Algeria’s succession plan: The mystery that MNCs should keep on their radar

Abdelaziz Bouteflika was the man who led Algeria out of a bloody civil war and back to stability. Now, after suffering two strokes, he is a shadowy and mysterious figure hanging on to the seat of presidency. Rarely does he make public appearances, and his deteriorating health has both Algerians and foreign powers pondering who is actually calling the shots from behind the scenes. MNCs operating in Algeria must monitor succession risk, as the economic pressures and Bouteflika’s ailing health can create significant disruptions to their businesses.

Bouteflika’s presidential term ends in 2019, but there is a strong possibility that he may pass away before then. Whether he makes it to 2019 or not, Bouteflika’s close associates, the business elite, and the army must agree on a succession plan to ensure a smooth transition. This is especially pertinent now because it is a precarious time for Algeria’s economy, even reminiscent of the late 1980s when the drop in oil prices put Algeria in an economic crisis and disenchanted youth took to the streets in protest.

Since the slump in oil prices, Algeria’s foreign reserves dropped from $178 billion in 2014 to $114 billion at the end of 2016, and the currency depreciated more than 30%. To cope with falling hydrocarbon revenues, the government is embarking on a path of timid economic reform, including tax increases, but falling short of reforming the subsidy system, a key ingredient in maintaining the social contract between the people and the government.

Thus, with the balance between political, economic, and social stability on a delicate scale, a solid succession plan is crucial for Algeria. However, the secrecy of government operations leaves the plan open to speculation.

Scenario 1: Status quo maintained – In one scenario, the ruling class could pick one of their own to put forward as a presidential candidate and ensure his election by weakening the opposition. It is almost certain, however, that this candidate must be supported by the military in order to be elected. In this scenario, the status quo would be maintained and it would be ‘business as usual’ in Algeria. Maintaining the stability with a younger and healthier president than Bouteflika may even be positive for investor confidence, as there would be more certainty around the capabilities of the president.

Scenario 2: Instability emerges amid void of power – In a second, but less likely scenario, Bouteflika’s close associates, the business elite, and the military may be unable to agree on a succession plan, becoming disorganized and divided. Consequently, elections could be delayed, leading Algerians to become frustrated over the political situation, sparking social unrest. External forces of domestic militant groups may try to take advantage of the power vacuum and cause great instability in the country. A weakened ISIS in neighboring Libya may even attempt to set up a new stronghold in Algeria.

The prospect of this second scenario taking form is less likely because Algerians still have a fresh memory of the civil war from 1991-2002 and want to avoid widespread unrest. Additionally, they see the chaos in the region around them and fear the manifestation of a situation such as in Syria, Libya, or Yemen.

Nonetheless, the second scenario is an important risk for MNCs to monitor: It could lead the government to radically boost expenditures to sustain political stability, thus undermining the government’s fiscal position further, reducing its foreign exchange reserves, and creating inflationary pressures. Instability would also cause depreciatory pressures on the dinar. Then, if the central bank does not devalue the currency, the already large gap between the official and black market rate could severely widen. Additionally, insecurity would weaken consumer and business confidence, potentially detracting investments to the market and distracting the government from much needed economic reforms.

Heightened economic pressures, ongoing regional security risks, and Bouteflika’s worsening health conditions create numerous disruptive risks for MNCs. Executives must take steps to prepare their business to heightened risks, despite the uncertainty:

  1. Monitor the legislative elections in April 2017: During the last legislative elections in 2012, Islamist parties were hoping to make gains like their counterparts in Egypt and Tunisia, but on the contrary, they suffered their worst electoral defeat in history. This time around, Algeria’s leading Islamist parties will merge together in hopes of a better outcome. What is important to watch is the reaction of the ruling class to a possible victory for the Islamist parties. The last time an Islamist party won the parliamentary elections in 1991, Algeria’s ruling class were displeased, so the military cancelled the elections and declared a state of emergency, sparking the civil war.
  2. Track forthcoming economic reforms: Tax hikes, such as an increase in the VAT from 17% to 19%, were introduced in the 2017 government budget. However, these are not likely to be the final reforms. With oil prices expected to rise only incrementally this year, the government’s revenues will remain under pressure. The announcement and implementation of subsidy cuts or further tax hikes could fuel social discontent and increase the likelihood of protests should a succession crisis occur.
  3. Monitor moves by the current regime to consolidate power: Over the past couple of years, the government implemented mainly cosmetic reforms to gain support and consolidate power. For example, a series of constitutional amendments were passed to appeal to the Berber population, women, and local businessmen and ensure their backing of the ruling. Further reforms of a similar nature would make the second scenario less likely, as the current regime appeases and solidifies its support base.
  4. Maintain close relationships with government officials: Close cooperation with government officials presents the opportunity for MNCs to stay on top of upcoming regulatory, political, and economic changes. In an environment of political uncertainty, maintaining a good relationship with government officials is a valuable resource.

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