Algeria Economic & strategic Outlook 12/2008

Global Research

December 2008

Economic

Algeria Economic & Strategic Outlook

Algeri

a

Promising Opportunities

Global Investment House KSCCGlobal Tower,P.O. Box 28807 Safat13149 KuwaitTel: (965) 22951000Fax: (962) 22951299E-mail: [email protected]://www.globalinv.net

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Omar M. El-Quqa, CFAExecutive Vice [email protected] No: (965) 2295 1110

Faisal Hasan, CFAHead of [email protected] No: (965) 2295 1270

Mahmoud SoheimManager-Egypt [email protected] No: (202) 3760 9526

Cherine Fayez Farkouh, CFAFinancial [email protected] No: (202) 3760 9526

Table of Contents

Summary ................................................................................................................................ 1

Annual Indicators ................................................................................................................... 4

Economic News Flow (January 2008 to December 2008) .................................................... 5

Macroeconomic Profile .........................................................................................................10

Gross Domestic Product .......................................................................................................13

Public Finance .......................................................................................................................17

Public Debt ............................................................................................................................20

External Trade .......................................................................................................................22

Exports .......................................................................................................................22

Imports .......................................................................................................................23

Current Account ....................................................................................................................25

Capital & Financial Account and Balance of Payment ........................................................26

Foreign Direct Investment ....................................................................................................27

Privatization ..........................................................................................................................28

Monetary Policy ....................................................................................................................29

Foreign Exchange Reserve ...................................................................................................31

Exchange Rate ......................................................................................................................31

Inflation .................................................................................................................................32

Population and Labor Force ..................................................................................................33

Sector Performance ...............................................................................................................35

Hydrocarbons .............................................................................................................35

Oil ...................................................................................................................35

Natural Gas .....................................................................................................38

Banking ......................................................................................................................41

Telecommunications and IT ......................................................................................47

Agriculture .................................................................................................................51

Fertilizers ...................................................................................................................55

Steel ...........................................................................................................................57

Cement .......................................................................................................................59

Construction and Real Estate .....................................................................................61

Tourism ......................................................................................................................63

Capital Market ......................................................................................................................66

Global Research - Algeria Global Investment House

December 2008 Economic & Strategic Outlook 1

Summary

The financial windfall realized in the Algerian economy over the past several years reveals inherent investment opportunities, especially with the country’s prime location, which facilitates trade with other countries in both the African and European continents. Being among the top African countries possessing ample oil and gas resources, Algeria was able to take advantage of the international boom in the oil sector that took place since the late 90’s, realizing high revenues from the hydrocarbons projects. This has encouraged investment activity, which is expected to flourish furthermore given the country’s need for diversifying its sources of wealth beyond hydrocarbons.

During the period from 2003 to 2007, nominal GDP grew at a CAGR of 15.2%, while real GDP grew at a CAGR of 4.2%. Nominal GDP grew by 9.1% y-o-y between 2006 and 2007, reaching AD1 9,232.7bn. Whereas, real GDP grew by 4.6% y-o-y, reaching AD5,581.1bn, compared to AD5,335.7bn the previous year. According to the International Monetary Fund (IMF), nominal GDP is estimated to grow by 28.3% y-o-y, to reach AD11,849.9bn in 2008, while real GDP is estimated to reach AD5,852.3bn in the same year, a growth of 4.9%.

In 2008, the government surplus is expected to represent 14.3% of GDP, reaching AD1,694.5bn, implying a remarkable growth rate of 61.0%. This is attributable to the expected boost in revenues by 34.0%, compared to a 23.6% rise in expenses. The revenues’ acceleration is spurred by the 35.5% expected surge in hydrocarbons proceeds, reaching AD4,029.0bn.

The total public debt provisional figure represents 18% of GDP in 2007, that is approximately US$24.2bn, implying a y-o-y decline of 17.1%. Algeria was successful in dropping its total government debt, between 2003 and 2007, at a CAGR of 8.5%, mainly through the decline of its external debt.

Midyear export balances inclined by 61.5% as of June 2008, reaching US$44.3bn, compared to US$27.4bn in June 2007. This was mainly attributed to the hydrocarbon exports, forming 94.1% of total exports, as they rose by 55.0% over the year, reaching US$41.6bn, up from US$26.9bn.

Algeria increased its imports by 27.9% in 2007, as they reached US$27.4bn, compared to US$21.5bn in 2006. This represents a CAGR of 21.5% over the years from 2003 to 2007. The main imported products in 2007 were the industrial equipment, which amounted to US$10.0bn, representing 36.3% of total imports and realizing an increase of 16.7% over the previous year.

Preliminary results of June 2008 indicate that the current account surplus was ameliorated by 68.0% y-o-y, reaching US$22.3bn in June 2008, compared to US$13.3bn in June 2007. This was a result of many factors. Exports rose by 61.6%, compensating for the 81.8% jump in imports, leading to an acceleration of 45.2% in the trade balance, as it rose from US$15.2bn in June 2007 to US$22.0bn in June 2008. Meanwhile, the deficit in the services and income account dropped by 61.0%, reaching US$1.1bn, compared to US$2.8bn the previous year. Also, the transfers account was ameliorated by 54.0%, reaching US$1.3bn. The amelioration of the current account balance by 68.0% over the period from June 2007 to June 2008, has offset the increase in the capital account deficit, which became US$2.5bn, up from US$0.7bn, and led to an enhancement in the overall balance of the balance of payment by 57.1% over the same period, as it reached US$19.8bn, up from US$12.6bn.

1 AD=Algerian Dinar


2 Economic & Strategic Outlook December 2008

The Foreign Direct Investment (FDI) inflows to Algeria reached US$1.7bn in 2007, representing 1.2% of GDP, a decline of 7.2% y-o-y, as it stood at US$1.8bn in 2006. Meanwhile, it grew at a CAGR of 23.6% over the 3-year period starting from 2004, where it amounted to US$0.9bn.

Along with the liberalization process announced in the late 90’s, Algeria announced its movement towards a privatization program, taking various forms, starting from selling public enterprises, to even partial sales of state-owned corporations, which could take place either through the secondary market, organizing bids or through private deals. Usually, a restructuring of the state-owned enterprise takes place prior to the privatization, to ensure profitable and successful deals.

Over the period from June 2007 to June 2008, domestic liquidity (M2) in Algeria grew by 22.1%, reaching AD6,602.1bn, which was mainly a result of the 27.5% rise in Money Supply (M1), amounting to AD4,732.7bn, compared to AD3,712.2bn in June 2007. In addition, Quasi money accelerated by 10.4% over the same period, reaching AD1,869.3bn.

Net international reserves rose by 41.5% y-o-y, to reach US$110.6bn in 2007, compared to US$78.2bn, the previous year. This balance represents a CAGR of 34.9% over the 4-year period starting from 2003. The rise of oil and gas prices helped boost exports proceeds, which resulted in the surge of reserves over the period. As of June 2008, international reserves reached US133.2bn.

Future balances of foreign reserves will depend to a great extent on the trend of hydrocarbon prices in the coming period. The foreign exchange market in Algeria is controlled by Banque d’Algerie, through a floating management system. Most of the operations take place through the Central Bank, whereas a minor proportion is left to function within the interbank market.

Following the general trend that took place in 2007 in the whole world, inflation in Algeria has reached high levels, after it had slowed down for 2 years, to reach back the 3.6% level, which was achieved in 2004. Though the government has targeted inflation at 3.5% for 2008, IMF estimates that inflation would reach 4.3% by the end of 2008. It is worthy to note that inflation averaged 4.2% over the 9M period ending September 2008.

The Algerian economy is ruled by hydrocarbon exports, which amounted to US$59.3bn in 2007, contributing to almost 44.1% of GDP and 97.8% of the country’s total exports. The surge in hydrocarbons prices in recent years has had a positive effect on the whole economy, primarily improvements in the Country’s budget, external debt and foreign currency reserves.

Algeria is perceived as being under banked, with low penetration rate and low banking density. These facts carry out many potential opportunities for banks with expansion plans, which have been illustrated by the existence of international lenders in the market.

The Algerian telecom and IT sector took off in 2000 after the government’s decision to end its stronghold on the sector and the creation of the Post and Telecommunications Regulatory Authority (ARPT). As a result, the telecom and IT sector has transformed immensely with massive local and foreign investments, being directed towards constructing a state of the art telecommunications infrastructure.



While Algeria used to be a food exporting country, its current production does not meet the local demand, which led it to import around 45% of its food needs. In fact, Algeria became one of the main importers of wheat, agricultural seeds and milk products internationally. The majority of imports come from Europe, mainly France.

One of the main resources used to create nitrogenous fertilizers is natural gas, and since Algeria has one of the region’s largest natural gas reserves, it is perfectly positioned to be a major player in the fertilizers market.

Steel production in Algeria has been witnessing a steady rise over the past decade. During the mid-90s, output levels were decreasing due to a slowdown in the construction sector, however, since 1997 production levels have increased from 399 thousand tons to 1.2mn tons in 2006, representing a CAGR of 13.02%. This could be mainly attributed to the boom in the real estate sector, driven by companies from the Middle East.

The cement sector in Algeria has been steadily growing over the past five years, due to the renaissance of the construction sector. The policies adopted by the Algerian government since the mid-1990s directed at the enhancement of foreign investments are now bearing fruits, as massive projects are being announced aiming at revolutionizing Algeria’s construction and infrastructure sector.

As for the construction and real estate sector, it has been witnessing an annual real growth rate of around 7% since 2002. The sector confronts many challenges in Algeria. These are represented by lands’ paucity, which consequently drives prices higher, lack of experienced labor, in addition to growing construction costs. The real estate sector is expected to witness further progress in the future, especially with the prevailing aim of diversifying the Country’s sources of wealth away from the hydrocarbons sector. In addition, the fact that 69% of the population is between the age of 15 and 64 years old had increased demand on real estate, which should in turn trigger new projects establishments.

Concerning infrastructure, as most of Algeria’s external trade takes place through its ports, the Algerian government realizes the importance of ameliorating its ports performance. Therefore, it announced in August 2008 the recuperation of the port of Oran. There is another plan to expand the port of Bejaïa, which is deemed to be the most important port in Algeria after the port of Oran, by an additional 43ha. As for the Djendjen and Algiers ports, the Emirati “Dubai Ports World” (DPW) announced that they would initially invest around US$108mn for the development and expansion of these two ports. Moreover, the Algerian government plans to privatize 30 ports, one of which is the port of Oran.

The tourism sector is weakly performing in Algeria. This is due to the lack of superior accommodation in addition to security problems, which have been somehow improved over the last few years. It is worth mentioning that Algeria receives approximately 200 thousand tourists per year. The sector is expected to show better performance in the future, especially with the existence of announced plans for new hotels establishments.

The Algerian capital market is still very much inactive. The stock exchange (Bourse des Valeurs Mobilieres d’Alger) was established in the 1990’s and has very few listed stocks. Only 2 companies were listed in the stock exchange in 2007 and were not even witnessing a considerable trading activity.



Annual Indicators 2003 2004 2005 2006 2007 2008FEconomic PerformanceGDP at Current Prices (ADbn) 5,247.5 6,135.9 7,544.0 8,460.5 9,232.7 11,849.9GDP at Current Prices (US$bn) 67.8 85.1 102.7 116.8 134.3 171.3Growth Rate of GDP at Current Prices (%) 16.0% 16.9% 22.9% 12.1% 9.1% 28.3%GDP at Constant Prices (ADbn) 4,731.2 4,977.2 5,231.1 5,335.7 5,581.1 5,852.3Growth of GDP at Constant Prices (%) 6.9% 5.2% 5.1% 2.0% 4.6% 4.9%Per Capita GDP at Constant Prices (AD’000) 148.6 153.8 159.0 157.9 162.2 168.2Inflation, Average Consumer Prices (%) 2.6% 3.6% 1.6% 2.5% 3.6% 4.3%Population (mn) 31.8 32.4 32.9 33.8 34.4 34.8Government Finance (ADbn)*Total Revenues and Grants** 1,947.5 2,215.2 3,082.7 3,639.9 3,803.9 5,095.5

Hydrocarbon Revenue*** 1,350.0 1,570.7 2,352.7 2,799.0 2,972.9 4,029.0Total Expenditures 1,691.4 1,891.8 2,052.0 2,452.7 2,751.4 3,400.9

Personal Expenditure 398.0 446.8 492.2 531.3 470.9 568.8Other Current Expenditure 723.0 798.7 749.2 902.4 1,098.7 1,315.3Capital Expenditure 570.4 646.3 810.6 1,019.0 1,181.8 1,516.8

Budget Balance 256.1 323.4 1,030.7 1,187.2 1,052.5 1,694.5Special Accounts Balance 187.1 109.9 (129.0) (4.0) N/A N/ANet Lending by Treasury 32.6 11.8 5.2 32.0 N/A N/A

Overall Balance**** 410.6 421.5 896.5 1,151.2 N/A N/AGovernment Debt (US$bn)***** 34.5 34.3 29.6 29.2 24.2 N/AGross Domestic Public Debt (US$bn) 12.7 13.9 14.2 25.4 N/A N/AGross External Debt (US$bn) 21.8 20.4 15.5 3.7 N/A N/ABalance of Payment (US$bn)******Trade Balance 11.9 15.1 26.4 33.3 34.1 22.0

Total Exports 24.5 32.2 46.5 54.8 60.3 44.3Total Imports (12.6) (17.1) (20.0) (21.5) (26.3) (22.3)

Services and Income (Net) (4.1) (5.6) (7.4) (6.7) (6.4) (1.1)Transfers (Net) 1.8 2.5 2.1 1.6 1.9 1.3Current Account 9.6 11.9 21.1 28.2 29.5 22.3Capital Account (1.4) (1.9) (4.2) (11.2) (0.4) (2.5)Overall Balance 8.2 10.0 16.9 17.0 29.1 19.8Money and Banking******Money Supply (M1) (ADbn) 1,630.3 2,160.5 2,421.4 3,167.6 4,214.3 4,732.7Quasi-Money (ADbn) 1,724.0 1,577.5 1,736.2 1,766.1 1,763.7 1,869.3Net Foreign Assets (ADbn) 2,342.6 3,119.2 4,179.7 5,515.1 7,402.6 8,290.4Domestic Credit (ADbn) 1,803.6 1,514.4 846.6 601.4 (1.2) (565.7)International Reserves (US$bn) 33.4 43.6 56.6 78.2 110.6 133.2Interest RatesDiscount Rate 4.50% 4.00% 4.00% 4.00% 4.00% 4.00%Deposit Rate 4.50%–5.75% 2.25%–3.25% 1.25%–2.50% 1.80% 1.80% 2.00%Lending Rate 8.00%–9.00% 6.00%–9.00% 5.50%–9.00% 8.00% 8.00% 8.10%Real Interest Rate 1.30% 0.51% 0.09% (2.68%) (2.12%) N/AExchange Rates******* (AD/US$) end of period N/A 72.6137 73.3799 71.1582 66.8299 62.8140(AD/US$) period average N/A 72.0659 73.3627 71.0716 67.0718 63.3613(AD/EUR) end of period N/A 98.9507 87.0176 93.7545 98.3302 98.9664(AD/EUR) period average N/A 89.6423 91.3014 93.9017 97.6445 98.6392

*Estimated balances in 2007 and 2008** Excluding privatization receipts, which are classified under nonbank financing***Including dividends on current profits paid by Sonatrach****Including special accounts, net lending and operations of the Rehabilitation Fund*****Estimated balance in 2007******Provisional balances in 2007 and provisional midyear balances in 2008*******For 2008, end of period rates are for the end of June, while average rates represent average of rates in the month of June

Source:IMF, BP, Energy Information Association, African Development Bank, Organization for Economic Co-operation and Development, CIA World Factbook, Banque d‘Algerie, World Bank, Economist intelligence Unit, Go Currency website and Global Research



Economic News Flow (January 2008 to December 2008)

January • Mr. Abdelhamid Temmar, Industry and Investments Promotions Minister said that both

cement units located in eastern and center Algeria have been sold to the Italian company, Buzzi Unicem in an exceptional deal. The objective of such a concession, estimated to 35% of the capital of each company, is to improve both production capacity and consolidating current manpower.Mr. Temmar said that he is expecting the Italian company is to double its annual production capacity, estimated currently to 1mn tons, in order to meet the huge demand of workshops undertaken in the framework of the Republic President program, namely the 1mn houses and East-West highway projects. In accordance with the contract terms, the Italian company will be in charge of increasing cement production of the two units as to reach 945 thousand tons of clinker in Hdjer Essoud, and 900 thousand tons in Sour El Ghozlane factory. (Source: El Khabar Newspaper)

• 13 major state-owned companies will be included in a list of the 1 hundred companies list, which are to be set for privatization in the framework of the program of privatization process of the first half of the ongoing year, has unveiled the Minister of Industry and Investments Promotions, Mr. Temmar, adding that these companies are pertaining to several economic fields, namely steel industry, washing, cleaning and public works. (Source: El Khabar Newspaper)

• The construction sector nationwide is suffering from a steel shortage crisis, which has contributed to raising the prices to reach about AD1,500 per 50kg, following the new prices development in the international stock exchanges reaching AD650 per 50kg. These high prices have hindered the construction company’s activities, because of the escalating steel prices, traded at AD6,500 per 50kg, while few weeks ago it was traded at AD500 per 50kg. According to some experts, this situation could curb the housing projects being constructed, especially the social and participatory projects, whose prices have been already fixed by public authorities.(Source: El Khabar Newspaper)

• Oil prices under $60 will threaten the Algerian economy, because this will create difficulties related to different projects funding, indicated the Minister of Industry and Investments Promotion, adding that if the prices will lower to $60, this will not put the economy in jeopardy during 3 years only.

