Country Report Algeria September 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 recent increase in bomb attacks against official targets. 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 increased projected expenditure by 12.9% on top of the budget. Even so, record oil receipts mean that the fiscal balance will post a large surplus.
• New rules governing foreign investment could lead to a slowdown in investment growth in 2009. Despite buoyant domestic demand, we forecast real GDP growth of just 3.4% in 2008, rising below potential to 5.5% in 2009.
• Robust domestic demand will keep price pressures high in 2008, and inflation is expected to average around 5.4% this year, before easing slightly in 2009 to around 4.2%. Producer prices will fall in 2009.
• Algeria's current-account surplus is forecast to average around 20% of GDP in 2008-09, as international oil and gas prices remain above US$90/barrel.

Monthly review

• There was a major escalation in the activity of Islamist underground groups in Algeria in August, possibly reflecting the concern of al-Qaida's leadership to open up "new fronts" in the Middle East and North Africa.
• Mr Bouteflika has largely refrained from commenting on the increase in Islamist violence, possibly owing to his reticence to publicly admit that his civil reconciliation initiative has failed to deliver peace and security.
• The government has taken further measures to limit the activities of foreign investors. The latest measures entail, among other things, imposing a limit of 49% on foreign ownership of any investment project in Algeria.
• According to new rules, foreign investors will no longer be allowed to own land. Instead, they will be allowed to hold long-term leases, of 33-90 years.
• It is not clear whether changes to foreign investment rules will affect the investment projects that are currently being developed, such as a joint venture between Total of France and state-owned Sonatrach.
• The rate of inflation fell slightly in both June and July. The main driver of inflation continues to be food. The index for food and non-alcoholic beverages was up by 6.8% year on year in the first seven months of the year.

Source: Country Report