Algeria’s CEOs bullish about local economy despite obstacles

En Français

After posting results of the OBG Business Barometer: CEO Surveys from countries around the world, including Mexico, the Philippines, Egypt and Saudi Arabia, being able to present the first edition on Algeria is a milestone. The country is full of opportunities and challenges, and certainly demands greater local knowledge than other markets.

The private sector in Algeria has gained a foothold in the last two decades, although it still faces limitations, such as those on imports, that clearly affect its performance. Those familiar with the business environment in Algeria will also know that foreign private capital must deal with certain restrictions: foreign investors have been barred from taking majority stakes in local firms and projects since 2009.

This is partly why I was pleasantly surprised by the results of OBG’s inaugural Algeria CEO Survey. Notably, over two-thirds of CEOs said they were likely or very likely to make a significant capital investment in the coming 12 months, which shows a level of comfort with the rules of the game – and hopefully is also a larger bet on diversification.

I’ll explain why I mention the need for diversification. At the macro level, economic dependence on the hydrocarbons sector is still noticeable. It explains the deficit levels of 2015 and 2016, which happened in line with the fall in oil prices. That is perhaps the least surprising conclusion of our CEO Survey: respondents cited a rise in oil prices as the external event that could have the greatest impact on Algeria’s economy (66%), followed by trade protectionism (18%). Other external factors were not ranked highly, for instance increased instability in neighbouring countries (6%) and Trump’s administration (also 6%)

There are therefore positives and negatives to Algeria’s somewhat closed business environment. For example, the country’s overdependence on the energy sector is risky and undoubtedly affects public revenues. However, its resilience to external elements can be useful in certain cases, as it enables relatively sustained growth despite the vagaries of the global economy.

The tax situation in Algeria is also complex and challenging. The 2017 Finance Law increased the standard value-added tax from 17% to 19% and the reduced rate from 7% to 9%. Unfortunately, this may discourage domestic consumption in the coming months. According to our barometer, it seems the business scene in Algeria is divided on the competitiveness of the tax environment. While 45% of respondents found the tax environment in Algeria competitive (41%) or very competitive (4%), some 37% consider it uncompetitive (34%) or very uncompetitive (3%). Importantly, the perceived tax pressure differed depending on the size of the company.

I want to dig deeper into a couple more questions from our CEO Survey. In one very interesting exercise that serves to compare standards, we ask CEOs about their level of satisfaction with the quality of local suppliers and service providers. Overall, 30% of respondents ranked their level of satisfaction with local suppliers and service providers as high, while 42% reported satisfaction as low and another 25% as neutral. What was interesting, however, was that a higher proportion of international companies were dissatisfied with local suppliers and service providers.

The excessive reliance on Algeria’s hydrocarbon reserves – which is evident throughout the results of this survey – is being tackled by the government’s “New Economic Growth Model”, introduced in 2016. The plan outlines a strategy to reorient the economy by 2030 so that it is more diversified, dynamic and self-sufficient.

The second decisive factor determining the economic evolution of Algeria will be its degree of openness. Although the current stance may help limit the impact of external political and economic ups and downs in the short term, being better prepared to compete in global markets would greatly increase the country’s potential
in the long run.

The Algerian business environment is not all black and white, however; despite its complexities, there is still a silver lining. Its economy has continued to consolidate its growth levels and appears to be ending the year with remarkable form. While the IMF projected GDP growth of 2.3-2.7% for 2017, 66% of respondents to OBG’s survey are bullish about the economy and trust that the 3% milestone will be surpassed.