Regarding the privatization issue, Mr. Temmar has unveiled that 417 companies have been partially or completely privatized since 2003, this managed the public treasury to receive AD125bn, and to maintain 36 thousand jobs and create 18,396 new jobs. (Source: El Khabar Newspaper)

• The government has given the green light to the Ministry of Small and Medium Sized Enterprises, to elaborate a plan of action meant to resolve the companies’ financial charges issue, unveiled Mr. Mustapha Ben Bada, the sector’s Minister. Still, the private SMEs debts are valued at AD713bn, while all financings have been granted to these companies by public banks. In this context, the Minister said 100 companies are asking the Ministry to cut their financial charges. (Source: El Khabar Newspaper)



February • Bahrain-based Gulf Finance House (GFH) announced that it has reached an agreement

with the government of Algeria to establish a US$3bn GFH Economic Development Zone on the outskirts of Algiers. The zone would be the primary commercial development within the new master planned city of Bouinan and is expected to have an end value of more than US$3bn once completed on a 2.8 square km site. The GFH special projects team is currently working with industry experts to finalize the business districts of the zone and the business clusters within each business district. It is expected that the zone could include energy, financial, telecommunications, and IT business districts, as well as residential development and leisure facilities. (Source: MENAFN - Arab News)

• The Emirates International Investment Co (EIIC) plans to construct a US$5bn park (Parc Dounya), known as the green belt in Algeria. The Abu Dhabi-based EIIC will use its own resources to finance the Park on 670 hectares in the Algerian capital, with a quarter of the land set aside for commercial and residential use. The purpose of the new development is to provide a place where stressed residents can unwind. EIIC also has other projects in Algeria including a US$200mn luxury hotel development near Algiers, a dairy farm complex in the south and an electrical cable manufacturing company. (Source: MENAFN)

March • The real estate firm, SNASCO, which recently announced its intention to enter the

Algerian real estate market, has now announced the opening of its offices in Hidra- Algeria. SNASCO’s offices in Algeria will service the country, as well as the general North Africa region, where studies have shown a significant increase in investment across a number of economic sectors. (Source: MENAFN - Khaleej Times)

April • The Daewoo Engineering & Construction Co. announced that the Company has received

a US$626.5mn contract to construct a part of a fertilizer factory in Algeria. The Algerian plant will have a production capacity of 4,000 tons of ammonia per day, 7,000 tons of urea and 7,000 tons of granulated urea. (Source: MENAFN)

• Nokia Siemens Networks and Wataniya Telecom Algerie announced that, WTA will deploy Nokia Siemens Networks’ state-of-the art 3GPP Release 4 mobile soft-switching solution. This solution allows Wataniya to immediately reduce operating expenses, while accelerating the deployment of new services to mobile subscribers. (Source: MENAFN)

May • Spain’s General Cable announced that it has entered a joint venture for majority

ownership of E.P.E/EN.I.CA.BISKRA SPA (Enica Biskra), which is a leading provider of utility cables to the principal Algerian state-owned power utility and gas producer. Spain’s General Cable is seeking to aggressively invest in business, mainly for the fast growing Middle East and North African regions, which have more than four billion euros of addressable wire and cable demand. It is noteworthy that Enica Biskra is located in the province of Biskra, Algeria, roughly 260 miles southeast of Algiers and is on an 86 acre site with approximately 1mn square feet of manufacturing, warehousing and office space. (Source: MENAFN)



June • UAE has predicted that the Country’s investments in Algeria will reach US$50bn within

the coming few years. The UAE committee members discussed with their Algerian counterparts means to expand cooperation and joint investments in the industry, services, agriculture and energy sectors. (Source: Emirates News Agency (WAM))

July • JGC Corp., Japan’s second-largest plant engineering company, announced that it has won

a US$500mn order from Sonatrach, Algeria’s state-owned oil company, to construct a crude oil and natural gas treatment plant. The plant, to be built in Algeria’s Rhourde Nouss district, will be completed in 2011. JGC will handle the design and procurement of equipment, while wholly-owned unit JGC Algeria will construct the factory. Crude oil and gas will be separated at the plant and shipped through pipelines to oil refineries and gas treatment facilities. (Source: Reuters)

August • Algeria’s Energy and Mines Minister said that the Country’s energy sector plans to invest

US$45.5bn in 2008-2012, with US$35.8bn from state company Sonatrach and US$9.7bn from foreign partners. He further added that the aim of the spending is to increase the North African OPEC (Organisation of Petroleum Exporting Countries) member country’s oil production and gas exports. Sonatrach’s total investment, including its partners’ share, over the medium term plan of 2008 to 2012, amounts to US$45.5bn. (Source: Gulf News)

• The Algerian Prime Minister said that his government is planning to take a majority stake in any future investment project involving foreign capital, outlining a measure which already applies to much of the oil and gas sector. The North African country of about 34mn people is an important oil and gas supplier to Europe. In the energy sector, state energy conglomerate Sonatrach has the right to a 51% stake in any exploration and production and downstream activity. Outside of the oil and gas sector, foreign investors at present can own a majority stake in their Algeria ventures. Until recently, some of these foreign investors could repatriate 100% of their profits. (Source: Gulf Daily News)

• Algeria and Iran signed an agreement to build an assembly unit for train cars and a cement factory totaling Euro22mn. Algerian President of chamber of Commerce and Industry Ibrahim bin Jaber said, after a joint meeting between Algerian and Iranian businessmen, that Iran share from the agreement will be 51%, including the establishment of a cement factory with an estimated production power reaching 1mn tons annually. The Algerian official also stated that the amount of commercial exchange between the two countries reached US$25mn and is expected to reach US$50mn by the end of 2008. (Source: Kuwait News Agency (KUNA))

• The Chairman of SNASCO announced that the company has recently signed an agreement with the Family Housing Development Establishment in Algeria, to develop a waterfront project in the city of Oran worth roughly US$400mn. He further pointed out that the development is situated near the well-known Conference Palace project and extends over 150,000 square meters. (Source: Gulf News)



September • Alumco LLC, the UAE-based specialized aluminum facade contractor and major glass

processor, and Saudi Arabia-based Construction Products Holding Company (CPC) announced today the signing of a Memorandum of Understanding (MOU) to set up a new aluminum extrusion factory in Algeria. The project will involve investment to the tune of AED100mn and capital will be raised equally by both Alumco and CPC. The new factory, spread over 100,000 square meters, will have an initial production capacity of 50,000 tons per year, revealed Mr. Barakat, and work on the project is expected to start within six months from the signing of the MOU, with completion due within nine months to one year. (Source: Bahrain Tribune)

October • Swicorp announced a new partnership with Petroser. Petroser is the leading privately held

distributor of fuel and related products in Algeria. Under the terms of the partnership, Intaj Capital, Swicorp’s US$250mn private equity vehicle focusing on sectors driven by growth in consumer demand in the Middle East and North Africa region, has provided funding to allow Petroser to expand into two new lines of business. (Source: Khaleej Times)

• Bahrain-based Islamic investment bank, Al Salam Bank commenced operations in Algeria taking its Islamic banking model to the North African region. The bank acquired the license of Algeria’s Money and Credit Council to operate as one of the largest banks in North Africa and to offer its banking services through its headquarters in the Kingdom, besides a branch in the Algerian capital city with a paid up capital of AD7.2bn (US$100mn). (Source: Bahrain Tribune)

November • Dubai Ports World (DPW) will invest initially US$108mn in developing the ports of

Algiers and Djen-Djen. Sultan Ahmad Bin Sulayem, DPW Chairman said that the ports of Algiers are in need for the advanced equipments and machines, and have to be larger to accommodate bigger vessels. The project will handle these needs. Commenting on the size of the investment, Bin Sulayem said this is an initial investment, which will be increased when the traffic of the vessels starts. DPW will upgrade the infrastructure of the ports to accommodate even the fourth generation of the huge vessels, he added. Amar Tuo, Algerian Minister of Transport, said that Algeria is going through huge development, where a budget of US$200bn had been allocated to the 2005-2009 plan. Algerian ports will end up in a high level that would match up with the expected future Algerian wealthy economy. (Source: Gulf News)

• Two-way trade between France and Algeria, France’s biggest trade partner in Africa, is on course to reach Euro10bn (US$12.88bn) in 2008, a record high. Two-way exchanges between France and the OPEC member country in the first nine months of 2008 stood at Euro7.7bn, a rise of 49% from the same period in 2007. In 2007, two-way trade amounted to Euro7.52bn, with France running a surplus of Euro779mn. In 2006 trade stood at Euro8.17bn, with France running a deficit of Euro97mn. While some of the increase is attributable to higher world prices for oil and gas -- Algeria’s principal exports -- the increase also indicates a widening and deepening of French commercial interests in Algeria. More than 300 subsidiaries of French companies were present in Algeria, three



times as many as in 2005, directly employing 30,000 people and indirectly supporting 100,000 jobs. French exports are mainly food and agricultural products, worth 23% of the total, automobiles and automotive products, worth 15%, and pharmaceuticals, perfumes and cosmetics, worth 12%. (Source: Reuters)

December • Algeria’s decision to stop importing locally-produced medicines will save up USD500mn

of its annual pharmaceutical imports cost, according to the permanent secretary of Algerian Pharmaceutical Industry Union. (Source: Echorouk Newspaper)



Macroeconomic Profile

The financial windfall realized in the Algerian economy over the past several years reveals inherent investment opportunities, especially with the country’s prime location, which facilitates trade with other countries in both the African and European continents. Being among the top African countries possessing ample oil and gas resources, Algeria was able to take advantage of the international boom in the oil sector that took place since the late 90’s, realizing high revenues from the hydrocarbons projects. This has encouraged investment activity, which is expected to flourish furthermore, given the country’s need for diversifying its sources of wealth beyond hydrocarbons.

Revenues from oil and gas projects were the main reason behind the country’s ability to realize notable growth in its economy. This was reflected on its GDP figures, as nominal GDP grew by 9.1% in 2007, AD9,232.7bn, compared to AD8,460.5bn in 2006. While in real terms, GDP rose by 4.6% in 2007, reaching AD5,581.1bn, compared to AD5,335.7bn the previous year. Meanwhile, nominal GDP grew at a CAGR of 15.2% over the period from 2003 to 2007, whereas real GDP grew at a CAGR of 4.2%. It is worth mentioning that nominal GDP is expected to reach AD11,849.9bn in 2008, growing by 28.3% y-o-y. As for real GDP, it is expected to rise by 4.9% in the same year, reaching AD5,852.3bn.

The main catalyst behind such results was the performance of the hydrocarbon sector, contributing to around 44% of GDP and around 98% of total exports in 2007. It is worth mentioning that most of the projects in this sector are concerned with upstream activity. The sector grew by 4.9% y-o-y in 2007, reaching AD4,071.6bn, up from AD3,882.2bn in 2006. The sector’s projects dominate Foreign Direct Investment (FDI) inflows, which reached US$1.7bn in 2007, representing 1.2% of GDP.

Spurred by high hydrocarbons revenues realized over the beginning of 2008, the government is expected to realize a growth rate of 61.0% in its fiscal surplus in the same year, to reach AD1,694.5bn, where public revenues and expenditure are expected to grow by 34.0% and 23.6%, respectively.

The high revenues realized from the hydrocarbon projects in Algeria over the past years enabled the government to make advance payments and reduce its external debt considerably in 2006, as it reached US$3.7bn, compared to US$15.5bn in 2005, a decline of 75.8%. This had in turn positively affected many aspects of the country’s economy. These include the amelioration of the total government debt, as it reached an estimated balance of US$24.2bn in 2007, compared to US$34.5bn in 2003, declining by a CAGR of 8.5% over the 4-year period. Meanwhile, the reduction of external debt resulted in a 96.1% drop in the capital account deficit in 2007, which in turn resulted in an amelioration of the overall balance of the balance of payment, as it reached US$29.1bn, in 2007, up from US$17.0bn in 2006. Moreover, the decline in external debt resulted in an enhancement of the Domestic Liquidity (M2) after 2006, as it grew by 21.2% in 2007, compared to a growth rate of 18.7% in 2006.

One of the main challenges that the Algerian government faces is the high level of unemployment, which had an estimated rate of 14.1% in 2008. It is worth mentioning that unemployment rate in Algeria is considered higher than the average rate in the MENA region.



Nevertheless, the government was able to significantly reduce this rate, as it represented 31.0% in 2003.

The Algerian economy still has a lot of unexploited opportunities. The hydrocarbon sector governs the majority of projects taking place in the country. This fact may hinder the Algerian economy, as the Minister of Industry and Investments Promotion stated early this year that if oil prices went below US$60, problems in projects financing would arise. As proposed by the IMF, the government shall move towards wealth diversification. This could be achieved through concentrating on other sectors, which have promising potentials and will consequently reduce the unemployment rate. These sectors include banking, telecom, fertilizers, real estate, construction and other sectors. In addition, the IMF perceives that the Algerian economy may not be harmed with the global financial crisis, as the banking system in Algeria is minimally exposed to the international markets, nevertheless, the IMF suggested that macroeconomic policies should be flexible to handle any possible hard drops in oil prices.

A commission related to the finance ministry is currently monitoring the global financial crisis to propose any necessary amendments in the Algerian macro-economic policies, if the country’s economy is to be negatively affected by the world financial turmoil.

Other attempts of the Algerian government to secure the economy’s development was a new legislation announced in August 2008, which was concerned with restricting foreign participation in any business to only 49%. In addition, taxes of 15% will be imposed on repatriated capital starting from 2009. We believe this was a reasonable decision taken by the government to ensure the reinvestment of capital in the country and in the mean time this action will guarantee that citizens will benefit from their own economy’s improvement. Meanwhile, these decisions did not cut foreign investors’ appetite in the Algerian market. This is illustrated by the flow of announced foreign investments in various sectors, including energy, cement, real estate and fertilizers. It is worth mentioning that greater attention to downstream projects should take place in order to take advantage of the intrinsic opportunities in the energy sector.

In addition, the government announced plans to privatize state-owned enterprises and banks but the privatization process is still considered sluggish and is expected to remain slow over the coming period, due to the current world economic disorder. Moreover, it announced a plan to resolve abnormal debts of the Small and Medium Sized Enterprises, expected to witness growth, where the total finance charges on these companies were estimated at more than AD700bn at the beginning of 2008.

The government shall exert efforts to facilitate the ease of doing business in the Country to encourage the entrance of foreign investors in the market. A report published by the World Bank indicated that Algeria ranked number 132, in terms of ease of doing business, in a sample composed of 181countries.



Table 01: Algeria’s ranking in “Doing Business 2009”

Rank Doing Business 2009

Ease of Doing Business 132

Starting a Business 141

Dealing with Construction Permits 112

Employing Workers 118

Registering Property 162

Getting Credit 131

Protecting Investors 70

Paying Taxes 166

Trading Across Borders 118

Enforcing Contracts 126

Closing a Business 49Source: World Bank (Doing Business 2009 Report-Country Profile for Algeria)



Gross Domestic Product

Being ranked among the top African countries in terms of holding ample hydrocarbons reserves, Algeria’s economy is highly dependent on the oil and gas sector, which revenues were the catalyst for the Country’s economic growth. This growth was reflected on Algeria’s GDP acceleration in recent years.

During the period from 2003 to 2007, nominal GDP grew at a CAGR of 15.2%, while real GDP grew at a CAGR of 4.2%. Nominal GDP grew by 9.1% y-o-y, reaching AD9,232.7bn, compared to AD8,460.5bn in 2006. Whereas, real GDP grew by 4.6% y-o-y, reaching AD5,581.1bn, compared to AD5,335.7bn the previous year. According to the International Monetary Fund (IMF), nominal GDP is estimated to grow by 28.3% y-o-y, to reach AD11,849.9bn in 2008, while real GDP is estimated to reach AD5,852.3bn in the same year, a y-o-y growth of 4.9%.

Table 02: Gross Domestic Product 2003 2004 2005 2006 2007 2008*

GDP at Current Prices (ADbn) 5,247.5 6,135.9 7,544.0 8,460.5 9,232.7 11,849.9

GDP at Current Prices (US$bn) 67.8 85.1 102.7 116.8 134.3 171.286

Growth Rate of GDP at Current Prices (%) 16.0% 16.9% 22.9% 12.1% 9.1% 28.3%

GDP at Constant Prices (ADbn) 4,731.2 4,977.2 5,231.1 5,335.7 5,581.1 5,852.3

Growth of GDP at Constant Prices (%) 6.9% 5.2% 5.1% 2.0% 4.6% 4.9%

Per Capita GDP at Constant Prices (AD’000) 148.6 153.8 159.0 157.9 162.2 168.2

Population (mn) 31.8 32.4 32.9 33.8 34.4 34.8*EstimatedSource: IMF and Global Research

The per capita GDP at constant prices reached AD162,242.1 in 2007, compared to AD157,860.6 in 2006. It realized a CAGR of 2.2% over the 4-year period ending 2007. As per the IMF, the per capita GDP at constant prices is estimated to reach AD168,169.1 in 2008.

