small scale protests – Algerian public sector workers and students regularly stage strikes or demonstrations to demand better pay, affordable housing and improvement in working conditions. During my trip to Algeria, I myself witnessed a few small scale demonstrations in the streets of Algiers. In early 2015, the government announced a freeze to public sector hiring and increased the number of working hours for some public sector employees, like teachers. These have mostly been localized protests but could become national if a country-wide issue like subsidy rollbacks were to unite Algerians.
2. Protests over shale gas exploration –Fracking tests in Ain Salah, which are designed to help Algeria exploit its shale gas reserves, have been met with fierce opposition from the local population. Protests are unlikely to subside. The local population has historical, cultural and environmental concerns driving their discontent, and the opposition parties are helping to direct these concerns towards organized protests. So far, the protests have been mostly peaceful. However, if the government uses violence against the protesters, like it did in early March, then unrest could spread elsewhere in the country. There is already a frustration that resonates with the rest of the population’s anti-colonialist sentiments: French company Total’s involvement in fracking in Ain Salah while the activity is banned in France. This, combined with the existing nation-wide discontent with the illiberal tendencies of the government could lead Algerians in the rest of the country to protest as well
(Above: protestors resisting against fracking tests in Ain Salah; Source: Echorouk Online)
3. Poor health of President Bouteflika – The poor health of President Bouteflika and his common absence from public events exacerbates the population’s concerns over the outlook for political stability and the influence of the military and the intelligence service in daily governance. Such concerns, combined with rampant corruption among government officials generate discontent among Algerians. However, most of this discontent has remained off the streets due to fears of returning to the years of civil war which engulfed Algeria’s streets in violence between 1991 and 2002, as well as the government’s generous subsidy and social transfer payments.
Algeria faces a security threat both from within and along its borders
Security concerns over the country’s vulnerability to Islamist attacks are a pressing item on the government’s agenda. Perceptions over security in Algeria were significantly damaged in 2013 when al-Qaeda affiliated armed militants took over the In-Amenas gas facility near the Libyan border. Since then, authorities have increased their focus on defense spending and efforts to secure Algeria’s borders with Libya and Tunisia. The country is already the top arms buyer in Africa, and the current situation will not allow for any defense spending to be reduced in the coming year.
(Above: Algeria faces multiple threats around its borders)
Algeria’s uncertain outlook has implications for businesses already selling or considering to enter the market.
- Subsidy payments, which reduce the cost of fuel and food for Algerians, are likely to be in place in 2015 and will be removed only as a last resort. If subsidy payments are reduced or removed, companies selling consumer goods will need to reduce sales targets for the market
- Because the government is unlikely to reduce subsidies, it will try to reduce imports and foreign transactions as a way to cut costs. This will mean increased customs controls and possible delays in payments. This will also put the few companies who are manufacturing locally in a much more advantageous position against their foreign competitors
- The question of instability and insecurity will loom over the country throughout 2015 and could mute consumer confidence, especially as news from Libya, Tunisia and Egypt continue to show heightened terrorist activity in the region
- Opportunities could increase, if you are selling to the defense sector, while some government projects you were involved in, could be delayed
Make sure you align your strategic plan with government priorities. As the government is stretched across challenges, such as security, political stability, lower export revenues and a high import bill, it will prioritize the development of housing, healthcare and local manufacturing. Companies that can capitalize on this focus will be in an advantageous position.
In order to be a first mover in the country and engage government cooperation, companies need to evaluate increased localization, whether it be setting up a local office or a manufacturing plant. The government will prioritize local goods over imported ones in the next few years as oil prices remain low. It might also be the time to invest in local talent and legal advisors that will help you navigate the country’s complex political and regulatory environment. Prepare a contingency plan that includes details on where to shift resources within the Middle East or Africa in the event of a halt to your sales in Algeria, due to severe socio-political instability. The plan should also address the legal and financial conditions of exiting the country in the case of severe instability.
Because the government has a significant role to play in shaping the impact of low oil prices on the domestic economy, on sustaining the purchasing power of the consumer and on ensuring the security of its borders, companies will need to monitor government policies closely. This, combined with the already difficult business environment in Algeria, requires companies to evaluate increasing their local presence in the country to better manage the risks on the ground but to also reach the pockets of opportunity that the Algerian market offers.
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