Algeria: Low oil prices – a risk or an opportunity?

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.

Algeria, like many emerging markets, is quite different when seen from the ground. After a few days in Algiers, I can see that the country offers large opportunities in almost all sectors, but also demands a lot of attention and localized effort to capture them. Meanwhile, low oil prices pose a threat to some of the factors that make Algeria an attractive market. How the government deals with this challenge will determine how attractive the country will be for multinational corporations over the next several years.

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(Above: Algiers skyline)

For an economy that largely depends on its oil sector (95 percent of export revenue and almost two thirds of government revenue come from hydrocarbons), low oil prices present a significant challenge. Historically, the government used its large oil revenue to expand public sector spending on subsidies and healthcare and saved any surplus revenue in the Revenue Regulation Fund. These savings and the country’s large foreign exchange reserves helped the government maintain social spending and political stability.

However, low oil prices threaten this model and create significant uncertainty about the country’s political and economic future.

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(Above: Naftal, the country’s only and state-owned fuel provider)

Even with low oil prices, the government will try to avoid cutting spending on healthcare, fuel, and basic food subsidies. However, numerous investment projects will be delayed this year, such as the one to move the commercial Port Said away from Algiers and to replace it with a less industrial and more travel focused port.

Whether the Algerian population will feel the effects of low oil prices depends on the government’s ability to rapidly implement already delayed reforms to diversify the economy away from the oil sector and to attract foreign investment as an alternative source of foreign currency. However, my observations so far have indicated that this process is proceeding very slowly, perhaps too slowly to prevent a major reduction in government spending in the next two to three years.

Additionally, the Algerian central bank allowed the dinar to depreciate by 8 percent in early 2015. The reasons for this were to increase local-currency revenue that the government gains from oil exports as well as limit demand for imports. This represents a major challenge to consumer goods companies which will have to make difficult decisions about pricing their products, while consumer spending is likely to suffer this year.

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(Above: Containers at Port Said)

Other challenges multinational corporations face in the market include:

  • Bureaucracy: One of the main reforms required in Algeria is to ease the regulatory environment. In all my meetings, I heard complaints about the slow moving bureaucracy and constantly changing regulations. The legal and regulatory difficulties in entering the market are one of the main challenges faced by multinationals in all sectors. It is a significant factor that is deterring multinationals from increasing their presence in the market, and the challenges don’t end there.
  • Fragmented retail market: The retail market in Algeria is extremely fragmented, with most of the local trade taking place in independently owned shops. There are very few chains in the country that could facilitate easier and faster access to customers. This reduces the profitability of any multinationals that need large scale with many points of sales across the market.
  • Emerging market competition: Strong emerging market competition is very visible in Algeria. Such companies, mostly from Turkey and China, are doing well because of the lower prices they offer and the more localized presence they have built.

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(Above: One of the many local shops in the busy shopping street of Rue Didouche Mourad; Below: A Turkish company advertises with a famous Turkish actress.)

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(Above: A Chinese company is building Africa’s largest mosque in Algiers)

Despite these challenges, many western companies are drawn to the market and actively participate in trade shows and business delegations in Algeria. A population of 34 million with strong purchasing power compared with other North African markets, a government that is spending proportionally higher on education than elsewhere in North Africa, and an unsaturated domestic market make Algeria very attractive for multinationals. How the government turns these advantages into sustainable growth drivers despite oil prices will determine the future of this market.

Stay tuned for my next blog post where I will look at the uncertainties that dominate Algeria’s political landscape and what they mean for the government’s economic policies.

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