Chart 01: GDP Growth

4,73

1.2

4,97

7.2

5,23

1.1

5,33

5.7

5,58

1.1

5,85

2.3

6.9%

5.2% 5.1%

2.0%

4.6% 4.9%

4,000

4,500

5,000

5,500

6,000

2003 2004 2005 2006 2007 2008E0%

1%

2%

3%

4%

5%

6%

7%

8%

GDP at Constant Prices (ADbn) Growth of GDP at Constant Prices (%)-(right scale)

Source: IMF

The major contributor to GDP at all times was the hydrocarbon sector, which share reached 44.1% in 2007, amounting to AD4,071.6bn, up from AD3,882.2bn in 2006. This implies a y-o-y growth of 4.9%. It is worthy to note that the hydrocarbon sector grew by 15.8% in 2006,



compared to a growth of 44.5% in the previous year. This drop justifies the deceleration of real GDP growth from 5.1% in 2005 to 2.0% in 2006. The development of hydrocarbons sector indicates a CAGR of 21.5% over the 4-year period from 2003 to 2007.

Table 03: GDP by Economic Activity-at Current Prices

2003 2004 2005 2006 2007*Hydrocarbons 35.6% 37.8% 44.4% 45.9% 44.1%Other sectors 56.7% 54.9% 49.0% 48.7% 50.0%

Agriculture 9.8% 9.4% 7.7% 7.6% 7.7%

Industry 6.7% 6.2% 5.3% 5.0% 4.7%

Construction and public works 8.5% 8.3% 7.5% 8.0% 8.7%

Services 31.7% 31.1% 28.5% 28.1% 28.9%

Nongovernment services 21.2% 21.2% 20.1% 20.1% 20.5%

Government services 10.5% 9.8% 8.4% 8.0% 8.4%Imports taxes and duties 7.7% 7.3% 6.5% 5.4% 5.8%*ProvisionalSource: Banque d’Algerie, IMF and Global Research

The second highest contributor to GDP is the services sector, combining both government and non-government services. This sector constituted 28.9% of GDP in 2007, amounting to AD2,668.3bn, compared to a share of 28.1% in 2006, where its balance was AD2,381.3bn. This sector realized a growth of 12.1% in 2007, up from the 10.8% growth realized in the previous year. Over the 4-year period from 2003 to 2007, the services sector grew at a CAGR of 12.5%.

Chart 02: GDP Composition by Economic Activity-2007*

Hydrocarbons44.1%

Agriculture7.7%

Industry4.7%

Construction andPublic Works

8.7%

Services28.9%

Imports Taxes and Duties5.8%

*Provisional

Source: Banque d’Algerie, IMF and Global Research

The share of construction and public works in GDP in 2007 was 8.7%, reaching AD803.2bn, compared to a share of 8.0% the previous year, amounting to AD674.3bn. This sector was able to realize a y-o-y growth of 19.1% in 2007 and a CAGR of 15.9% for the 4-year period starting from 2003.



Meanwhile, the agriculture sector captured a share of 7.7% of GDP in 2007, amounting to AD710.9bn, compared to a share of 7.6% the previous year, reaching AD639.7bn. This sector realized a significant escalation in its growth, as it jumped from 0.1% in 2005 to 10.4% in 2006 and further to 11.1% in 2007. In addition, it realized a CAGR of 8.4%, over the period from 2003 to 2007.

Industry, excluding hydrocarbons, had a share of 4.7% of GDP in 2007, down from 5.0% the previous year. This sector witnesses a y-o-y growth rate of 1.9% in 2007, and a CAGR of 5.5% over the 4-year period, starting from 2003.

Table 04: GDP Composition by Expenditure Activity-Current Prices

In ADbn 2003 2004 2005 2006 2007*Jan-Jun

2007*Jan-Jun

2008* Final Consumption 2,902.5 3,216.0 3,414.7 3,643.3 N/A N/A N/A

Household Consumption 2,125.0 2,369.1 2,549.0 2,688.9 N/A N/A N/A

Public Consumption 777.5 846.9 865.7 954.4 N/A N/A N/A

Investment 1,590.1 2,034.1 2,380.1 2,501.3 N/A N/A N/A

Fixed Capital Formation 1,265.2 1,476.9 1,680.8 1,951.2 N/A N/A N/A

Change in Inventory 324.9 557.2 699.3 550.1 N/A N/A N/A

Net Exports* 754.9 885.8 1,749.2 2,315.9 2,284.0 1,030.8 1,393.9

Exports of Goods and Services 2,009.0 2,462.9 3,569.6 4,147.4 4,044.6 1,864.9 2,806.3

Imports of Goods and Services 1,254.1 1,577.1 1,820.4 1,831.5 1,760.6 834.2 1,412.3*ProvisionalSource: IMF, Banque d’Algerie and Global Research

The African Development Bank (AfDB) and the Organization for Economic Co-operation and Development (OECD) estimate the share of final consumption in GDP to be 1.8% in 2007, and project a contribution sof 3.2% in 2008. Consumption grew by 6.7% in 2006, reaching AD3,643.3bn, compared to AD3,414.7bn in 2005, and realizing a CAGR of 7.9% over the period from 2003 to 2006. This growth was mainly driven by the 5.5% increase in household consumption.

On the other hand, AfDB and OECD estimate the contribution of investment to GDP to be 3.1% in 2007 and project it at 2.7% in 2008, respectively. It is worth mentioning that investment realized a slight growth of 5.1% in 2006, reaching AD2,501.3bn, compared to a 17.0% growth, realized the previous year, where it amounted to AD2,380.1bn. This slowdown was mainly a result of the 21.3% decline in the change in inventory in 2006, compared to the previous year.

According to Banque d’Algerie, which represents the Central Bank of Algeria, the trade balance as of June 2008 reached approximately AD1,393.9bn, where the exports amounted to AD2,806.3bn. The trade balance reached around AD2,284.0bn in 2007, where the exports amounted to approximately AD4,044.6bn. In June 2007, it was AD1,030.8bn, where exports were AD1,864.9bn. Whereas in 2006, the trade balance increased by 32.4%, reaching AD2,315.9bn in 2006, compared to AD1,749.2bn, the previous year. This was a result of the 16.2% rise in exports, which surpassed the 0.6% increase in imports.

With the current global financial crisis, the IMF expects that Algeria would be able to realize



a higher growth in real GDP, compared to that of the world’s average, over the 3-year period from 2009 to 2012. Algeria is expected to realize a 4.5% GDP growth in 2009, compared to a world’s average of 3.0%. Furthermore, the world’s GDP growth is expected to reach 4.8% by 2012, whereas Algeria’s growth would be 5.1%.

Chart 03: Algeria’s Real GDP Growth vs. the World’s Real GDP Growth

0%

1%

2%

3%

4%

5%

6%

7%

8%

2003 2004 2005 2006 2007 2008F 2009F 2010F 2011F 2012F

Algeria's Real GDP Growth World's Real GDP Growth

Source: IMF

On the other hand, the World Bank’s latest report “World economic prospects 2009” issued in December 2008, has forecasted Algeria’s real GDP growth at 3.8% and 5.4% in 2009 and 2010, respectively, compared to a world average of 0.9% and 3.0% during those two years. This in turn divulges the intrinsic investment prospects in the Algerian economy.



Public Finance

In 2008, the government surplus is expected to represent 14.3% of GDP, reaching AD1,694.5bn, implying a remarkable growth rate of 61.0%, over 2007. This is attributable to the expected boost in revenues by 34.0%, compared to a 23.6% rise in expenses. The revenues’ acceleration is spurred by the 35.5% expected surge in hydrocarbons proceeds, reaching AD4,029.0bn. Meanwhile, AfDB and OECD estimated that the fiscal surplus would reach AD1,052.5bn in 2007, decreasing by 11.3%, compared to 2006, and representing 11.4% of GDP. The reason behind such decline is attributed to the slowdown of government revenues, as they were estimated to grow at 4.5% y-o-y, compared to a growth rate of 12.2% in expenses. Such slowdown resulted from the lower increase in the proceeds generated from hydrocarbons, as they rose by only 6.2% in 2007, compared to a growth rate of 19.0% in the previous year.

It is worthy to note that the Algerian government was able to ameliorate its budget balance in 2006, as it raised its surplus by 15.2%, reaching AD1,187.2bn up from AD1,030.7bn a year before, and improved its share of GDP from 13.7% in 2005 to 14.0% in 2006. This came on the back of the 18.1% rise in revenues, which amounted to AD3,639.9bn, compared to AD3,082.7bn in 2005. This had its effect on alleviating the burden of expenses, which realized a growth rate of 19.5% in 2006. This can be explained by the fact that revenues constituted 43.0% of GDP, while the expenses had a lower share of 29.0% in 2006.

Table 05: Government FinancesIn ADbn 2003 2004 2005 2006 2007E 2008F Total Revenues and Grants* 1,947.5 2,215.2 3,082.7 3,639.9 3,803.9 5,095.5

Hydrocarbon Revenue** 1,350.0 1,570.7 2,352.7 2,799.0 2,972.9 4,029.0

Tax Revenue 524.9 580.4 640.5 720.9 710.9 912.4

Nontax Revenues* 69.7 63.7 89.5 119.7 N/A N/A

Grants 2.9 0.4 0.0 0.3 N/A N/A Other Non-Distributed Items*** 0.0 0.0 0.0 0.0 120.0 154.0 Total Expenditure 1,691.4 1,891.8 2,052.0 2,452.7 2,751.4 3,400.9 Current Expenditure 1,121.0 1,245.5 1,241.4 1,433.7 1,569.6 1,884.1

Personnel Expenditure 398.0 446.8 492.2 531.3 470.9 568.8

Mudjahidins’ Pensions 62.7 69.2 79.8 92.5 N/A N/A

Material and Supplies 58.8 71.7 76.0 95.7 N/A N/A

Public Services 161.4 176.5 187.5 215.5 N/A N/A

Current Transfers **** 326.1 396.1 332.7 430.1 N/A N/A

Interest Payments 114.0 85.2 73.2 68.6 83.1 82.9

Other Non-Distributed Items*** 0.0 0.0 0.0 0.0 1,015.6 1,232.4Capital Expenditure 570.4 646.3 810.6 1,019.0 1,181.8 1,516.8 Budget Balance 256.1 323.4 1,030.7 1,187.2 1,052.5 1,694.5

Special Accounts Balance 187.1 109.9 (129.0) (4.0) N/A N/A

Net Lending by Treasury 32.6 11.8 5.2 32.0 N/A N/A Overall Balance***** 410.6 421.5 896.5 1,151.2 N/A N/A

* Excluding privatization receipts, classified under nonbank financing**Including dividends on current profits paid by Sonatrach***Due to lack of available data in 2007 and 2008, these items represent the difference between totals and available data****This item covers expenditures for public services, food subsidies, agricultural price support, and cash transfers for the poor*****Including special accounts, net lending and operations of the Rehabilitation Fund

Source: IMF, AfDB, OECD and Global Research



The hydrocarbons’ share of government revenues is estimated to reach 78.2% and 79.1% in 2007 and 2008, respectively. Revenues from taxes decreased by 1.4% in 2007 and are then estimated to realize a remarkable growth of 28.3% the following year, reaching AD912.4bn and representing 17.9% of total revenues.

It is worthy to note that the Algerian government has announced that taxes of 15% will be imposed on repatriated capital by foreign corporations operating in Algeria to their home countries starting from 2009.

As for the fiscal revenues in 2006, 76.9% came from the hydrocarbon sector, which as mentioned earlier, grew by 19.0% in the same year, reaching AD2,799.0bn. Tax revenues, constituting 19.8% of total revenues, grew by 12.6% y-o-y, reaching AD720.9bn, up from AD640.5bn in 2005. The revenues generated from taxes on goods and services, representing 47.4% of total tax revenues, rose by 10.6%, from AD308.8bn in 2005 to AD341.4bn in 2006. In the mean time, taxes on income and profits representing 33.5% of total tax revenues, increased by 43.5%, reaching AD241.2bn, up from AD168.1bn in 2005. Other non-tax revenues, constituting 3.3% of total revenues, grew by 33.7% in 2006, reaching AD119.7bn, compared to AD89.5bn in 2005. These revenues are derived from fees, Bank of Algeria dividends and dividends from holdings.

Table 06: Breakdown of Government Revenues In ADbn 2003 2004 2005 2006 2007E 2008FHydrocarbon Revenue 1,350.0 1,570.7 2,352.7 2,799.0 2,972.9 4,029.0

Of which: Sonatrach Dividends 65.0 85.0 85.0 85.0 N/A N/ANonhydrocarbon Revenue* 594.6 644.1 730.0 840.6 N/A N/A

Tax Revenue 524.9 580.4 640.5 720.9 710.9 912.4Taxes on Income and Profits 127.9 148.0 168.1 241.2 N/A N/A

Wage Income Taxes 63.3 77.4 85.6 96.1 N/A N/AOther 64.6 70.6 82.6 145.1 N/A N/A

Taxes on Goods and Services 233.9 274.0 308.8 341.4 N/A N/AVAT and Excises on Imports 92.9 118.8 135.8 140.9 N/A N/AVAT & Excises on Domestic Activities 102.5 115.1 129.1 145.7 N/A N/A

VAT on Domestic Transactions 73.4 86.6 98.9 114.2 N/A N/ATobacco and Alcohol Excises (DIC) 29.1 28.5 30.2 31.5 N/A N/A

VAT on Petroleum Products/levy 5.6 5.7 5.9 4.4 N/A N/AExcises on Petroleum Products 30.3 31.4 37.9 40.6 N/A N/AOther Indirect Taxes 2.7 2.9 0.1 9.7 N/A N/A

Customs Duties 143.8 138.8 143.9 114.8 N/A N/ARegistration and Stamps 19.3 19.6 19.6 23.5 N/A N/A

Non Tax Revenue* 69.7 63.7 89.5 119.7 N/A N/AFees* 23.6 27.0 35.1 44.4 N/A N/ABank of Algeria Dividends 42.1 30.0 48.7 75.3 N/A N/ADividends from Holdings 4.0 6.7 5.7 0.0 N/A N/A

Grants 2.9 0.4 0.0 0.3 N/A N/AOther Non-Distributed Items** 0.0 0.0 0.0 0.0 120.0 154.0Total Revenues and Grants* 1,947.5 2,215.2 3,082.7 3,639.9 3,803.9 5,095.5* Excluding privatization receipts, classified under nonbank financing**Due to lack of available data in 2007 and 2008, these items represent the difference between total and available data




Fiscal expenses were estimated to rise at 12.2% in 2007, a lower acceleration than the 19.5% realized in the previous year. This was due to the slowdown of the growth of both current and capital expenditure. Current expenses increased by 9.5%, reaching AD1,569.6bn, where funds allocated to personal expenditure declined by 11.4%, and those allocated for interest payments, inclined by 21.1%. As for 2008, total expenses are expected to reach AD3,400.9bn, implying a growth rate of 23.6%, resulting from the increase in current and capital expenditure by 20.0% and 28.3%, respectively. It is worthy to note that personal expenditure is projected to rise by 20.8% in 2008, while interest payments are to decrease by 0.2% in the same year.

As aforementioned, expenses rose by 19.5% in 2006, reaching AD2,452.7bn, compared to AD2,052.0bn, the previous year. Both current and capital expenditure contributed to such increase, as the current expenses incurred during the year, representing 58.5% of total expenditure, inclined by 15.5%, moving up from AD1,241.4bn to AD1,433.7bn. The major portion went to the wages and salaries, representing 37.1% of current expenses in 2006. They grew by 7.9% y-o-y, reaching AD531.3bn. Current transfers, with a share of 30.0% of current expenditure, grew by 29.3%, and amounted to AD430.1bn. Meanwhile, capital expenses, representing 41.5% of fiscal expenses, rose by 25.7%, reaching AD1,019.0bn in the same year.

Table 07: Breakdown of Government ExpenditureIn ADbn 2003 2004 2005 2006 2007E 2008FCurrent Expenditure 1,121.0 1,245.5 1,241.4 1,433.7 1,569.6 1,884.1

Personnel Expenditure 398.0 446.8 492.2 531.3 470.9 568.8

Wages and Salaries 392.8 442.3 490.1 531.3 N/A N/A

Other 5.2 4.5 2.1 0.0 N/A N/A

Mudjahidins‘ Pensions 62.7 69.2 79.8 92.5 N/A N/A

Material and Supplies 58.8 71.7 76.0 95.7 N/A N/A

Public Services 161.4 176.5 187.5 215.5 N/A N/A

Hospitals 59.3 63.2 61.7 73.5 N/A N/A

Other 102.1 113.2 125.8 142.0 N/A N/A

Current Transfers* 326.1 396.1 332.7 430.1 N/A N/A

Food Subsidies 0.3 1.0 1.5 2.9 N/A N/A

Youth Employment Support Fund 2.3 7.8 4.0 5.5 N/A N/A

Other Transfers 323.5 387.3 327.2 421.7 N/A N/A

Interest Payments 114.0 85.2 73.2 68.6 83.1 82.9

Other Non-Distributed Items** 0.0 0.0 0.0 0.0 1,015.6 1,232.4Capital Expenditure 570.4 646.3 810.6 1,019.0 1,181.8 1,516.8Total Expenditure 1,691.4 1,891.8 2,052.0 2,452.7 2,751.4 3,400.9

Special Accounts Balance 187.1 109.9 (129.0) (4.0) N/A N/A

Net Lending by Treasury 32.6 11.8 5.2 32.0 N/A N/ATotal Expenditure and Net Lending 1,536.9 1,793.7 2,186.2 2,488.7 N/A N/A

*This item covers expenditures for public services, food subsidies, agricultural price support, and cash transfers for the poor** Due to lack of available data in 2007 and 2008, these items represent the difference between total and available data




Public Debt

The total public debt provisional figure represents 18% of GDP in 2007, that is approximately US$24.2bn, implying a y-o-y decline of 17.1%. Algeria was successful in dropping its total government debt, between 2003 and 2007, at a CAGR of 8.5%, mainly through the decline of its external debt.

