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Algeria risk: Risk overview
[March 01, 2006]

Algeria risk: Risk overview


(RiskWire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING

FROM THE ECONOMIST INTELLIGENCE UNIT

RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC56C56Security riskC43C43Political stability riskC60C60Government effectiveness riskD71D71Legal & regulatory riskD68D68Macroeconomic riskA10A10Foreign trade & payments riskC57C57Tax policy riskB38B38Labour market riskD68D68Financial riskD79D79Infrastructure riskD66D66Note: E=most risky; 100=most risky.Overall assessment



Algeria's security risk is high, though improving. Social unrest remains a threat given high levels of unemployment, particularly among the young. Islamist insurgents, though greatly weakened in recent years, in particular by the general amnesty in the summer of 2005, remain a small threat in rural areas. Government effectiveness is weak and the influence of an opaque clique of army generals is generally malign, though their hold on the political economy is weakening. The bureaucracy is over-staffed and trade unions are generally restive. Against this, the cabinet is now dominated by reformists and they will strive to deregulate the economy, even if resistance from some quarters is likely to be fierce. An Association Accord has been signed with the EU and Algeria is keen to join the World Trade Organisation. The macro-economic outlook is good, though unemployment is widespread and due to structural, rather than cyclical causes.

Security Risk


Despite the recent general amnesty for militant Islamists, more radical elements within the two main outlawed Islamist groups are expected to continue their campaigns of violence. However, the level of threat is much reduced both in terms of intensity and geographical reach and the government will step up counter-insurgency measures to eliminate any remaining renegades, to whom little quarter is likely to be given following the amnesty. Road travel in the east is now comparatively safe, although in the west, fragments of the Groupe Islamique Armee still operate. The GIA is ruthless and makes no distinction between civilian and government personnel (all are considered "apostate"): moreover, foreigners would provide a tempting target. Travel to rural areas to the immediate west and south of Algiers should be avoided.

Political Stability Risk

There has been, and will continue to be, sporadic unrest in various areas of the country, stemming from inadequate affordable housing, high levels of unemployment and local corruption. Opacity of the political system is also a problem given the pervasiveness of clientlelism. The moderately reformist president, Abdelaziz Bouteflika has used his victory in the April 2004 presidential election to good effect by replacing conservatives in the military and elsewhere with his own supporters, although this hasn't yet fully translated into tangible reform measures.

Government Effectiveness Risk

Most of the military elite have probably been convinced of the value of foreign investment (as long as it does not impinge on their own retail operations or import concessions). In sectors such as power, water and housing, foreign firms are involved in Build-Own-Operate (BOO)-style projects and the process is reasonably transparent. However, more broadly, the quality of the bureaucracy is extremely poor and red tape and a reluctance to take decisions are major problems. Cronyism is also a plague in government departments, certainly in respect of hiring; less so in the award of contracts. The fact that unemployment is so high means that the bureaucracy is unlikely to be streamlined in the short term.

Legal & Regulatory Risk

Algeria signed an Association Accord with the EU in December 2001 and has made clear its commitment to join the World Trade Organisation (though necessary legislation - on intellectual property rights for example - has not been passed). Membership would help bring transparency to the legal process. However, for the moment the proper enforcement of business regulations is patchy and is subject to political pressure, as well as bureaucratic inertia. Algeria's colonial history was bloody and there is perhaps a latent suspicion of foreign motives, but this is not particularly acute. This same history gave rise to a strongly statist/protectionist system of government and this mentality still informs much of the bureaucracy. Consequently, the judiciary is neither nimble nor brave (decisions are often referred upwards). Nor is it particularly well versed in more contemporary issues such as intellectual property rights. Corporate accounting practices also leave much to be desired.

Macroeconomic Risk

The macroeconomic position is basically sound. The balance of payments outlook is extremely robust and management of the exchange rate is appropriate. Real growth prospects are good, though they are centred largely on the capital intensive, and geographically remote, hydrocarbons sector. Consequently, job-creation is largely a product of government spending and is therefore vulnerable to political pressures. Liquidity management is a concern, given unsophisticated monetary tools.

Foreign Trade & Payments Risk

The government's human rights record is dubious, and this is likely to cause friction with some of its EU trade partners, but the imposition of an embargo on the country is an extremely remote possibility. High tariffs are still a risk and the system tends to be revised in an ad hoc manner, often in response to "special interests" such as the military elite. Still, the government is now in the process of reducing these following strong pressure from the IMF and the EU. It should be noted, however, that the most recent round of tariff reductions simultaneously imposed a "temporary additional duty" of 60% on a list of goods (equivalent to about 8% of Algeria's tariff list). However, this has now been reduced to 36% and is due to be phased out completely by 2006. Algeria has extensive current and capital account controls.

Tax Policy Risk

Discriminatory taxes are a thing of the past and are unlikely to be brought back under any of the possible alternative governments. Indeed, the government insists that it is committed to attracting foreign investment and tax breaks for foreign investors are available. However, foreign companies continue to complain that the existing tax system is unwieldy and opaque. This may be more a product of the bureaucracy rather than the tax system itself, but unfortunately the prospects for bureaucratic reform are not good given high levels of unemployment. The influence of the military elite is also unhelpful, since they use the bureaucracy as a repository for their retainers.

Labour Market Risk

In the past Algeria's labour movement has often been used as a tool of the military elite to exert political pressure (or to undermine business rivals). This may still be the case, but the grassroots membership also holds considerable sway and union leaders cannot simply "rubberstamp" government decisions. While labour market laws are often enforced only laxly, the corollary of this is frequent strikes (this despite high levels of unemployment). Little emphasis is put on productivity gains when settling wages and skilled labour is at a premium. The latter problem, which has been exacerbated by a flood of emigration in the past 10 years, extends to ignorance of basic computing techniques. Alleviating the shortage of skilled workers will require major investment in education. The government says it is committed to this, but improvements will not be felt for a number of years.

Financial Risk

Financial intermediation is poor and is likely to stay that way over the next two years. The banking sector is dominated by six state-owned banks, whose asset quality is poor since they tend to lend to either loss-making public institutions or cronies of the military elite (the two largest private banks went bankrupt in 2003). Reform of the banking sector is likely to take time given the likely state of the public banks' balance sheets and the involvement of the military elite (the exact financial situation of these banks has still not been revealed to the IMF despite repeated requests). In a sign of the government's lack of confidence in the sector, in August 2004 the prime minister ordered all public funds to be withdrawn from private banks and deposited with the Treasury (the decision was unexpected, and criticised by the IMF, among others). The stock exchange is under-developed and under-capitalised.

Infrastructure Risk

Algeria's infrastructure risk is high--reflecting a hiatus of investment during the civil war ravaged 1990s--though the government has begun to spend money on its improvement. The road network is sparse and in disrepair in many areas. Construction and repairs have been hampered by the threat of Islamist attacks, particularly in the west of the country. The country's port facilities are reasonable, if poorly managed, but air links are poor, if improving--both Air France and British Airways have restored direct routes to Algeria. After years of neglect, Algeria's telecoms infrastructure is beginning to be upgraded, though most of the effort has focused on upgrading the cellphone network, which has expanded rapidly. Land-line connections remain meagre and unreliable and Internet use is still in its infancy. Water supply is being upgraded, but from a very low base. A severe earthquake in May 2003 further debilitated the housing stock.

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