Economic Reckoning Is Coming for Algeria

(Bloomberg) -- One of the Arab world’s most isolated economies is fast succumbing to the coronavirus pandemic and the unprecedented crash in oil prices.

Algeria, already rocked by a year of anti-government protests after the resignation of President Abdelaziz Bouteflika, is staring down its fiercest economic challenge yet. While practically unburdened by external debt, hardly any corner of the $173 billion economy will escape the global shockwaves.

The OPEC member can’t look to energy revenue for relief any time soon. Once reliant on windfall earnings to help keep the lid on social dissent, Algeria now needs an oil price of over $157 a barrel just to balance its budget. Global benchmark Brent is trading below $30, while oil futures in New York fell below zero on Monday for the first time ever.

Algeria, home to some 44 million people, chose President Abdelmadjid Tebboune in a sparsely attended December vote and had been warning of hard times even before the global pandemic struck. It has since reported 2,629 coronavirus cases with 375 fatalities -- the highest death toll in the Arab world -- and rushed to introduce measures to protect Algerians, including cash payments to needy families and deferrals of credit repayments and company tax dues.

The North African country is on track this year to run a budget shortfall of 20% of gross domestic product, with a current-account deficit worse than even defaulted Lebanon’s, according to the International Monetary Fund. Gross reserves may drop below $13 billion next year, a plunge of nearly 90% since 2017, forecasts published last week show.

The lethality of the outbreak is testing Algeria’s fragile health-care system, where the density of physicians and hospital beds lags behind Lebanon.

The IMF now predicts the economy will contract 5.2% in 2020, sending unemployment to more than 15%. The outlook underlines the urgency for Algeria’s rulers, a cabal of army officers and independence-era politicians, as they struggle to placate the peaceful grassroots movement Hirak that’s demanding sweeping changes.

“It’s a more critical moment of reckoning than it was a year ago, because here we have three crises -- economic, political and the virus -- potentially converging at a time when the population is still highly mobilized and trust in the state is low,” said Riccardo Fabiani, North Africa project director at the International Crisis Group. “The patronage system that buys support has never been this weak.”

What still sets Algeria apart is its almost complete lack of external debt. After an economic blueprint in late 2019 floated the idea of borrowing from abroad, Tebboune announced in March that the idea had been shelved.

But imbalances in the economy leave it open to other vulnerabilities.

The economic pain is already setting in. The General Association of Algerian Entrepreneurs said in March that 25,000 companies in the construction and public works sector had come to a standstill.

A confederation of industrialists and producers estimated Algerian companies had lost at least 70% of their markets. Italy, France and Spain -- all among the worst hit by the pandemic -- were the top three destinations for Algerian exports in 2019.

The country’s past oil and gas riches may mean it has enough foreign-currency reserves to be a buffer against crude prices of $15-$20 for about a year -- longer if the government introduces curbs on imports, Fabiani said.

This sets up the country, which was engulfed in a civil war for much of the 1990s, for another political showdown when its current restrictions to prevent the spread of the virus lift.

“I am sure that Hirak will pick up again as soon as the containment ends,” said Mohammed, a 30-year-old engineer at a state owned company who’s regularly taken to the streets in the past year and asked to be only identified by his first name for his safety. “Nothing will be able to stop it.”

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