The government external debt reached US$3.7bn in 2006, compared to US$15.5 in 2005, a decline of 75.8%. This came on the back of the Country’s ability to make advance payments, taking advantage of the growing GDP. On the other hand, domestic debt grew at 79.4% from 2005 to 2006, as it climbed from US$14.2bn to US$25.4bn.

Table 08: Public Debt

In US$bn 2003 2004 2005 2006 2007*

Gross Domestic Debt 12.7 13.9 14.2 25.4 N/A

Gross External Debt 21.8 20.4 15.5 3.7 N/A Total Government Debt 34.5 34.3 29.6 29.2 24.2*Estimated

Source: IMF, AfDB, CIA World Factbook and Global Research

The majority of gross domestic public debt in 2006 went to the equipment bonds and regular securities, which represented 91.7% of the total local debt, equivalent to US$23.3bn, realizing a y-o-y growth of 93.9%. The remaining debt came from the Central Bank overdrafts and the refinancing bonds, constituting 5.5% and 2.8% of the domestic debt, respectively. It is worthy to note that the Central Bank overdrafts declined by 7.7% in 2006, reaching US$1.4bn. In addition, refinancing bonds shrank by 7.2% in the same year, where they amounted to US$0.7bn.

Chart 04: Composition of Gross Domestic Public Debt-2006

Equipment Bonds andRegular Securities

91.7%

Central BankOverdrafts

5.5%

RefinancingBonds2.8%

Source: IMF

The Algerian government succeeded in reducing its gross external debt as percent of GDP from 32.2% in 2003 to 3.2% in 2006. Conversely, domestic debt increased from 18.7% of GDP in 2003 to 21.8% in 2006. The overall effect was an amelioration of the total debt status, bringing it down from 50.9% of GDP to 25.0% of GDP over the 3-year period from



2003 to 2006. As per the CIA World Factbook, a further enhancement was realized, as the government reduced its total debt, both public and private, to an estimate of 18% of GDP in 2007.

Chart 05: Public Debt as a % of GDP

13.8%

18.7%16.3%

21.8%

32.2%

23.9%

15.0%

3.2%

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006

Gross Domestic Debt / GDP Gross External Debt / GDP

Source: IMF, AfDB and Global Research



External Trade

Exports

Midyear export balances inclined by 61.5% as of June 2008, reaching US$44.3bn, compared to US$27.4bn in June 2007. This was mainly attributed to the hydrocarbon exports, forming 94.1% of total exports, as they rose by 55.0% over the year, reaching US$41.6bn, up from US$26.9bn.

The hydrocarbon exports were impeded by the deceleration of output in 2007, as they rose by 10.6% in the same year, realizing a lower growth than the 17.6% achieved in the previous year. Nevertheless, their share of total exports remained the same at 97.8% in 2007. The low increase in the hydrocarbon exports drove the total exports to rise similarly at a lower rate, as they rose by 10.6% in 2007, which was below the 17.9% growth rate realized in the previous year. Total exports in 2007 inclined by a CAGR of 25.5% over the period from 2003 to 2007.

Table 09: Exports

In US$mn 2003 2004 2005 2006 2007*Jan-Jun

2007*Jan-Jun

2008* Hydrocarbon 23,988 31,548 45,572 53,608 59,303 26,877 41,660 Food 47 66 67 73 92 43 N/A Raw Materials 49 97 134 195 153 53 N/A Semi Finished Products 316 432 651 828 988 409 N/A Agricultural Equipment 1 - - 1 1 - N/A Industrial Equipment 29 50 38 44 44 23 N/A Consumer Goods 35 15 20 44 34 11 N/A Other Non-Distributed Items** - - - - - - 2,630 Total Exports 24,465 32,208 46,482 54,793 60,615 27,416 44,290*Provisional**Due to lack of available data in June 2008, these items represent the difference between totals and available dataSource: Banque d’Algerie

Algerian exports increased notably over the 3-year period starting 2003, as they swelled from US$24.5bn in 2003 to US$54.8bn in 2006, where they realized a y-o-y growth of 17.9% in 2006. Being the bedrock for the economy’s development, hydrocarbon exports constituted 97.8% of total exports in the same year.

Chart 06: Composition of Exports-2007*

Crude Oil41.8%

Oil Condensates 14.0%

Refined PetroleumProducts

9.6%

Liquefied PetroleumGases7.5%

Liquefied NaturalGas

10.8%

Natural Gas14.2%

Other Non Hydrocarbon Exports 2.2%

*ProvisionalSource: Banque d’Algerie



The majority of Algerian exports were directed to the US in 2007, as they captured a share of 29.4% of total exports, up from 27.2% in 2006. Italy and Spain followed with shares of 13.8% and 9.6% of total exports, respectively. Exports to these countries were reduced over the year, as Italy’s portion of total exports was 17.0% in 2006, while 9.7% of total exports went to Spain in the same year. Other countries including Canada and France constituted 8.4% and 7.4% of total exports in 2007, respectively.

Chart 07: Exports by Country-2007

US29.4%

Italy13.8%

Spain9.6%

Canada8.4%

France7.4%

Others31.4%

Source: CIA World Factbook

Imports

Algeria increased its imports by 27.9% in 2007, as they reached US$27.4bn, compared to US$21.5bn in 2006. This represents a CAGR of 21.5% over the years from 2003 to 2007. The main imported products in 2007 were the industrial equipment, which amounted to US$10.0bn, representing 36.3% of total imports and realizing an increase of 16.7% over the previous year. The semi finished products, constituting 25.2% of total imports in 2007, surged by 40.2%, reaching US$6.9bn, compared to US$4.9bn in 2006. Also, imports of food amounted to US$4.8bn in 2007, a 27.0% y-o-y increase and a share of 17.6% of total imports. Data from Banque d’Algerie indicated that total imports reached US$22.3bn in June 2008.

Chart 08: Composition of Imports

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

2003 2004 2005 2006 2007*

US$mn

Energy Raw Materials Semi Finished Products Agricultural Equipment

Industrial Equipment Consumer Goods Food

*Provisional

Source: Banque d’Algerie



The major importing country of the Algerian products in 2007 was France, having a share of 19.1% of total imports, down from 22.0% in the previous year. China followed with a share of 9.2%, up from 8.5% in 2006. Then came Italy and Spain, which shares remained somehow stable, representing 8.7% and 6.1% of total imports, respectively.

Chart 09: Imports by Region-2007France19.1%

China9.2%

Italy8.7%

Spain6.1%US

5.6%Germany

5.5%

Turkey4.2%

Others41.6%

Source: CIA World Factbook



Current Account

Preliminary results of June 2008 indicate that the current account surplus was ameliorated by 68.0% y-o-y, reaching US$22.3bn in June 2008, compared to US$13.3bn in June 2007. This was a result of many factors. Exports rose by 61.6%, compensating for the 81.8% jump in imports, leading to an acceleration of 45.2% in the trade balance, as it rose from US$15.2bn in June 2007 to US$22.0bn in June 2008. Meanwhile, the deficit in the services and income account dropped by 61.0%, reaching US$1.1bn, compared to US$2.8bn the previous year. Also, the transfers account was ameliorated by 54.0%, reaching US$1.3bn.

The current account surplus realized a growth of 4.6% in 2007, reaching US$29.5bn. This modest growth was attributed to the slight increase of 2.1% in the trade balance, realized in the same year, as it amounted to US$34.1bn, which was in turn a result of the jump of 22.3% in imports, parallel to a 10.1% rise in exports. In addition, the deficit in the services and income account was reduced by 5.1%, reaching US$6.4bn. Moreover, net transfers inclined by 15.5%, reaching US$1.9bn in 2007, compared to US$1.6bn in the previous year.

The current account surplus in 2006, representing 24.2% of GDP, increased by 33.5%, reaching US$28.2bn, compared to US$21.1bn in 2005. This was mainly a result of the rise in the trade balance, which grew by 26.1% in the same year, reaching US$33.3bn, up from US$26.4bn in the previous year. This was a result of the 17.9% increase in exports, surpassing the 7.0% rise in imports.

Meanwhile, the government was able to reduce the deficit in the services and income account by 8.6% in 2006, reaching US$6.7bn, compared to US$7.4bn in the previous year. Nevertheless, net transfers decreased by 21.8% over the year, reaching US$1.6bn, down from US$2.1bn in 2005.

Table 10: Current Account

In US$bn 2003 2004 2005 2006 2007*Jan-Jun

2007*Jan-Jun

2008*Trade Balance 11.9 15.1 26.4 33.3 34.1 15.2 22.0

Exports 24.5 32.2 46.5 54.8 60.3 27.4 44.3Hydrocarbons 24.0 31.5 45.6 53.6 59.3 27.0 41.7Other Exports 0.5 0.7 0.9 1.2 1.0 0.41 2.6

Imports (12.6) (17.1) (20.0) (21.5) (26.3) (12.3) (22.3)Services and Income (net) (4.1) (5.6) (7.4) (6.7) (6.4) (2.8) (1.1)

Services (net) (1.4) (2.0) (2.3) (2.2) (4.0) (1.8) N/ACredit 1.6 1.9 2.5 2.6 2.84 1.42 N/ADebit (2.9) (3.9) (4.8) (4.8) (6.86) (3.2) N/A

Income (net) (2.7) (3.6) (5.1) (4.5) (2.4) (1.0) N/ACredit 0.8 1.0 1.4 2.4 3.3 1.61 N/ADebit (3.5) (4.6) (6.5) (6.9) (5.7) (2.6) N/AOf which:

Interest Payments (1.2) (1.3) (1.0) (0.8) (0.2) (0.1) N/AProfit Repatriation (2.3) (3.3) (5.5) (6.2) (5.4) (2.5) N/A

Transfers (net) 1.8 2.5 2.1 1.6 1.9 0.87 1.3 Current Account 9.6 11.9 21.1 28.2 29.5 13.3 22.3

*ProvisionalSource: IMF and Banque d’Algerie



Capital & Financial Account and Balance of Payment

The amelioration of the current account balance by 68.0% over the period from June 2007 to June 2008, which have been discussed earlier, has offset the increase in the capital account deficit, which became US$2.5bn, up from US$0.7bn, and led to an enhancement in the overall balance of the balance of payment by 57.1% over the same period, as it reached US$19.8bn, up from US$12.6bn.

The Balance of payment witnessed an increase in its overall balance by 71.0% in 2007, reaching US$29.1bn, up from US$17.0bn in 2006. The main driver for such jump was the amelioration of the capital account, as the government succeeded in reducing the deficit in that account by almost 96%, from US$11.2bn in 2006 to US$0.4bn in 2007, which in turn came on the back of the reduction of the external debt that occurred in 2006.

Table 11: Balance of Payment

In US$bn 2003 2004 2005 2006 2007*Jan-Jun

2007*Jan-Jun

2008*Current Account 9.6 11.9 21.1 28.2 29.5 13.3 22.3Capital Account (1.4) (1.9) (4.2) (11.2) (0.4) (0.7) (2.5)

Direct investment (net) 0.6 0.6 1.1 1.8 1.5 (0.5) 1.0

Loans (net) (1.4) (2.2) (3.1) (11.9) (0.9) (0.9) (0.3)

Drawings 1.7 2.1 1.4 1.0 0.5 (0.2) 0.6

Amortization (3.0) (4.4) (4.5) (12.9) (1.5) (1.1) (0.9)

Short-term capital and errors and omissions (0.6) (0.3) (2.3) (1.1) (1.0) (0.3) (3.2)Overall Balance 8.2 10.0 16.9 17.0 29.1 12.6 19.8*ProvisionalSource: IMF and Banque d’Algerie



Foreign Direct Investment

The Foreign Direct Investment (FDI) inflows to Algeria reached US$1.7bn in 2007, representing 1.2% of GDP, a decline of 7.2% y-o-y, as it stood at US$1.8bn in 2006. Meanwhile, it grew at a CAGR of 23.6% over the 3-year period starting from 2004, where it amounted to US$0.9bn.

The Algeria government started a liberalization program for the country’s economy in 1996. Since then, foreign investments have begun to flow to Algeria, spurred by the government encouragement, especially in the hydrocarbon sector. Currently, FDI inflows are in the range of 13%-14% of Algeria’s investments, up from 2.3% when it started over in the late 90’s. Inflows are expected to increase furthermore, in response to the government’s attempts to ameliorate various aspects in the economy, one of which is the infrastructure sector.

Albeit the majority of inwards are coming from the hydrocarbon sector, especially from Europe, we find that foreign projects have begun exploring other sectors, such as building materials, telecommunication, water and electricity. Nevertheless, oil and gas projects are expected to dominate future foreign investments, as the government plans to raise its hydrocarbon production. Meanwhile, demand from Europeans is still assured for the medium-term.

In August 2008, the Algerian government issued a new legislation that limits the foreign participation in any business to only 49%. This comes in line with the government aim of expanding the local partnership in projects, in an attempt to obtain major control over the proceeds generated from various projects. In addition, new taxes of 15% on repatriated capital will be imposed on some foreign businesses operating in Algeria, starting 2009. Moreover, the hydrocarbon sector witnessed increased costs of engineering and construction.

While all these legislations and actions taken by the Algerian government might be seen as a cause for delays or reconsiderations for some projects, we believe that the low cash cost of production for many industries, on the back of the relatively cheap different feedstock, is the real trigger for more FDI inflows in Algeria.

Chart 10: Foreign Direct Investment

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2004 2005 2006 2007

US$mn

Foreign Direct Investment Inflows Foreign Direct Investment Outflows

Source: Economic Intelligence Unit (World Investment Prospects to 2011 Report)



Privatization

Along with the liberalization process announced in the late 90’s, Algeria announced its movement towards a privatization program, taking various forms, starting from selling public enterprises, to even partial sales of state-owned corporations, which could take place either through the secondary market, organizing bids or through private deals. Usually, a restructuring of the state-owned enterprise takes place prior to the privatization, to ensure profitable and successful deals.

The government has announced the privatization of the majority of the “Credit Populaire d’Algerie” Bank that should have taken place by the end of 2007. Nevertheless the subprime crisis that hit the US market has apparently affected some of the banks that were about to present their bids and the deal was postponed. The government plans currently to sell a stake of another bank “Banque de Developpement Local” to a strategic investor, but has not yet scheduled the date on which it will execute the deal.

Meanwhile, the government was planning to partially privatize its major fixed line operator “Algerie Telecom” through selling a stake of 35% in an Initial Public Offering (IPO). This deal was supposed to take place by the end of 2006. Nevertheless, the government announced in 2008 that it will postpone the deal for 2 or 3 years to improve the operator’s services, so that it would be more commercial. Other privatization deals announced to be currently in the pipeline are for ports and Air Algeria.

On the other hand, 13 state-owned corporations have been announced to be privatized in an invitation by the government in 2008 to national and international investors to tender for privatization. These enterprises operate in various fields and industries, including car batteries, detergents, salt production, insecticides, steel manufacturing, road works and other areas. As announced by the Minister of Industry and Investments Promotion in the beginning of 2008, 417 privatization deals took place since 2003. These deals resulted in proceeds amounting to AD125bn and a creation of 18,396 jobs. Meanwhile these deals helped maintaining 36 thousand jobs.

It is expected that the privatization process would remain slow over the near future due to the global economic crisis, which could hinder the financial position of foreign investors and consequently could negatively affect their appetite for acquisition deals.



Monetary Policy

Over the period from June 2007 to June 2008, domestic liquidity (M2) in Algeria grew by 22.1%, reaching AD6,602.1bn, which was mainly a result of the 27.5% rise in Money Supply (M1), amounting to AD4,732.7bn, compared to AD3,712.2bn in June 2007. In addition, Quasi money accelerated by 10.4% over the same period, reaching AD1,869.3bn.

Domestic liquidity grew at a CAGR of 15.5% over the 4-year period from 2003 to 2007, as it reached AD5,978.0 in 2007, compared to AD3,354.3bn in 2003. It realized a y-o-y growth of 21.2% in 2007. This was mainly attributed to the 33.0% increase in (M1), as it moved up from AD3,167.6bn in 2006 to AD4,214.3bn the following year. It is worth mentioning that domestic liquidity witnessed acceleration in its growth starting from 2006, as before that the government’s efforts to minimize external debt were translated into a slow growth of M2, as it represented only 11.4% in 2004 and 11.2% in 2005. Then in 2006, it rose by 18.7%.

