Algeria Readies to Splash Cash as Oil Prices Rise

(Bloomberg) -- OPEC member Algeria is looking to boost spending outlined in its 2018 budget by 6 percent, capitalizing on high oil prices ahead of presidential elections next year.

A proposed amendment to the 2018 budget law would raise spending to almost 9.13 trillion dinars ($79 billion). The additional funds would be directed to the investment budget, which will rise 12 percent to 4.5 trillion dinars, according to a draft seen by Bloomberg.

Algeria, which relies almost entirely on oil and gas revenue for hard currency, has been struggling to narrow a budget deficit that had ballooned to over 15 percent of GDP with the plunge in oil prices that began in 2014. That slide had also nearly halved foreign reserves, sharply crimping the government’s ability to sustain costly subsidies that are key to maintaining social order in the North African nation.

To cover costs, the government laid out a plan that included borrowing from the central bank in order to avoid tapping international debt markets and imposed import restrictions to save hard currency reserves. Analysts warned the strategy posed risks, such as currency depreciation and high inflation.

Social Tension

The draft law didn’t detail where the additional money would come from or how it would be spent and a finance ministry official declined to comment. Analysts said, however, that the spending increase was most likely to be funded by the central bank and timed to coincide with the upcoming presidential elections in which aging and ailing President Abdelaziz Bouteflika is expected to seek a fifth term with no successor in sight.

Algeria Readies to Splash Cash as Oil Prices Rise

“In typical Algerian style, they are being extremely opaque about the sources of financing, but it can only be the central bank financing and the rise in oil prices,” independent North Africa analyst Riccardo Fabiani said. “With the debate around a fifth term for Bouteflika, the concern now is to smooth over rising tensions within society.”

Thousands of teachers and doctors have staged strikes since the beginning of 2018, demanding better pay and work conditions. The government’s response, which included bringing in a well-known religious figure to mediate with doctors, has had mixed results.

Oil Prices

The current budget is based on an assumption of Brent crude at $50 per barrel, while the international benchmark’s average per barrel price since the start of 2018 was $68.59. That increase in oil prices has already begun paying off for Algeria, with the trade deficit narrowing by 83.6 percent at the end of the first quarter of 2018 from $3 billion a year earlier. Inflation, meanwhile, has eased to 4.6 percent.

The additional expenditure, however, means that oil prices would need to rise further to balance the budget; the International Monetary Fund estimates the budget break-even point for Algeria will be $105.7 per barrel this year, up from $86.7 in 2017.

Algeria Readies to Splash Cash as Oil Prices Rise

The rise in oil prices gives the government policy flexibility, but economists warn it could be a double-edged sword.

"We’ve had experiences like this in the past -- when there’s a drop in oil prices, the government systematically adopts austerity measures, said Smail Lalmas, an Algiers-based economic analyst. “But as soon as there is a rise in oil prices, we go back to spending. There’s nothing to indicate that this time will be different.”

©2018 Bloomberg L.P.