Boston, MA- USA, November 5, 2013. MEA Risk announces today the release of its Stability Rating for Algeria. As of November 5, 2013, Algeria receives rating “B-”, with a numerical grade of 50.7 on a scale of 1-to-100, with 100 representing the highest level of stability and anything below 16 representing a failed state.
Rating “B-” signifies that Algeria qualifies as “Watch Neutral Negative”. “Watch” means the country is going through a transition in one or many key factors of stability. The country is under observation. “Neutral” signifies that the current environment generally poses limited to no-risk of systemic failure, as the country retains capabilities and resources to maintain a stable environment. “Negative” signifies that despite the neutral assessment, current government actions and ongoing events are putting the country on a negative path, and unless changes are enacted, the country could move into deeper negative territory.
Summary of analysis and rating: Algeria is going through major transitions relative to its political, economic and social environments. Of these three categories, the Political Category is the worse performer, ending at 43 points on a max scale of 100. The country is facing a murky transitional leadership period. This murky transition is characterized by upcoming presidential elections whose key candidates are not known from voters only six months prior to the elections. This lack of visibility on the potential future President leads to numerous speculations that raise the risk level for Algeria. Among them is the possibility, although unlikely, that the current President Abdelaziz Bouteflika will be seeking another term. There are indications, albeit not confirmed, that Bouteflika may be looking for an interim period until a consensus figure emerges. This also hints on an ongoing internal debate among the regime leadership and an eventual lack of consensus on who to support as President.
This situation is evolving as President Bouteflika continues to receive medical attention due to illness at the age of 76. Despite his declining health and reduced physical abilities, Bouteflika and his allies have been working over the past years to lessen the role of opposition. At this stage, opposition in Algeria is minimal to non-existent. Even the usual counterbalance to the Presidency, the so-called DRS, the Algerian intelligence, seems to have been somewhat neutralized through changes in functions and leadership at the Ministry of Defense. These political maneuvers leave Algeria very vulnerable to a variety of weaknesses. So much so that all key political life has frozen. The national assembly, which is tasked to debate the nation’s parliamentary agenda, has been virtually inactive, leaving full decision making to President Bouteflika and the men surrounding him.
The political climate is further challenged by a tense regional security environment. Wherever Algeria looks, dangerous security issues remain a major distraction. To the east are Tunis and Libya, two countries that are facing severe transition periods. The fast growth of the Jihadists and the very presence of Islamists in power in Tunisia constitute points of concern. Libya in particular is source of dangerous factors, including free movement of weapons and people, and that could impact Algeria, which has dispatched about 22,000 troops to secure its southeastern border with Libya.
To the south is the presence of Al Qaeda and other Jihadists, whether they are in Mali, Niger, southern Libya and even within its territory. Ethnic feuds continue to fuel instability in Algerian regions like the Kabylie and in areas bordering Mali where conflicts between Arab and African Touaregs risk expanding if not neutralized.
Looking West, the Western Sahara territory remains a point of contention between Algeria and Morocco. Morocco has been pushing on the diplomatic front, but has been largely unsuccessful in gather US support on the Western Sahara issue. Meanwhile, Algeria and Morocco continue to watch each other with suspicion.
Given these various factors and more, we have rated Algeria’s Political Stability at “B-” Neutral Negative, graded at 43. We do not expect major changes to occur during the course of the fourth quarter 2013, but more when we get to the first quarter of 2014 ahead of the presidential elections.
On the economic front, Algeria also gets “B-” Neutral Negative, with a better grade of 53 points. The improved grade compared to the political grade is related to two key positive factors that Algeria enjoys, and that is its high foreign currency reserves of over $200 billion or about 44 months of import, and very low foreign debt at below $3.5 billion. Additionally, its gold holdings are worth some $7.5 billion. These figures indicate that Algeria has the financial capabilities to withstand severe social problems, especially related to subsidies to buy peace for stability.
However, there are growing concerns over a series of issues, from high inflation to stifling administrative business procedures. Our assessment of the negative factors starts with the global oil market where demand as a function of global GDP growth is not likely to grow, unless Algeria targets high-growth economies like China. Two economic blocks that Algeria supplies 85% of its hydrocarbon remain a concern in our analysis. Economic growth in the European Union is likely to be flat to negative this year and next, while even though its GDP may be growing over 2%, US imports of Algeria hydrocarbons have been declining. The resurgence of production of hydrocarbons within the United States, thanks to Shale Gas, is likely to lead the US to purchase less, and Algeria may be on the receiving end of this trend.
Within Algeria, economic and industrial policies remain underwhelming and inefficient. The country has a plan to upgrade its oil and gas industry, with investments in upstream, transport, downstream and marketing worth $80 billion to 2016. However, such investment, driven almost exclusively by state-owned oil company Sonatrach, will require foreign investment to be successful. Unfortunately, Algeria’s foreign investment code remains unpopular among major corporations, despite the latest round of fiscal incentives enacted by the Algerian government. Meanwhile, a confidence crisis over Sonatrach, the ministry of energy and the government in general, not only in the aftermath of the In-Amenas terror attack, but largely due to ongoing corruption scandals is affecting foreign investor perception of doing business in Algeria. Therefore counting on domestic investors should be the logical venue for decision makers, however even there, Algeria has been waging an anti-business offensive aimed at re-nationalizing private assets like steel firm ArcelorMitlal, tire company Michelin and mobile phone operator Djezzy, sending bad signals to local investors that their business is not fully welcomed. In addition and by extension, doing business in Algeria is very difficult and risky, and this environment is not likely to improve until at least after the presidential elections.
The Social/Human factors receive the higher grade of “B” or Neutral:Watch, with a grade of 56.6 point on a 100 point scale. Such outcome was the result of these key points:
• Algeria has sufficient financial reserves to withstand and manage social crises.
• Islamist insurgencies of the 1990s have been largely neutralized and existing Al Qaeda threats are not cause of imminent risk. Al Qaeda recruitment among the youth has been reduced substantially
• Ethnic conflicts are localized, minimal and pose no threat to broad stability.
Areas of concern related to socio-economic conditions include high unemployment, as well as on the democratization front, from gender equality and women/children rights, to independence judiciary, to religious rights, etc. Algeria has an opportunity to redress many of these weaknesses in its future constitution, but that would require a substantial paradigm shift in governance leadership.
“Given the current political climate, regional conflicts, economic and social conditions, we do not anticipate either an improvement in the Stability Rating or its degradation over the next 3 months,” says Arezki Daoud, Principal Analyst at MEA Risk. “We expect some changes to begin to affect our views at the beginning of 2014, as the regime will likely make its positions clearer regarding the April 2014 elections.”
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