The period from June 2007 to June 2008 witnessed a y-o-y increase of 29.1% in net foreign assets, which stood at AD8,290.4bn, a higher balance than that of domestic liquidity, indicating that these assets are a principal source of funds for the country.

Table 12: Money Supply

In ADbn 2003 2004 2005 2006 2007*Jan-Jun

2007*Jan-Jun

2008*Net Foreign Asset 2,342.6 3,119.2 4,179.7 5,515.1 7,402.6 6,419.4 8,290.4

Central Banks 2,325.9 3,109.1 4,151.5 5,526.4 7,382.9 6,392.8 N/A

Commercial Banks 16.7 10.1 28.2 (11.3) 19.7 26.6 N/ADomestic Credit 1,803.6 1,514.4 846.6 601.4 (1.2) 324.0 (565.7)

Credit to the Government 423.4 (20.6) (933.2) (1,304.0) (2,183.3) (1,686.2) N/A

Credit to the Economy 1,380.2 1,535.0 1,779.8 1,905.4 2,182.1 2,010.2 N/ATotal Domestic Liquidity (M2) 3,354.3 3,738.0 4,157.6 4,933.7 5,978.0 5,405.7 6,602.1

Money Supply (M1) 1,630.3 2,160.5 2,421.4 3,167.6 4,214.3 3,712.2 4,732.7

Money in Circulation 781.3 874.3 921.0 1,081.4 1,284.5 1,153.3 N/A

Demand Deposits 718.9 1,127.9 1,224.4 1,750.4 2,551.1 2,185.1 N/ADeposits with Treasury & PostalChecking System

130.1 158.3 276.0 335.8 378.7 373.8 N/A

Quasi-Money 1,724.0 1,577.5 1,736.2 1,766.1 1,763.7 1,693.5 1,869.3*ProvisionalSource: Banque d’Algerie

The discount rate has been almost stable for the last four years, as it stood at 4%. As for the deposit and lending rates, in nominal terms, as they remained stagnant in 2007 with rates of 1.8% and 8.0%, respectively. For deposit rates, they averaged between 1.25% and 2.50% in 2005, while lending rates averaged between 5.50% and 9.00% in the same year. It is worthy to note that these rates are expected to be raised by 2008, as a tool used by the government for tightening monetary policy to control inflation and keep positive real interest rates. However, with the current expected recession, many commodities’ prices would drop, which will ease the inflation in Algeria.



Table 13: Movement in Interest Rates

2003 2004 2005 2006 2007 2008F

Discount Rate 4.50% 4.00% 4.00% 4.00% 4.00% 4.00%

Deposit Rate 4.50%–5.75% 2.25%–3.25% 1.25%–2.50% 1.80% 1.80% 2.00%

Lending Rate 8.00%–9.00% 6.00%–9.00% 5.50%–9.00% 8.00% 8.00% 8.10%Source: AfDB, IMF, Banque d’Algerie and EIU

Real interest rates in Algeria turned out to be negative in the last couple of years, as they reached -2.68% and -2.12% in 2006 and 2007, respectively. This drop of real interest rates is due to the accelerated inflation, which was opposed by stable nominal rates. It is worth mentioning that an over liquidity in the banking system occurred as a result of the augmented funds deposited by Sonatrach, the national enterprise for research, production, transport, transformation and marketing of oil and gas in Algeria. To curb the excess liquidity, many tools were used, one of which was setting the required reserve ratio at 6.5% and another was to offer interest-bearing deposits, in addition to calling for tenders. This has led to settling more than 96% of the over liquidity problem. A tighter monetary policy is expected to be adopted to combat inflation, this includes increasing nominal interest rates to adjust real interest rates to reach positive terms.

Chart 11: Real Interest Rates Development

-4

-2

0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007

%

Source: World Bank



Foreign Exchange Reserve

Net international reserves rose by 41.5% y-o-y, to reach US$110.6bn in 2007, compared to US$78.2bn, the previous year. This balance represents a CAGR of 34.9% over the 4-year period starting from 2003. The rise of oil and gas prices helped boost exports proceeds, which resulted in the surge of reserves over the period. As of June 2008, international reserves reached US133.2bn. Future balances of foreign reserves will depend to a great extent on the trend of hydrocarbon prices in the coming period.

Chart 12: International Reserves

-

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 Jun2008

US$bn

Source: AfDB and Banque d’Algerie

Exchange Rate

The foreign exchange market in Algeria is controlled by Banque d’Algerie, through a floating management system. Most of the operations take place through the Central Bank, whereas a minor proportion is left to function within the interbank market.

The difference between the official and non-official foreign exchange markets lessened at the beginning of 2006, as importers were required to have a minimum capital of AD20mn. This has resulted in diminishing number of importers and thus demand for foreign currency was reduced. Nevertheless, the appreciation of the Euro in 2007 spurred its demand and resulted in an expansion in the gap between the two markets.

Soaring oil and gas export prices and the resulting ample reserves of foreign currency helped appreciating the local currency, as the average exchange rate was AD67.07:US$1 in 2007, where it stood at AD71.07:US$1 the previous year. It is worthy to note that the average exchange rate for the month of June 2008 reached 63.36AD:US$1.

Table 13: Exchange Rates

2004 2005 2006 2007Jan-Jun

2007*Jan-Jun

2008*(AD/US$) end of period 72.6137 73.3799 71.1582 66.8299 67.7960 62.8140

(AD/US$) period average 72.0659 73.3627 71.0716 67.0718 68.0384 63.3613

(AD/Euro) end of period 98.9507 87.0176 93.7545 98.3302 91.6317 98.9664

(AD/Euro) period average 89.6423 91.3014 93.9017 97.6445 91.3000 98.6392

*End of period rates are for the end of June, while average rates represent average of rates in the month of JuneSource: Banque d’Algerie and Go Currency Website



Inflation

Soaring prices of imported goods to Algeria, whether primary or industrial, in addition to the expansionary fiscal policy adopted by the government, in terms of increased investment plans, as well as salaries increases, were behind the surging inflationary pressures witnessed in Algeria in 2007.

Following the general trend that took place in 2007 in the whole world, inflation in Algeria has reached high levels, after it had slowed down for 2 years, to reach back the 3.6% level, which was achieved in 2004. Though the government has targeted inflation at 3.5% for 2008, IMF estimates that inflation would reach 4.3% by the end of 2008. It is worthy to note that inflation averaged 4.2% over the 9M period ending September 2008.

The efforts made by the Algerian government towards squeezing inflationary pressures are expected to result in lower inflation levels in 2009, as it is expected to reach 4.0%, according to the IMF estimates. Like many developing economies, Algeria suffered from the surging food prices in 2008, which are expected to ease in 2009, pushing the inflationary level down.

Chat 13: Inflation (Average Consumer Prices)

-

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 2008F 2009F0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Inflation, Average Consumer Prices-Index, 2000=100 Inflation, Average Consumer Prices-Annual Percent Change (right scale)

Source: IMF



Population and Labor Force

Population in Algeria reached an estimate of 34.8mn in 2008. This implies a y-o-y growth of 1.2%, as it amounted to 34.4mn in 2007. In the mean time, population grew at a CAGR of 1.8% over the 5-year period from 2003 to 2008, where it represented 31.8mn in 2003. The birth and death rates remained stagnant since 2004 at around 17.1 per 1,000 and 4.6 per 1,000, respectively.

Chart 14: Population in Algeria

31.832.4

32.933.8

34.4 34.8

25

27

29

31

33

35

37

39

2003 2004 2005 2006 2007 2008E

mn

Source: IMF

Of the Algerian population, around 26.3% is below the age of 14 years old, 68.7% is in the range between 15 and 64 years old, while 5% are above 65 years old. It is worthy to note that the labor force is estimated to represent 27% of the population in 2008, as it reached 9.4mn, representing a y-o-y growth of 0.8%, where it stood at 9.3mn in 2007.

Table 14: Population Indicators

2003 2004 2005 2006 2007 2008*

Labor Force/Population % 29.5% 29.7% 30.1% 30.0% 27.1% 27.0%

Unemployment Rate % 31.0% 26.2% 25.4% 17.1% 15.7% 14.1%

Rate of Births (per thousand) 21.9 17.1 17.1 17.1 17.1 17.0

Rate of Deaths (per thousand) 5.1 4.6 4.6 4.6 4.6 4.6

Illiteracy (%) 30.1% 29.0% 27.9% 30.1% 26.0% N/A*EstimatedSource: Index Mundi and AfDB

Unemployment rate witnessed a sharp decline over the 5-year period from 2003 to 2008, as it dropped from 31.0% in 2003 to an estimate of 14.1% in 2008. Nevertheless, the government still has to control unemployment rate, as it is considered higher than the average of other MENA countries in 2007. New candidates to the labor force and absence of immigration opportunities make reduction of unemployment rate more difficult. In addition, the hydrocarbon sector, capturing the overwhelming majority of the Algerian economic activity is more of a capital intensive industry, implying that it cannot absorb a large proportion of unemployed population.



Chart 15: Employment by Sector-2006

Agriculture27.3%

Industry8.1%

Construction andPublic Works

17.8%

Government23.7%

Other23.2%

Source: IMF

The agriculture sector captured around 27% of the labor force in 2006. The public sector followed with a share of 23.7%, then the construction with 17.8%.

The government’s plan towards decreasing unemployment should begin with realizing economic growth in various aspects, including easing trade activity and encouraging investments. Also, the government should act towards making new jobs creation, which could be achieved through providing facilities in the labor market, one of which is to ease turnover. In addition, increasing wages could be a stimulant for new jobs opportunities.

It is worthy to note that the government is currently expanding its fiscal spending, including raising employees’ salaries. Furthermore, the IMF proposed that the proceeds of the Algerian hydrocarbon sector should be oriented towards lowering personal income taxes for labor intensive industries. However, with the current declines in the international oil prices, on the back of the expected world recession, this plan may found difficulty in application.



Sector Performance

Hydrocarbons

The Algerian economy is ruled by hydrocarbon exports, which amounted to US$59.3bn in 2007, contributing to almost 44.1% of GDP and 97.8% of the country’s total exports. The surge in hydrocarbons prices in recent years has had a positive effect on the whole economy, primarily improvements in the Country’s budget, external debt and foreign currency reserves.

Chart 16: Algeria’s Hydrocarbons Exports Development

-

5,000

10,000

15,000

20,000

25,000

30,000

2004 2005 2006 2007*

US$mn

Crude Oil Oil Condensates Refined Petroleum Products LPG LNG Natural Gas

*Provisional


The Country is rich in both oil and natural gas. Algeria owns 0.9% of the world oil reserves, equivalent to 12.2 billion barrels (bbl). As for the natural gas, the Country holds 2.6% of the world proven reserves, amounting to 159.5 trillion cubic feet (tcf).

Oil

Algeria holds the third largest oil proven reserve in Africa, after Libya and Nigeria, estimated at 12.2 bbl as of January 2008. Most of the proven reserves are mainly located in the eastern half of the country. The Hassi Messaoud basin contains over 70% of the Country’s proven oil reserves. Many industry analysts consent that Algeria’s oil sector is still under explored, despite the fact that the country has produced oil since 1956.

Chart 17: Top 5 African Proven Oil Reserve Holders, 2007

41.5

36.2

12.29.0

5.0

-

5

10

15

20

25

30

35

40

45

Libya Nigeria Algeria Angola Sudan

Billion Barrels

Source: Energy Information Administration (EIA)



Algeria is an active member of the Organization of the Petroleum Exporting Countries (OPEC). It is worth mentioning that the Algerian Minister of energy and mining, Mr. Chakib Khelil is the current head of OPEC. The country’s oil production reached 2,000 barrels per day (bbd) in 2007, representing 19.4% of the African production and 2.5% of the world’s total daily oil production. The Algerian oil production grew at a CAGR of 1.9% between 2003 and 2007.

The Algerian oil is among the highest quality in the world for its low sulfur content, 0.1%, which meets the European Union countries stern regulations on sulfur content of gasoline and diesel fuel.

Chart 18: Oil Production in Africa in 2007

Nigeria22.8%

Algeria19.4%

Libya17.9%

Angola16.7%

Egypt6.9%

Sudan4.4%

Gabon2.2%

Chad1.4%

Tunisia0.9%

Other Africa0.8%

Cameroon0.8%

Rep of Congo(Brazzaville)

2.2%

Equatorial Guinea3.5%

Source: BP Statistical Review of World Energy, June 2008

Though Algeria’s oil production is high, the local consumption doesn’t exceed 13.5%, leaving the rest for exports. The Algerian government plans to increase its industrial base to make use of the abundant oil supply, as well as the proven reserves, instead of orienting it to exportation. In other words, the country is shifting its policy to more downstream projects than upstream ones.

In April 2005, the hydrocarbon law passed to remove many restrictions on foreign energy companies, however the sector is still dominated by the government entity Sonatrach, which is either the owner or the majority holder in joint ventures in hydrocarbon related projects. As for oil exploration promotion, upstream contracts signing, development plans approvals, as well as taxes and royalties collections, are also state regulated through Al Naft agency.



Chart 19: Algeria’s Oil Production and Consumption Development

-

500

1,000

1,500

2,000

2,50019

80

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Thousand barrels daily

Oil Production Oil Consumption

Net

Exp

orts


With domestic oil consumption limited at 270,000 bbd, Algeria’s oil net exports reached 1.73million bbd in 2007. Algerian oil, as aforementioned, for its low sulfur content is favored in developed world, where stern environmental regulations apply. Close to half of the Algerian oil exports are exported to the US, followed by Europe with 38% of the total exported quantities and the remaining 14% is oriented to Asia.

Chart 20: Algerian Oil Exports by Destination in 2007

Europe38%

America48%

Asia14%

Source: Sonatrach Annual Report 2007

The Algerian oil exports are helped by a network of pipelines, which facilitate transport the crude oil and oil condensates, as well as the Liquefied Petroleum Gases (LPG) to exportation terminals on the coast of the Mediterranean. Most of the oil pipelines are operated by Sonatrach. As the Hassi Messaoud field is where the major Algerian oil fields are located, it is the origin of most of the transported crude oil to the export ports.

Table 15: Algeria’s Major Domestic Crude Oil Pipelines

Origin Destination Length (miles) Capacity (bbl/d)

Hassi Messaoud Arzew 500 470,000

Hassi Messaoud Bejaia 410 370,000

Hassi Messaoud Skikda 400 520,000

In Amenas Hassi Messaoud 390 390,000

Hassi Berkine Hassi Messaoud 180 110,000

El Borma Mesdar 170 55,000

B. Mansour Algiers 80 77,000

Mesdar Hassi Messaoud 70 26,000Source: Energy Information Administration (EIA)



Algeria has four oil refining facilities with a combined capacity of 450,000 bbd and are all operated by Naftec, an affiliate of Sonatrach. Naftec supplies the majority of the Algerian oil products needs. The bulk of the country’s refined products come from the Skikda refinery, which operates with a capacity of 300,000 bbd. The three other refineries are geographically spread in order to supply different parts of the country with the required end products.

Chart 21: Algeria’s Crude Oil Refining Capacity

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Thousand Barrels per Day

Source: Energy Information Administration (EIA)

After the hydrocarbon law of 2005 came into effect, the foreign partnerships with Sonatrach increased. Many multinationals were eager to open more business in Algeria in the field of oil and gas for its rich resources and huge proven reserves.

Chart 22: Crude Oil and Condensates Production by Ownership Structure

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Sonatrach Foreign Partnership


Natural Gas

Algeria ranks among the top ten countries with the highest proven natural gas reserves in the world, with 159 trillion cubic feet (tcf) as of January 2008. On the African continent, Algeria ranks second in terms of the natural gas proven reserves. Such a huge reserve has positioned the Country as one of the most favorable destinations for both natural gas dependant upstream and downstream projects. Almost quarter of the Algerian dry natural gas proven reserves are located in Hassi R’Mel field, with 85 tcf of proven reserves.



Chart 23: Top African Natural Gas Reserve Holders in 2007

187.0

159.4

72.9

52.842.8

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Nigeria Algeria Egypt Libya Other Africa

Trillion cubic feet


The Country produced 8.0billion cubic feet per day (bcf/d) of natural gas in 2007, while it consumed about 2.4bcf/d and the remaining was exported mostly in liquefied form. Between 2006 and 2007, the Algerian production dropped slightly by 1.7%, at the same time the consumption rose by 2.7%, during the same period.

Between 2000 and 2007, the Natural Gas production slightly dropped at a CAGR of 0.2%, while the consumption rose at a CAGR of 3.0%. This in turn came on the back of the Country’s expansion of more downstream projects like fertilizers and petrochemicals to maximize the value added of its abundant reserves of the light feedstock.

Chart 24: Algeria’s Natural Gas Production vs. Consumption Development

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Natural gas Production Natural gas Consumption


In 2007, Algeria ranked fourth on the world in terms of Liquefied Natural Gas (LNG) exports, behind Qatar, Malaysia and Indonesia. It is worth mentioning that Algeria was the world’s first producer of LNG in 1964, through its plant located in Arzew, which currently became the Country’s largest LNG export terminal facility. Skikda and Algiers are considered important exportation terminals as well.

France imported 31.8% of Algeria total LNG exports in 2007, followed by Turkey and Spain with 18.0% and 17.5%, respectively.



