Algeria Receives Neutral Negative Stability Rating, Graded 50.7/100 | MEA Risk is pleased to announce 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, as explained below. The country is under observation.

• “Neutral” means that current environment generally poses limited to no-imminent risk of systemic failure, as the country has the capabilities and resources to maintain a stable environment.

• “Negative” means 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.

Interpretation:

In our methodology, any grade that exceeds 66 points on “B+” rating and more indicates a safe nation, rated “Stable.” Below 66 and down to 36, the country qualifies as “Rated Watch.” This means although you can do business with that country, you must exercise caution and have contingency plans in case of force majeure, crisis or failure. This is because any critical aspect of governance could collapse, such as rule of law, security, independence judiciary, popular protest, etc. Yet the country remains interesting and has real advantages justifying doing business with. Anything below 36 remains a high risk with strong likelihood of failure. A stability rate of below 16 designates a “Failed State.”

Specific to Algeria:

Domestic and foreign investors, government, international, and academic institutions should interpret that a Grade 50.7-Rating “B-”-Watch:Neutral Negative as an indication that Algeria although stable but boasts major structural weaknesses, making it partly stable. While the country maintains attributes that justify doing businesses there, serious caution has to be applied when approaching Algeria. Companies should have proper due diligence and defensive posture in case of degradation. Where Algeria does well and where it does poorly are listed in the ‘Reasoning” section below:

Reasoning Leading to the “B-” 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 rated, ending at 43 on a max scale of 100. The country is facing a murky transitional leadership period, characterized by severe reductions in civil liberties and greater tension in the political world.

Political Factors:

This murky transition is characterized by upcoming presidential elections in which 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 stability risk level for Algeria. Any uncertainty and lack of clarify are negative variables in our model. Lack of communication, as is the case in Algeria today, is a by-product for lack of transparency, further worsening the Stability Rating.

Among the speculations is the possibility, although unlikely, that the current President Abdelaziz Bouteflika will be seeking a fourth term. There are indications, albeit not confirmed, that Bouteflika may be looking for an interim period until a consensus figure emerges. Former President Liamine Zeroual was cited as a potential replacement, but sources say that he did not accept the offer. This also hints of an ongoing internal debate among the regime leadership and an eventual lack of consensus on who to support as President.

This situation is still 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 weaknesses in the Bouteflika system. So much so that all key political life is virtually frozen. The national assembly, which is tasked to debate the nation’s parliamentary agenda, has been somewhat inactive, leaving full decision making to President Bouteflika and the men surrounding him.

The political climate is further challenged by a tough regional security environment. Wherever Algeria looks, dangerous security issues could affect its stability, and are certainly a major distraction. To the east are Tunisia 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 concerns. Libya in particular is source of dangerous factors, including free movement of weapons and people, and could impact Algeria.

To the south is the presence of Al Qaeda and other Jihadists, whether they are in Mali, Niger, southern Libya and even within the Algerian 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. More recently, Morocco recalled its Ambassador to Algiers in protest for a speech given by Algeria’s Justice Minister on behalf of Bouteflika in which he insisted on deploying human rights monitoring in the Morocco-controlled Western Sahara territory.

Economic Factors:

On the economic front, Algeria also gets “B-” Neutral Negative, with a better grade, yet very low 53 points. The improved grade compared to the political grade is related to two key positive factors that Algeria enjoys. They are 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 any substantial social disruptions, using subsidies to secure stability.

However, there are growing concerns over a series of issues, from high inflation to stifling administrative 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 to which 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 Algerian hydrocarbons have been declining, and likely to continue on that reduced momentum. The resurgence of production of hydrocarbons in 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, piloted 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, if not much later.

Social/Human Factors:

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 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 and its operations in the Sahara or in the northeast of Algeria do no represent an imminent threat.
• Ethnic conflicts are localized, minimal and pose no threat to broad stability.

Areas of concern relate to socio-economic conditions, with 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.

Outlook:

Given the current political climate, regional conflicts, economic and social conditions, we do not anticipate either an improvement in the Stability Rating or degradation over the next 3 months. 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.

To access the full report, please download it here.

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