Country Report Algeria August 2008

Outlook for 2008-09

• The threat to general security from the militant Islamist insurgency is likely to remain high in the near term, following a series of suicide attacks in 2007 and in May and June this year. This is not likely to affect overall political stability.
• The president, Abdelaziz Bouteflika, is expected to push through an amendment to the constitution enabling him to stand for a third term in 2009. This is likely to be approved by parliament, rather than by referendum.
• Fiscal policy will remain strongly expansionary. The supplementary budget for 2008 included an increase in projected expenditure of 12.9%. Even so, record oil receipts mean that the fiscal balance will post a large surplus.
• The government has stated that the output in the hydrocarbons sector is likely to be below forecasts in 2008. Although we still expect non-oil demand to remain strong, we have cut our forecast for real GDP growth in 2008 to 3.4%.
• Buoyant domestic demand will keep price pressures high in 2008, and average inflation this year is expected to be around 5.5%, before easing slightly in 2009.
• High international oil and gas prices mean that Algeria's current-account surplus is forecast to average 24.1% of GDP in 2008-09.

Monthly review

• We believe that the passing of a constitutional amendment to permit MrBouteflika to stand in 2009 is only a matter of time following the appointment of Ahmed Ouyahia as prime minister in June.
• In a speech in late July, Mr Bouteflika strongly denounced profit-taking by foreign investors. The speech heralded a stricter regime for foreign investors, including the obligation to reinvest profits locally.
• Mohammed Laksassi, the central bank governor, has announced that the bank will diversify its foreign-exchange reserves, in a bid to dampen inflation.
• Algeria's seventh international oil and gas round was launched on July 13th after a lengthy delay. The round introduces a new requirement on bidders, with some concessions being offered only in return for overseas assets.
• The imposition of a new car-sales tax has thrown dealers and consumers alike into disarray.
• Inflation decelerated slightly in June, after peaking at 6.3% year on year in May. Average inflation in the first six months of 2008 was 4.9%.
• Algeria's merchandise trade surplus for the first half of 2008 was US$22.6bn, up from a surplus of US$15bn in the same period of 2007. Export earnings reached US$40.5bn, and the import bill rose by 37.7% to US$17.9bn.