Chart 25: Top LNG Exporters in 2007

Chart 26: Algerian LNG Exports by Destination in 2007

-200400600800

1,0001,2001,4001,600

Qatar

Mala

ysia

Indonesia

Algeria

Nigeria

Australi

a

Trinidad

& Tobag

oEgypt

Oman

BruneiUAE

Equatoral

Guinea US

Libya

Norway

Billion cubic feet

Other6.4%

France31.8%

Turkey18.0%

Spain17.5%

Italy9.9% US

8.6%

Japan3.2%

UK2.6%

Greece2.0%

India 1.8%

China 1.7%

Belgium 1.4%

South Korea 1.0%Taiwan 0.6%


The Algerian natural gas sector is also state regulated through Sonatrach, which controls production and wholesale. As for the retail distribution, it is dominated by another government entity that is Sonelgaz. Foreign investments in the sector were allowed and various foreign gas producers, including BHP-Billiton, BP, Repsol, Statoil and Total, have entered the Algerian natural gas market in partnerships with Sonatrach.

Chart 27: Natural Gas Production by Ownership Structure

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Sonatrach Foreign Partnership


The Algerian natural gas is equipped with a network of pipelines which facilitate both its domestic and exports distribution. The local pipeline network’s midpoint is around the Hassi R’Mel natural gas field, from where the natural gas is distributed to most of the cities. As for the exports pipeline network, Algeria has two main pipelines connected to Europe, the Trans-Mediterranean (Transmed, also called Enrico Mattei) and the Maghreb-Europe Gas (MEG, also called Pedro Duran Farell). The Transmed is a 1,078.3km pipeline, which runs from the Hassi R’Mel via Tunisia and Sicily to end in Italy. The MEG is a 1,609.3km length pipeline connecting Hassi R’Mel with Cordoba, Spain via Morocco, where it ties into the Spanish and Portuguese natural gas transmission networks. It is worth mentioning that the MEG pipeline is operated by a consortium led by Spain’s Enagas, Morocco’s SNPP, and Sonatrach.

Though these are the main two export pipelines for Algerian gas, there are other export oriented pipelines but under construction. The Medgas pipeline, planned to be completed by 2009, should link Beni Saf in Algeria to Almeria in Spain, with an eventual extension to France. The Galsi Pipeline, also projected to be completed by 2009, should link Algeria to Italy. Finally, the Trans-Saharan Pipeline, which is aimed to link Nigeria to Algeria through Niger, in order to export the Nigerian natural gas through the Medgas and Transmed to European markets. Due to its huge length and possible disruptions, as well as its huge cost, estimated at US$10bn, the project’s feasibility is still questioned. If the project proves feasible, the pipeline should function by 2015.



Banking

The banking sector in Algeria is still in its development stage. As a major contributor to an economy’s growth, the Algerian government is seeking the adoption of many reforms on the sector, some of which have already occurred and others are still under process.

Algeria is perceived as being under banked, with low penetration rate and low banking density. These facts carry out many potential opportunities for banks with expansion plans, which have been illustrated by the existence of international lenders in the market.

After the nationalization of French banks in 1986, the banking sector in Algeria consisted of 5 public commercial banks, an investment bank and the National Fund for Provident Savings. The sole investment bank was Banque Algerienne de Developpement (BAD). The 5 public commercial banks were Credit Populaire d’Algerie (CPA), which was about to be privatized in 2007, Banque Nationale d’Algerie (BNA), Banque Exterieure d’Algerie (BEA), Banque de l’Agriculture et du Developpement Rural (BADR) and Banque de Developpement Local (BDL).

The law of currency and credit, passed on 1990, permitted the launch of private banks. This law was a new start for the banking system in Algeria, as it allowed the entrance of local and foreign lenders, matching the liberalization movement initiated by the government. Meanwhile, this law assigned Banque d’Algerie to be the responsible for applying the monetary policy, acting as the Central Bank. Afterwards, new legislations for banking activities were placed in the ordinance 03-11 of August 26, 2003. One of the provisions of this ordinance was the minimum capital requirement for a bank, which starting from 2004, was set at a minimum of AD2.5bn.

Public banks were increased by the creation of the Islamic Bank “Al Baraka” in 1991, which was formed between Banque Algerienne de Developpement Rural “BADR” and the Saudi Group of Della Al Baraka to perform commercial activities. It is worthy to note that Al Baraka Bank has 17 branches in Algeria and is planning to expand its branch network to reach around 50 branches by 2013.

In 1995, the first national private bank “Union Bank” was created by some Algerian businessmen, as a commercial bank. In addition, many financial institutions were established starting the same year, namely Caisse Nationale du Logement (CNL), Caisse de Garantie des Credits Immobiliers (CGCI), Societe de Refinancement Hypothecaire (SRH) and other institutions.

Foreign interest in the Algerian banking sector was illustrated in 1997, where many foreign lenders got approvals to get a presence in the market. Some of these were, Citibank, which had already a representation office in the Country, Societe Generale, BNP and others.

As of 2006, the banking sector in Algeria constituted of 21 banks and 7 lending institutions. Private banks amounted to 15 banks, including domestic and international players. Nevertheless, the market is dominated by the state-owned banks, which contributed to 95% of the aggregate assets of the banking system in 2007. Of late, Deutsche Bank and HSBC announced their intention to operate in Algeria, which indicates that there are potential opportunities inherent in the market.



This positive sentiment comes from the fact that the banking sector in Algeria is deemed to be unexploited, with around 15% of the population holding ATM cards. Also, there is a rising need for expanding branch network, as currently a branch serves on average 30 thousand people, which entails the establishment of new banks or branches to satisfy the unfulfilled demand, which is expected to increase even more with the growing population, around 34mn in 2007.

As an oil rich Country, where economy growth is highly dependent on the hydrocarbons sector, the need rose to diversify sources of wealth, which could be achieved through motivating the private sector investments. This necessitates a sound banking system to ensure the availability of necessary funding for such investments. That is why the government acted towards ameliorating the banking sector through the adoption of some reforms.

The treasury repurchased some of the Non Performing Loans (NPLs) extended by state-owned banks to public enterprises over the period from 1990 to 2002, which accounted for around 4% of GDP annually. One of the reforms made on the banking sector was to replace banks’ loans to public enterprises with subsidies granted to them in the government budget of 2005. It is worthy to note that NPLs in 2007 reached 38% of the public banks’ loans books. Other reforms included improving banks’ management, transparency and improving surveillance on banks.

Of the important reforms that occurred on the banking system in 2006, was the establishment of the Algerian Real Time Settlements system, which is responsible for urgent electronic transfer of large payments. In addition, the banking system witnessed the launching of Algerie Telecompensation interbancaire, which is an interbank electronic clearing system.

Other ways of reforms were the privatization of some public banks, however this process is still dawdling and is not yet complete. The government announced that CPA, which is one of the largest public banks in Algeria, would be privatized by the end of 2007, where the government would still own 49% of the Bank. Six banks showed their intention to participate in the bid, these were BNP Paribas, Societe Generale, Credit Agricole, France Natexis, the Spanish Banco Santander and Citigroup. It is worth mentioning that Societe Generale and BNP were already operating in Algeria. The bid did not take place as scheduled, as three of the prospective bidders abandoned the deal. Citigroup was affected by the subprime crisis, which hit the USA in 2007. Credit Agricole requested to postpone the deal, while Banco Santander preferred to concentrate on its acquisition of ABN Amro. As a result, the government decided to postpone the deal, without specifying a date, fearing that it will end up with an underestimated price for the Bank. In addition, partial privatization of BDL is in the pipeline.



Table 16: Balance Sheet of Deposit Money BanksIn ADbn 2002 2003 2004 2005 2006 2007*Assets

Reserves 203.9 373.8 280.6 198.1 273.6 445.2

Net Foreign Assets 49.6 55.5 76.7 91.4 83.9 100.2

Credit to the Government 843.9 808.6 803.4 876.4 1,014.5 950.4

Credit to the Economy 1,266.0 1,379.5 1,534.4 1,779.0 1,904.1 2,180.7

Credit to the Public Sector 715.5 791.4 857.7 882.4 847.0 968.4

Credit to the Private Sector 550.2 587.8 674.7 895.9 1,055.7 1,210.4

Other 0.3 0.3 2.0 0.7 1.4 1.9

Other Items (Net) 960.3 917.0 1,197.9 1,264.9 1,952.8 2,832.3Total Assets 3,323.7 3,534.4 3,893.0 4,209.8 5,228.9 6,508.8Liabilities

Demand Deposits 642.2 718.8 1,127.9 1,224.4 1,750.4 2,541.5

Public Sector 322.1 387.3 697.4 773.9 1,163.9 1,800.8

Private Sector 244.5 232.3 273.9 321.3 442.4 578.9

Other 75.6 99.2 156.6 129.2 144.1 161.8

Time Deposits 1,485.2 1,724.1 1,577.5 1,736.1 1,766.2 1,763.8

Public Sector 382.9 514.0 254.1 365.8 364.5 355.0

Private Sector 1,001.6 1,102.2 1,189.2 1,232.8 1,271.4 1,394.3

Other 100.7 107.9 134.2 137.5 130.3 14.5

Short Term Foreign Liabilities 36.7 38.8 66.5 63.2 95.3 80.5

Medium and Long Term Foreign Liabilities 36.7 41.9 49.7 20.6 19.4 16.1

Government Deposits 69.9 51.1 66.5 99.1 143.7 217.6

Obligations to the Government 36.2 59.7 49.0 54.6 33.5 28.9

Capital 131.0 137.8 141.7 151.8 161.3 170.8

Reserves 19.9 22.0 24.5 19.7 23.5 27.8

Other Items (Net) 865.9 740.2 789.7 840.3 1,235.6 1,661.8Total Liabilities 3,323.7 3,534.4 3,893.0 4,209.8 5,228.9 6,508.8

*Provisional


Over the 5-year period from 2002 to 2007, the aggregate liabilities of the deposit money banks grew at a CAGR of 14.4%, reaching AD6,508.8bn in 2007, compared to AD3,323.7bn in 2002. Meanwhile, they inclined by 24.5% y-o-y, as they represented AD5,228.9bn in 2006. This y-o-y rise was mainly caused by the acceleration in demand deposits, contributing to 39.0% of total liabilities, as they rose by 45.2%, from AD1,750.4bn in 2006 to AD2,541.5bn in 2007. Provisional data published by Banque d’Algerie indicates that these deposits reached AD2,933.7bn in June 2008.



Chart 28: Composition of Time Deposits at Deposit Money Banks -2006

Chart 29: Composition of Time Deposits at Deposit Money Banks -2007*

In LocalCurrency

86.4%

In ForeignCurrency

13.6%

In LocalCurrency

86.9%

In ForeignCurrency

13.1%


Time deposits at deposit money banks witnessed a slight decline of 0.1%, as they reached AD1,763.8bn in 2007, down from AD1,766.2bn a year before. Meanwhile, the contribution of these deposits to total liabilities declined from 33.8% in 2006 to 27.1% the following year. These deposits have a provisional balance of AD1,869.3bn in June 2008. It is worth mentioning that deposits in local currency represented 86.4% of total time deposits in 2006 and their contribution remained stable in the following year, as it reached 86.9%.

Chart 30: Development of Demand Deposits in the Financial Sector (2006-2007)

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Concerning demand deposits of the total financial sector, they reached AD2,929.8bn in 2007, compared to AD2,086.2bn the previous year, implying a y-o-y growth of 40.4%. Deposits at banks constitute the majority of these deposits. They swelled by 45.2% over the year, as described earlier, capturing 87.1% of total demand deposits in 2007, up from 83.9% in 2006. Other demand deposits are represented by deposits with treasury and deposits with postal checking system, which shares of total demand deposits reached 5.7% and 7.2% in 2007, respectively.



Chart 31: Development of the Credit to the Economy (2006-2007)

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On the other hand, the 24.5% y-o-y rise in total assets of the deposit money banks was mainly caused by the 14.5% increase in the credit to the economy, constituting 33.5% of total assets, as it reached AD2,180.7bn in 2007, up from AD1,904.1bn the previous year. Credit to the economy is composed of short term credit, with a share of around 46%, equivalent to AD998.7bn, implying a y-o-y increase of 9.1% over 2006, while the medium and long term credit grew by 19.6%, from AD989.7bn in 2006 to AD1,183.5bn the following year.

Chart 32: Credit to the Economy by Sector-2006 Chart 33: Credit to the Economy by Sector-2007*Local

Administration0.1%

Public Sector44.5%

Private Sector55.5%

LocalAdministration

0.0%

Public Sector44.4%

Private Sector55.6%


As for the distribution of credit to the economy, the two years 2006 and 2007 witnessed similar shares, as around 56% went to the private sector, while the rest went to the public sector.

Chart 34: Loans/Deposits Development

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Loans/Deposits-excl. govt Loans/Deposits

*Provisional

Source: Banque d’Algerie and Global Research



The loans to deposits ratio indicates a declining trend over the period from 2002 to 2007. The ratio including credit to the government and government deposits went down from 96.0% in 2002 to 69.2% in 2007. By excluding the government balances, we find that the ratio moved from 59.5% in the beginning of the period to reach 50.7% in 2007, which is still too low compared to the approximate world average of 80%.

The banking sector in Algeria offers promising opportunities. Given the small percentage of population using banking products and services along with the growing population, of which 69% are between the age of 15 and 64 years old, we expect higher demand on banking services in the years to come. In addition, prospective projects are expected to take place, spurred by ample hydrocarbons reserves in the country. These projects would represent profitable lending opportunities for the banking sector, which would easily fulfill lending needs, given its low loans/deposits ratio.



Telecommunications and IT

The Algerian telecom and IT sector took off in 2000 after the government’s decision to end its stronghold on the sector and the creation of the Post and Telecommunications Regulatory Authority (ARPT). As a result, the telecom and IT sector has transformed immensely with massive local and foreign investments, being directed towards constructing a state of the art telecommunications infrastructure.

In the past, the telecom sector was monopolized by the state owned Algerie Telecom, which controlled both the fixed-line and mobile telephony services. However, with a new policy directed at deregulating the telecom sector, the Algerian government decided to offer private licenses for investors from around the world. In 2001, Egypt’s Orascom Telecom was awarded the first private license, after submitting a bid worth US$737mn, to start its GSM operations in 2004, under the trade name “Djezzy”. The license granted to Djezzy expires in 2016, and there is an option to renew the contract for two 5 year periods. In addition, Algerie Telecom decided to create an independent GSM services operator and created its own offshoot Mobilis. In 2004, Kuwait’s Wataniya Telecom was awarded the second private license, after outbidding rivals with a US$421mn bid, and operates its GSM services through its subsidiary “Nedjma”. And so, today, the Algerian mobile services market is controlled by only three operators, Djezzy, Mobilis and Nedjma.

The Algerian government had planned to sell 35% of Algerie Telecom in an initial public offering (IPO), however, continued delays forced the government to reschedule the offering until mid 2008. Of late, Algerie Telecom’s CEO has announced that the entire plan has been pushed forward at least two years, to allow more time for the Company to improve the quality of its services and increase its competitiveness, which in turn will increase the Company’s value.

Chart 35: Algerian Mobile Services Market Share (30 Sept. 2008)

Djezzy63%

Mobilis20%

Nedjma17%

Source: Orascom Telecom Holding

The mobile services industry has been widely welcomed by the Algerian people, who have embraced the new technology and elevated its status, making telecommunications market in Algeria is now worth an estimated US$6.4bn.

According to the Post and Telecommunications Regulatory Authority (ARPT), in 2007, there were around 27mn mobile services subscribers in Algeria, distributed as follows, Djezzy



had 13mn subscribers, Mobilis had 9mn subscribers and Nedjma had 5mn subscribers. This represents a stunning 127% CAGR between 2000 and 2007, in which Algeria started with 86 thousand subscribers. As a result of this overwhelming demand for mobile services, the Algerian government decided to switch mobile phone numbers from nine-digits to ten-digits.

Moreover, with 28mn subscribers Algeria has an impressive 81% penetration rate, one of the highest in the region in 2007.

Chart 36: Number of Mobile Cellular Subscribers and Penetration Rate

0.3% 0.3% 1.4%4.5%

15.1%

41.6%

63.0%

81.4%

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Mobile cellular subscribers Penetration Rate

Source: International Telecommunication Union

Upon issuing private mobile services licenses in Algeria, the average revenue per user (ARPU) started declining from highs of about US$36 in 2002 to about US$10 in 2005. This was mainly due to the fact that for the first time there was competition in the sector. The three competing operators had to make attractive offers to customers by decreasing costs and tariffs, which ultimately reduced the ARPU. However, due to its large market share, Djeezy was still able to achieve a higher ARPU than its rivals. In 2007, Djeezy’s ARPU was US$12.3, while Nedjma’s ARPU was US$7.6 and Mobilis’s ARPU was US$3.0.

Chart 37: Average Revenue per User (ARPU) per operator in 2007

12.3

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Djezzy Nedjma Mobilis

US$

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The fixed-line market in Algeria doesn’t enjoy as much success and penetration as its mobile services counterpart, as there are only about 3.1mn subscribers, as of 2007, which is an extremely low number, when compared to the 27mn subscribers of mobile services, the same year. This low penetration rate, of 9.1%, has obstructed internet access in the country, which depends on the amount and quality of fixed lines.



Chart 38: Telephone lines and Penetration Rate

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9.1%

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Fixed telephone lines Penetration Rate


In 2005, Lacom, a 50-50 Egyptian joint venture between Telecom Egypt and Orascom, was awarded a 15-year license as a fixed-line operator and high-speed internet services developer, at an estimated cost of US$65mn. The agreement stipulated that the venture would have to invest about US$1bn in state of the art telecommunication networks. Moreover, the license also gave Lacom a two year exclusivity period to run both national and international fixed line services. Lacom launched its operations on February 2006, and by the end of the year the venture had more than 44 thousand subscribers. However, in 2007, Lacom launched a complaint against Algerie Telecom alleging the state-owned firm of “unfair practices” that resulted in Lacom recording US$45mn losses. The Post and Telecommunications Regulatory Authority (ARPT) responded that it had taken all the necessary measures to ensure fair competition. However, after months of speculation, on November 13th, 2008, Telecom Egypt announced that Lacom will be liquidated due to the difficulties it faced in the Algerian market.

Although growth has been impressive in the last couple of years, Algerian internet penetration remains low, at 10.3%, compared to its neighboring countries. Internet users have increased from 500 thousand in 2002 to 3.5mn in 2007, reflecting a 47.6% CAGR, most of which use dial up connection, even though the government has been trying to promote broadband connections. The broadband users represented only 8% of the total internet users in Algeria in 2007.

It is worthy to mention that the Algerian internet market was liberalized in 1998, and a year later the competition started between Internet Service Providers (ISPs). Since the end of 2000, ISPs, which were required to get a license, have to get an authorization regulated by a schedule of conditions. Only 30 ISPs are operational despite the fact that more than 90 service providers got the authorization.



Chart 39: Internet Users and Penetration Rate

0.5% 0.7%1.6%

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7.4%

10.3%

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Internet Users Penetration Rate


In 2006, the ARPT legalized the use of VoIP (Voice over Internet Protocol), a service allowing broadband users to transmit voice calls through the internet, and awarded 11 licenses to providers of VoIP services. By late 2006, there were only six active operators providing the service.

The future of the telecom and IT sector in Algeria appears to be bright. Penetration level in the mobile services is expected to increase to 99.5%, as subscribers are expected to reach 35.8mn by 2010. Djeezy’s market share might decrease, as Nedjma increases its own. However, Djeezy is still expected to have pricing power, high EBITDA margin and a strong brand name.

The fixed-line market is also poised for expansion, as it is an extremely untapped market with huge potential, due to its relationship with internet connectivity. Even though, the liquidation of Lacom by both Telecom Egypt and Orascom doesn’t send a positive message to foreign investors, there is still massive potential in the Algerian fixed-line market. The government has already placed improvements in the information and communications technology sector on top of its priority list, indicating an emphasis on the development of the sector. Moreover, various cyber parks are currently being constructed in different regions within the country, further implying the interest and growth of the sector.



Agriculture

During the French colonization era, agriculture was the dominant sector in Algeria. The French gave great attention to agricultural production. They exploited many channels to ameliorate the sector and developed large arable lands, orchards, citrus gardens and vineyards. Due to their efforts, most of the country’s food needs- around 90% of grains consumption- were satisfied by local production, to the extent that Algeria was even exporting food and raw materials to France, in exchange for consumer and capital goods. Before shifting to the hydrocarbon sector as the main driver for the economy’s wealth, food exports generated around 63% of total exports revenues.

Algeria lost foreign management and expertise when it gained its independence. Accordingly, interest to the agriculture was abandoned, especially that many factors related to the country’s aridity and rainfall volatility had an additional negative influence on the sector. In addition, viticulture production and exports, which dominated the sector during the French colonization period, declined considerably due to Islamic considerations. Since then, the importance of hydrocarbons showed up and the government’s focus moved towards developing the oil and gas sector. The significance of the agriculture sector diminished, as it captured around 27% of the total labor force in 2006, compared to a contribution of around 40% during the 1960’s. Nevertheless, the agriculture is still considered the country’s major employer. On the other hand, the current contribution of Agriculture to GDP reached around 7% in 2007, compared to a 44% share of hydrocarbons.

Chart 40: Agriculture as a % of GDP

9.8%9.4%

7.7% 7.6% 7.7%

0%

2%

4%

6%

8%

10%

12%

2003 2004 2005 2006 2007*

*Provisional

Source: Banque d’Algerie and IMF

Arable lands constitute around 3% of the total country’s land, where cultivation is mostly concentrated on the coastal plain of the Tell region. The principal crops constituting the main agricultural activities are wheat, barley and potatoes. Wheat production reached 2,688 thousand tons in 2006, realizing a y-o-y growth of 11.3%, as its production amounted to 2,415 thousand tons the previous year. This implies a CAGR of 15.7% over the 4-year period starting from 2002. Concerning barley, it reached 1,236 thousand tons in 2006, growing by a 19.7% over 2005 and rising at a CAGR of 31.3% over the 4-year period. As for potatoes, Algeria produced 2,181thousand tons in 2006, compared to 2,157 thousand tons in 2005, growing by 1.1% y-o-y and implying a CAGR of 13.1% over the period from 2002 to 2006.



Other crops include tomatoes, citrus fruits, olives, dates, grapes, wines, tobacco, sorghum, millet, rye, rice, oats and corn.

Chart 41: Principal Crops Production

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500

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1998 1999 2000 2001 2002 2003 2004 2005 2006

In Thousand Tons

Wheat Barley Potatoes

Source: African Statistical Yearbook 2007

In 2007, the agriculture sector grew by 11.1% y-o-y, reaching AD710.9bn and captured a share of 7.7% of GDP, compared to a share of 7.6% a year before. Ameliorations in the sector took place and had a positive effect on the 2007 total production, of which was the expansion of table grapes areas, which led to an enhancement in the fresh fruits exports, in addition to the developments made on the orchards areas, as they reached 1mn hectares in 2006, up from 518 thousand hectares in 1999.

Table 17: Agricultural Land Use Patterns

In Thousand Hectares 2002 2003 2004 2005 2006

Cereals 3,130.8 3,045.1 3,290.8 3,151.2 3,266.7

Durum wheat 1,350.7 1,321.6 1,372.5 1,314.9 1,358.0

Bread wheat 813.8 812.5 808.8 721.2 700.1

Barley 894.9 833.5 1,029.0 1,023.4 1,117.7

Other 71.4 77.5 80.5 91.7 90.9

Pulses 62.2 68.0 72.1 69.2 66.9

Fodder crops 300.3 272.8 461.6 484.2 364.7

Industrial crops* 30.1 32.4 32.8 26.2 15.7

Vegetables** 158.1 184.2 197.8 211.0 212.4

Grapes 80.0 94.0 97.5 100.0 97.0

Fruit trees 577.0 645.7 703.9 778.5 810.1

Natural prairies 23.6 26.0 25.4 26.1 25.6

Others 3,769.0 3,796.5 3,437.6 3,544.2 3,544.5

Total cultivated land 8,131.1 8,164.7 8,319.5 8,390.6 8,403.6

Fallow 3,733.8 3,701.5 3,382.9 3,589.9 3,404.8*Industrial tomatoes and tobacco**Potatoes, tomatoes, garlic, onions and watermelonsSource: IMF and Global research

It is worth mentioning that per capita agricultural production and per capita food production grew each by an average of 5.6% over the period from 2001 to 2006.



Table 18: Index Numbers of Agricultural Production (1999-2001=100)

1998 1999 2000 2001 2002 2003 2004 2005 2006

Total Agricultural Production 98.2 100.7 95.3 104.0 105.6 124.9 137.5 137.3 142.9

Total Food Production 98.0 100.8 95.2 104.0 105.7 125.2 137.7 137.5 143.1

Total Agricultural Production (Per Capita)

101.1 102.2 95.3 102.6 102.6 119.5 129.6 127.5 130.8

Total Food Production (Per Capita)

100.9 102.3 95.2 102.5 102.6 119.8 129.8 127.7 131.0

Source: African Statistical Yearbook 2007

While Algeria used to be a food exporting country, its current production does not meet the local demand, which led it to import around 45% of its food needs. In fact, Algeria became one of the main importers of wheat, agricultural seeds and milk products internationally. The majority of imports come from Europe, mainly France. Also, wheat, dry dairy, corn, soybean meals and oils are imported from the USA. In 2007, imported food represented 17.6% of total imports, while exported food’s share of total exports was 0.15%. The major food exports by Algeria are dates, grapes and wines, olives, citrus fruits and industrial tomatoes. Although the sector has been greatly impacted by privatization, it is still influenced by governmental control, through subsidies and price fixing and other intervention activities.

Chart 42: Imports and Exports of Food (2003-2007)

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Imported Food Exported Food (right scale)

*Provisional


The government created a national plan for agricultural development (PNDA), with the main aim of improving the agricultural sector, through enhancing agricultural production, lands, forestation and protecting the steppe.

The plan showed successful results after its implementation. These were reflected on the employment activity, as 200,000 jobs were created. In addition, progress occurred in the production of many crops, of which dates, potatoes, tomatoes, vegetables, fruits, eggs and others. Also, other plans included jobs creation reaching 300,000 by 2009 and expanding agricultural lands.

The government made many efforts recently to ameliorate the sector’s performance. In July 2008, a new law was approved, concerning the concession of state agricultural land,



constituting around 30% of the total agricultural territory in Algeria. The goal is to make the government control the agricultural activity through the concession option, where the beneficiaries who use lands with other objectives than farming will be penalized. A national economic recovery plan for the 4-year period ending 2009, included a budget of US$4.2bn, to be oriented to agricultural developments, including lands concessions, soil amelioration and other activities. In addition, in April 2008, the government encouraged farmers to increase cereals production to the extent that it would purchase domestically produced wheat with prices close to international ones.

The main irrigation source for the Algerian agriculture is rainfall, on which the sector accounts heavily. The Mitidja region, which is characterized by arable lands and gardens, witnessed low quantities of rain in the beginning of 2008. Therefore, the government announced that waste water will be used to irrigate lands. In addition, it announced a plan to transfer water from Oued Djer, which will be used to irrigate 24 thousand hectares in Mitidja, through the establishment of a diversion dam and a pumping station.

The agricultural sector holds potential opportunities, especially with the dates production, constituting the dominant exported food. However more diversification is needed, as enhancement should be made in the production of cereals, vegetable oils, sugar, milk and dairy products, to relatively decrease the country’s imports of food.



Fertilizers

Over the last couple of years, the Algerian government has been implementing a program dedicated towards increasing utilization of all its energy and natural resources, through improving its downstream energy industries. One of the key sectors targeted by this program is the fertilizers sector.

Fertilizers, as a commodity, play a key role in the survival and development of human beings, as plant nutrients are an essential component of agriculture. They can be split into two broad categories, organic and inorganic. Organic fertilizers are natural fertilizers obtained mainly from animal manure, while inorganic fertilizers could be considered as chemical additives for plants to take in, such as nitrogen, phosphorus and potassium, hence, inorganic fertilizers are usually categorized as nitrogenous, phosphate and potash fertilizers. One of the main resources used to create nitrogenous fertilizers is natural gas, and since Algeria has one of the region’s largest natural gas reserves, it is perfectly positioned to be a major player in the fertilizers market.

Since 1980, fertilizers production has increased from 54.6 thousand tons to 133.6 thousand tons in 2005 at a CAGR of 3.64%. The increase in fertilizers production in Algeria came on the back of the abundance of natural gas in the country. This in turn clarifies why most of the fertilizers production is concentrated in the nitrogenous types, which are primarily devised from natural gas. Moreover, the majority of production is being exported, as low production costs give Algerian fertilizers a price advantage.

Chart 43: Total Fertilizers Production in Algeria

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Thousand metric tons

Phosphate Fertilizers Nitrogenous Fertilizers Total Production

Source: FAO Data

On the other hand, fertilizers consumption has decreased from 235.7 thousand tons in 1980 to 107.4 thousand tons in 2005, representing a -3.1% CAGR. This could be attributed to the extremely underdeveloped agricultural landscape of Algeria compared to other countries in the region.



Chart 44: Total Fertilizers Consumption in Algeria

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Source: FAO Data

The main entity responsible for the production of fertilizers in Algeria is the National Company for Fertilizers, Asmidal, a subsidiary of the state-owned Sonatrach. Asmidal acts as a partner to almost all private or international companies interested in exploiting Algeria’s undeniable potential in the fertilizers market. The company used to have two complexes for nitrogenous and phosphate fertilizers, however, as a result of the economic reforms that Algeria is experiencing, the company’s new goal is the administration of a set of portfolios. Asmidal currently owns 34% of Fertial, which produces ammonia, nitrogenous and phosphate fertilizers, and 45% of Kimal, which specializes in producing STPP (Sodium Tri-Poly-Phosphate), used in detergents. In addition, other companies in Asmidal’s portfolio include Somias, Gaurding Company and Asfertrade SPA, which all operate in the fertilizers sector.

One of the main projects currently underway in the Algerian fertilizers market is Sorfet, a joint venture between Egyptian based Orascom Construction Industries (OCI) and Asmidal, which will establish a mammoth ammonia/fertilizer production facility in the region of Arzew, to come on stream by 2010. This region has been expansively developed for energy and natural resources industries, and is considered as a focal point for chemical exports. Sorfet, which will be constructed on 33 hectares, is designed to produce as much as 1mn tons of ammonia/urea fertilizer, in addition to 700 thousand tons of ammonia. Moreover, all equipment for the plant will be supplied by German giants Uhde.

In addition, Omani based Suhail Bahwan Group Holding (SBGH) has also entered into a joint venture with Asmidal to construct a new ammonia/urea plant. The new plant, named Sharkia El Djazairia El Omani lil Asmida (AOA), will cost an estimated $US2.4bn and will produce around 7,000 tons of urea and 4,000 tons of ammonia per day.

The outlook of the fertilizers sector in Algeria appears to be a bright one, as the country’s relatively cheap feedstock, labor and its proximity to Europe give it a competitive advantage over its rivals. Moreover, continuous reforms in business legislation will further enhance Algeria’s ability to attract foreign investments to the downstream industries. However, one of the main obstacles that will face the Algerian government is that the country has a severely underdeveloped infrastructure, which may deter some investors. Moreover, Algeria will most definitely face stiff competition from countries in the MENA region, as several countries within the region are interested in developing their own downstream industries. The Gulf countries in particular, buoyed by high oil revenue, are looking to decrease their dependency on oil exports and are very interested in further enhancing their downstream industries.



Steel

The face of the steel sector in Algeria has been witnessing a dramatic change over the last couple of years. Economic reforms initiated by the Algerian government have liberalized the country’s economy. In turn, this has created an enormous potential for industrial and constructional development, which positively affected the steel sector. Production levels have significantly risen from their previous historic levels to feed the ever growing demand created by the resurgence of the real estate sector. Moreover, large iron ore reserves located in the region of Tebessa have had a positive impact on the industry, as they have significantly reduced the costs of production.

Steel production in Algeria has been witnessing a steady rise over the past decade. During the mid-90s, output levels were decreasing due to a slowdown in the construction sector, however, since 1997 production levels have increased from 399 thousand tons to 1.3mn tons in 2007, representing a CAGR of 12.3%. This could be mainly attributed to the boom in the real estate sector, driven by companies from the Middle East. It is worth mentioning that Algeria’s steel production reached 0.6mn tons in October 2008.

Chart 45: Algeria’s Crude Steel Production

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2008

Thousand Metric Tons

Source: World Steel Association

The steel market in Algeria is a monopoly with only a single producer, ArcellorMittal–Annaba. Prior to 2001, steel production was carried out only by the state owned Sider, but in October 2001, LN Mittal N.V, through its subsidiary Ispat, was able to purchase 70% equity stake of the company and renamed the company Mittal-Annaba. Moreover, LN Mittal acquired 70% equity interest of iron ores in Boukhrada and Ouenza from Ferphous, and named the new company Ispat Tebessa. When Mittal merged with Luxemburg-based giants Arcellor and created the largest steel company in the world, Mittal-Annaba was renamed ArcellorMittal–Annaba.

The complex in Annaba has a capacity of 2mn tons per year and ArcellorMittal has been engaged in a series of operations to enhance all production facilities. In 2007, the company started a development plan for all production units. The plan is to overhaul the plant over two years ending by late 2008, with an estimated cost of US$75mn. Moreover, ArcellorMittal have recently announced plans to invest a massive US$2.5bn on a brand new steel complex in Jijel state, pending to the approval of the Algerian authorities. The new complex, if approved, will lift total production capacity to an estimated 2.8bn tons/year. In addition to establishing new plants, the company also announced its intentions to further enhance the production capacities of its mines in Boukhrada and Ouenza to reach an estimated 3mn tons by 2010, which could lead to an increase in total production to reach 2mn tons.



However, the company faced major problems in 2008, as technical breakdowns to both the blast furnace and rolling mill stopped production for four month, which resulted in a loss of 30% of the annual production.

In late 2007, the Algerian government approved plans presented by Egyptian steel powerhouse Ezz Steel to construct a new Greenfield steel plant, its first outside Egypt. The plant, which is expected to be up and running by late 2010 or early 2011 at most, will be built on two phases and is expected to have a capacity of 3mn tons per year of long products. The production of long products is obviously a result of the booming construction sector of Algeria, however, the company has also announced that an expansion to produce flat products is also expected at some time later. By expanding its operations in Algeria, Ezz Steel will become the largest consolidated steel producer in the Middle East region.

In 2008, steel prices worldwide soared to record highs, driven by ever growing demand from emerging markets, including Algeria. This surge in prices placed enormous pressure on the construction sector and resulted in the deterioration in quality of housing units. To make matters worse, the technical breakdown in Arcelor Mittal’s Annabe complex created a severe steel deficiency, causing prices to rise even higher while prices worldwide were declining. In January, steel was being traded at AD1,500 per ton and in November the price reached an estimated AD8,000 per ton. Moreover, it is expected that prices will reach a stunning AD10,000 per ton in March 2009.

The potential of the steel market in Algeria is enormous, as the current demand-supply gap is too large to be filled by a sole producer. Algeria is considered the second largest importer of steel in the Arab region, as the country’s reinforcing steel imports reached 2mn tons per year in 2007. These imports are expected to increase in the future with the increasing arrival of real estate companies to Algeria. Moreover, demand for flat steels is also expected to increase, as the Iranian government reached an agreement with its Algerian counterpart to construct a new facility to manufacture cars. Additional advantages that the country posses, include the abundance of raw materials, relatively cheap labor and cheap energy prices.



Cement

The cement sector in Algeria has been steadily growing over the past five years, due to the renaissance of the construction sector. The policies adopted by the Algerian government since the mid-1990s directed at the enhancement of foreign investments are now bearing fruits, as massive projects are being announced aiming at revolutionizing Algeria’s construction and infrastructure sector. As a result, Algeria’s cement sector has immensely benefited, as both demand and supply of cement has drastically increased and the country, which is regarded as a net importer of cement, is starting to bridge the gap between its demand and supply.

The construction sector in Algeria is mainly driven by the government’s initiatives aimed at expanding the nation’s extremely underdeveloped housing sector. Algeria suffers from one of the most severe housing shortages in the Middle East and has one of the highest occupancy rates on earth. In 2007, the housing deficit was estimated to be 1mn housing units and this figure is expected to rise to 2mn in the future. This has prompted the Algerian authorities to formulate a construction policy with a vision of creating 150,000 housing units annually for the next decade. As a result, Algeria’s cement consumption has been steadily increasing at a high growth rate to feed the North African nation’s ever growing appetite for development, and since 2004 cement construction had grown at a CAGR of 13.0%.

Chart 46: Cement Consumption in Algeria

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Source: World Cement Book 2007

The production of cement in Algeria didn’t take off until 2004 when the Algerian Cement Company (ACC) effectively commenced operations. During the period between 1997 and 2004, production levels remained somewhat static around 9mn tons per year. However, as more investments were directed into the sector, cement output has grown at impressive rates. In 2007, total production reached about 15.5mn tons, up from 11.3mn tons in 2004, a CAGR of 11.1%.

Chart 47: Cement Production in Algeria

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Source: World Cement Book 2007 and US Geological Survey



The largest cement producer in Algeria is the Algerian Cement Company (ACC), which was formed in 2001 by Egyptian based Orascom Construction Industries (OCI) and is considered the largest foreign investment outside the petrochemicals and telecom sectors. ACC commenced its activities in early 2004, were it had one production line with a capacity of 2.5mn tons per year, and in mid-2005 a second production line was added with an additional capacity of 2.5mn tons per year, raising the total capacity of the plant to 5mn tons per year. Moreover, OCI introduced plans to establish an additional 2.5mn tons per year plant near the coast of Algeria, which will give the company a brilliant export facility. As for white cement, OCI also built a 0.6mn ton per year plant, named Ciment Blanc d’Algerie (CBA), to capitalize on the local market’s increasing demand. However, in late 2007, the French cement giant Lafarge was able to acquire OCI’s cement operations including ACC and CBA. It is worth mentioning that Lafarge became the world’s largest cement producer after this deal.

The Algerian government has been busy trying to find potential investors for the 12 state-owned cement complexes. These complexes have a combined capacity of 11.5mn tons per year, but have been operating below these capacities due to a severe lack of maintenance. In 2006, Italian cement producer Buzzi Unicem acquired a 35% stake in two Algerian companies, which own cement complexes in both Hadjar Soud and Sur El Ghozlane, having a combined capacity of 2mn tons.

In addition, Pharaon Commercial Investment Corporation, a Saudi Arabian based firm, also acquired a 35% stake in the Beni Saf plant, owned by Le Groupe de Ciments de L’Ouest, and has announced its intentions to increase the plant’s capacity from 0.5mn tons per year to 1mn tons per year. Other Saudi investments in the Algerian cement sector include a plant worth an estimated US$200mn to be established in the region of Galfa by a Saudi-Algerian venture. The new plant is expected to be completed in 2009 and will produce approximately 1mn tons per year.

In July 2007, the Egyptian company ASEC was granted a contract to construct a cement complex at the central region of Djelfa, with an estimated cost of US$550mn. The new plant is expected to commence its activities in 2010 and will have a capacity of 3mn tons per year.

In July 2008, the Algerian government and its Iranian counterpart signed an agreement to establish a new cement plant with a capacity of 1mn tons per year, at a cost of Euro220mn. The new plant will be 51% owned by the Iranian government and is an extension to the various joint projects agreed upon by the two countries.

The future of the cement sector in Algeria continues to look bright, as the boom and expected growth of the housing and construction sectors will continue to drive cement demand even higher. Moreover, newly added and announced capacities will further enhance the cement industry’s ability to meet the soaring demand. Even though Algeria is still considered a net importer of cement, the country is moving positively towards self-sufficiency, as is reflected in the declining import figures from major markets, such as Egypt and Turkey. Another vital factor that will help the cement sector to continue to grow and attract foreign investments, is the fact that production costs are extremely low compared to any region in the world. In 2007, it was estimated that it costs approximately a stunning US$15 to produce one ton of cement in Algeria, a figure that is likely to attract a large number of investors.



Construction and Real Estate

As for the construction and real estate sector, it has been witnessing an annual real growth rate of around 7% since 2002. The sector confronts many challenges in Algeria. These are represented by lands’ paucity, which consequently drives prices higher, lack of experienced labor, in addition to growing construction costs.

In 2005, the Algerian government announced a plan, with a 5-year period, which will include US$60bn as government expenditure, with the aim of ameliorating the sector’s performance. The plan included the development of 1mn housing units. This plan spurred foreign corporations to establish projects in Algeria.

Emaar, the Emirati Developer, announced in 2007 that it will establish 4 real estate projects, with an estimated cost of US$20bn. These projects cover a new town called Sidi Abdellah, a tourist resort at Colonel Abbas, a healthcare resort at Staouali County and a redevelopment of the waterfront at Algiers. The projects will include hotels, villas, shopping centers, marinas, apartments, hospitals, sport centers, students’ campuses, a para-medical school, a medical school and a golf course. The new city of Sidi Abdellah will have an area of 400hectares (ha), while the tourist and waterfront projects areas are expected to be 109ha and 260ha. It is worth mentioning that Emaar announced in February 2008 that it will raise its investments in the Algerian projects to reach US$30bn.

In addition, the Saudi-originated real estate developer “SNASCO” announced in 2008 that it will establish a mega waterfront project in the city of Oran, with an estimated area of 150 thousand square meters and an estimated cost of Euro400mn. The project will include residential and commercial units.

Moreover, the Emirates International Investment Company (EIIC) announced in the same year the establishment of the “Parc Dounya” project, which is expected to be completed in 5 years and has an estimated area of 6.6mn square meters. The project’s total investment is estimated to be US$5bn. The Company will provide 75% of the project’s area as a public park. The remaining area will be used for residential and commercial activity and will include hospitals, a convention center, lakes, hotels, a golf course and a playground for children.

Table 20: Selected Announced Real estate Projects in Algeria

Developer Project Estimated Area Estimated Cost Description

Emaar Colonel Abbas Touristic Resort 109ha

A combinedcost of up to

US$30bn

Apartments and villas, a marina and a shopping center

Staouli Healthcare City N/A

Sports facilities, medical and para-medical school, apartments and villas, a shopping mall, a students’ campus, a spa hotel, a research center and a hospital

City Abdellah Development 400ha Sports facilities, golf course, apartments and

villas, hotels, a hospital and a university campusAlgiers Bay Waterfront Development

260haA marina, a marina hotel, office buildings, villas and apartments, two shopping malls, a convention center and retail outlets

SNASCO Oran Waterfront 150,000 m2 Euro400mn Residential and commercial units

EIIC Parc Dounya 6.6 mn m2 US$5bnPublic park, children’s playground, a golf course, hospitals, a convention center, lakes and hotels

Source: Zawya and News Announcements



The real estate sector is expected to witness further progress in the future, especially with the prevailing aim of diversifying the Country’s sources of wealth away from the hydrocarbons sector. In addition, the fact that 69% of the population is between the age of 15 and 64 years old ensures an increased demand on real estate, which should in turn trigger new projects establishments.

Concerning infrastructure, as most of Algeria’s external trade takes place through its ports, the Algerian government realizes the importance of ameliorating its ports performance. Shipment to Algeria is considered too expensive. In addition, trade through ports in Algeria faces long wait-time, reaching 7 days in Algiers port, whereas the average wait-time is around 1 or 2 days internationally. Moreover, the Algerian ports capacity is limited to vessels with 400 containers only. Therefore, the Algerian government announced in August 2008 the recuperation of the port of Oran. The government’s plan is to be completed over two phases, where the first one will start from 2009 for a 3-year period. In the first phase of the plan, a new 600m berth will be established over a reclaimed land having an area of 24ha, with an estimated cost of US$182.5mn. In addition, 2 container cranes will be acquired. In the second phase, US$431mn will be invested, as a 900m berth is to be established over a reclaimed land, with an area of 34ha, with 2 more cranes to be acquired. The government aims at enhancing the port’s capacity to reach 1.5-2mn containers per year.

Table 21: Selected Ports Developments

Ports Description

Port of Oran-1st phaseTo be completed over a 3-year period, starting from 2009. Includes establishing a new 600mn berth, at an estimated cost of US$182.5mn, in addition to the acquisition of two container cranes

Port of Oran-2nd phaseTotal estimated investment of US$431mn. Includes establishing a 900m berth, in addition to the acquisition of two new container cranes

Port of Bejaïa An additional 43ha expansion

Djenjen and Algiers Ports

DPW announced an initial investment of US$108mn for the development and expansion of the two ports

Source: Oxford Business Group

There is another plan to expand the port of Bejaïa by an additional 43ha. It is worthy to note that Bejaïa port is deemed to be the most important port in Algeria after the port of Oran, with a capacity of 500 thousand containers per year. As for the Djendjen and Algiers ports, the Emirati “Dubai Ports World” (DPW) announced that they would initially invest around US$108mn for the development and expansion of these two ports. Moreover, the Algerian government plans to privatize 30 ports, one of which is the port of Oran.



Tourism

Though the tourism sector in Algeria is progressing, the sector is still underperforming. This is due to the lack of superior accommodation in addition to security problems, which have been somehow improved over the last few years. According to the World Tourism Organization (UNWTO) report on tourism highlights 2008, Algeria ranked 4th on Africa (excluding Egypt and Libya) in terms of number of tourist arrivals in 2007, as they reached 1,743 thousand tourists, representing 3.9% of the continent’s total. On the other hand, tourist receipts reached US$215mn in 2006, compared to US$184mn in 2005, a y-o-y growth of 16.8%.

Table 22: Tourism Statistics in Algeria compared to Africa and other Maghreb countries International Tourist Arrivals International Tourist ReceiptsMajor Destinations (‘000) Share (%) (US$mn) Share (%) 2005 2006 2007* 2007* 2005 2006 2007* 2007*Africa 37,260 41,369 44,430 100.0% 21,820 24,602 28,292 100.0%Algeria 1,443 1,638 1,743 3.9% 184 215 N/A N/A

Tunisia 6,378 6,550 6,762 15.2% 2,143 2,275 2,555 9.0%

Morocco 5,843 6,558 7,408 16.7% 4,621 5,967 7,264 25.7%

South Africa 7,369 8,396 9,090 20.5% 7,327 7,875 8,418 29.8%*ProvisionalSource: UNWTO (Tourism Highlights-2008 Edition)

As aforementioned, Algeria received 1,743 thousand tourists in 2007. This implies a y-o-y growth of 6.4%, as this number amounted to 1,638 thousand tourists in 2006. In the mean time, it implies a CAGR of 10.5% over the 7-year period, from 2000 to 2007.

Chart 48: Algeria’s Number of Tourist Arrivals

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As for the North African Countries -excluding Libya, Algeria’s number of tourists was the least in the last three years, ending 2007. As mentioned earlier, it captured only 3.9% of total tourists visiting Africa in 2007, a relatively small share compared to its peers.



Chart 49: Algeria Tourists Arrivals compared to other North African Countries

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Source: UNWTO (Tourism Highlights-2008 Edition)

Algeria is characterized by a prime geographical location, with a coastal side of 1,200km, and a large desert land wrapping almost 80% of the country’s area. Such features enable it to succeed as a touristic destination. Realizing the importance of the sector, the government aims at enhancing the tourism performance in the near future.

To achieve this goal, the Algerian government made several steps beginning with developing infrastructure, mainly roads and transportation. It is worthy to note that US$8.2bn have been allocated for public works related projects, one of which is the rehabilitation of the East-West Highway. The government also employed a plan called “Horizon 2025”, which is mainly concerned with ameliorating infrastructure. In addition, a new Algiers international airport was established in 2006. Meanwhile, the Ministry of National Planning, Environment and Tourism signed 80 contracts with various Algerian investors in 2008, with the aim of establishing touristic projects starting from 2008. These projects, which have an estimated cost of AD20bn, include the establishment of a marina and hotels.

The government adopted a plan for the development of the tourism sector, which is to be completed by 2013. The number of tourists is targeted to reach 3mn tourists by the end of the plan’s period. The plan includes ameliorating touristic hotels and accommodation aspects, along with the quality of services provided. This plan has an estimated cost of AD232bn and is targeting to expand hotels capacity to reach 187 thousand beds, up from 92 thousand beds at the beginning of 2007. This would result from the expansion plan that covers 174 different touristic zones.

As an attempt to further ameliorate the tourism sector, the government encouraged investments and a new legislation has been announced, which includes a tax exemption for a 10-year period for tourism-related projects. In addition, it announced its plan to privatize various public hotels, owned by Tourism and Hotel Company (GESTOUR) and Societe de Gestion des Participations de l’Etat (SGP).

The government pays a great attention to the amelioration of the Algerian bay. A large mosque, enabled to encompass around 12 thousand people is to be established on the coastal line, in addition to a health center, commercial and business areas.



Many international investors announced their intention to develop touristic projects in Algeria. The UAE’s Al Hamed Group announced an initial investment of US$90mn to be directed to the coastal line in Algiers. Also a hotel was announced to be established by Starwood Hotels and Resorts, which already exists in the Algerian market. Accor and the Mehri Group announced the establishment of 36 hotels. The US Tourist Group Panorama announced that it would develop a touristic resort, with an estimated cost of US500mn in El Aouana region. Other resorts are to be established in Algiers and Boumerdes, having an estimated capacity of 25 thousand beds and an estimated cost of US$300mn. Also, a tourist resort is to be established by Emaar, among its 4 real estate projects, having a combined cost of US$20bn, which have been announced to be raised up to US$30bn approximately.

Moreover, the Emirati-based real estate developer, Al Qudra Holding, signed a contract in 2007 for establishing a tourism compound, with an area of 8ha on the coast of Sidi Faradj, which is estimated to be completed by 2010, with an estimated cost of US$250mn. It is worth mentioning that the Company announced its intention to develop tourism and real estate projects in Algeria, worth US$350mn.

The numerous announced tourism projects indicate that the sector is to show better performance in the future, especially with the government’s aim to expand its economy through other sources than hydrocarbons.



Capital Market

The Algerian capital market is still very much inactive. The stock exchange (Bourse des Valeurs Mobilieres d’Alger) was established in the 1990’s and has very few listed stocks. Only 2 companies were listed in the stock exchange in 2007 and were not even witnessing a considerable trading activity. These are Group Saidal and Entreprise de Gestion Hoteliere,Spa (EGH El Aurassi). Due to the inactive market, private companies are not encouraged to list their shares in the stock exchange. As for the bond market, its situation is slightly better, as bond issuance is supported by low interest rates in the market and sufficient domestic liquidity. It is worth mentioning that of the total issued bonds in 2005, corporate bonds had a share of 33%.

The extensively low number of listed shares and the low dividends distributed by these companies are the main reasons leading to the weak activity of the Algerian stock market. This insignificant number of listings resulted in the Algerian exchange having the least market capitalization among its neighbors, as it didn’t reach US$100mn in 2007, while the Morocco and Tunisia stock exchanges had a market capitalization reaching US$12bn and US$4bn, respectively.

The Algerian government should exert efforts to improve its stock market activity. The sentiment for the bond market is more positive, as publicly owned enterprises are more inclined to issue bonds when they need sources of funds. As an attempt to ameliorate the market, the government announced its plan to list bonds with maturities ranging from 7 to 15 years in the stock exchange. In addition, it announced its plan for privatizing portions of state-owned corporations through the stock exchange.

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Algeria Economic & strategic Outlook 12/2008

Economy & Finance