Algeria Economic & strategic Outlook 12/2008

Global Research Economic

Algeria

Algeria Economic & Strategic Outlook
December 2008
Promising Opportunities

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Financial Analyst
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Phone 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

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.
AD=Algerian Dinar
1

December 2008 Economic & Strategic Outlook 1


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.

2 Economic & Strategic Outlook December 2008


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 2008F
Economic Performance
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$bn) 67.8 85.1 102.7 116.8 134.3 171.3
Growth Rate of GDP at Current Prices (%) 16.0% 16.9% 22.9% 12.1% 9.1% 28.3%
GDP at Constant Prices (ADbn) 4,731.2 4,977.2 5,231.1 5,335.7 5,581.1 5,852.3
Growth of GDP at Constant Prices (%) 6.9% 5.2% 5.1% 2.0% 4.6% 4.9%
Per Capita GDP at Constant Prices (AD’000) 148.6 153.8 159.0 157.9 162.2 168.2
Inflation, Average Consumer Prices (%) 2.6% 3.6% 1.6% 2.5% 3.6% 4.3%
Population (mn) 31.8 32.4 32.9 33.8 34.4 34.8
Government Finance (ADbn)*
Total Revenues and Grants** 1,947.5 2,215.2 3,082.7 3,639.9 3,803.9 5,095.5
Hydrocarbon Revenue*** 1,350.0 1,570.7 2,352.7 2,799.0 2,972.9 4,029.0
Total Expenditures 1,691.4 1,891.8 2,052.0 2,452.7 2,751.4 3,400.9
Personal Expenditure 398.0 446.8 492.2 531.3 470.9 568.8
Other Current Expenditure 723.0 798.7 749.2 902.4 1,098.7 1,315.3
Capital Expenditure 570.4 646.3 810.6 1,019.0 1,181.8 1,516.8
Budget Balance 256.1 323.4 1,030.7 1,187.2 1,052.5 1,694.5
Special Accounts Balance 187.1 109.9 (129.0) (4.0) N/A N/A
Net Lending by Treasury 32.6 11.8 5.2 32.0 N/A N/A
Overall Balance**** 410.6 421.5 896.5 1,151.2 N/A N/A
Government Debt (US$bn)***** 34.5 34.3 29.6 29.2 24.2 N/A
Gross Domestic Public Debt (US$bn) 12.7 13.9 14.2 25.4 N/A N/A
Gross External Debt (US$bn) 21.8 20.4 15.5 3.7 N/A N/A
Balance of Payment (US$bn)******
Trade Balance 11.9 15.1 26.4 33.3 34.1 22.0
Total Exports 24.5 32.2 46.5 54.8 60.3 44.3
Total Imports (12.6) (17.1) (20.0) (21.5) (26.3) (22.3)
Services and Income (Net) (4.1) (5.6) (7.4) (6.7) (6.4) (1.1)
Transfers (Net) 1.8 2.5 2.1 1.6 1.9 1.3
Current Account 9.6 11.9 21.1 28.2 29.5 22.3
Capital Account (1.4) (1.9) (4.2) (11.2) (0.4) (2.5)
Overall Balance 8.2 10.0 16.9 17.0 29.1 19.8
Money and Banking******
Money Supply (M1) (ADbn) 1,630.3 2,160.5 2,421.4 3,167.6 4,214.3 4,732.7
Quasi-Money (ADbn) 1,724.0 1,577.5 1,736.2 1,766.1 1,763.7 1,869.3
Net Foreign Assets (ADbn) 2,342.6 3,119.2 4,179.7 5,515.1 7,402.6 8,290.4
Domestic Credit (ADbn) 1,803.6 1,514.4 846.6 601.4 (1.2) (565.7)
International Reserves (US$bn) 33.4 43.6 56.6 78.2 110.6 133.2
Interest Rates
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%
Real Interest Rate 1.30% 0.51% 0.09% (2.68%) (2.12%) N/A
Exchange 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 49
Source: 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
*Estimated
Source: 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
6,000 8%
6.9%
7%
5,500 6%
5.2% 5.1% 4.9%
4.6% 5%
4%
5,000
3%
2.0%
4,500 2%
4,731.2

4,977.2

5,231.1

5,335.7

5,581.1

5,852.3

1%
4,000 0%
2003 2004 2005 2006 2007 2008E
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%
*Provisional
Source: 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*
Imports Taxes and Duties
5.8%

Services
28.9% Hydrocarbons
44.1%

Construction and
Public Works
8.7%
Industry
Agriculture
4.7%
7.7%
*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
Jan-Jun Jan-Jun
In ADbn 2003 2004 2005 2006 2007*
2007* 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
*Provisional
Source: 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
8%

7%

6%

5%

4%

3%

2%

1%

0%
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 Finances
In 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 1,232.4
Budget Balance 256.1 323.4 1,030.7 1,187.2 1,052.5 1,694.5
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 2008F
Hydrocarbon 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/A
Nonhydrocarbon Revenue* 594.6 644.1 730.0 840.6 N/A N/A
Tax Revenue 524.9 580.4 640.5 720.9 710.9 912.4
Taxes 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/A
Other 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/A
VAT and Excises on Imports 92.9 118.8 135.8 140.9 N/A N/A
VAT & 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/A
Tobacco 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/A
Excises on Petroleum Products 30.3 31.4 37.9 40.6 N/A N/A
Other 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/A
Registration 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/A
Fees* 23.6 27.0 35.1 44.4 N/A N/A
Bank of Algeria Dividends 42.1 30.0 48.7 75.3 N/A N/A
Dividends 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/A
Other Non-Distributed Items** 0.0 0.0 0.0 0.0 120.0 154.0
Total 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 Expenditure
In ADbn 2003 2004 2005 2006 2007E 2008F
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
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 1,232.4
Total Expenditure 1,691.4 1,891.8 2,052.0 2,452.7 2,751.4 3,400.9
Total 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
Reﬁnancing
Bonds
Central Bank 2.8%
Overdrafts
5.5%

Equipment Bonds and
Regular Securities
91.7%

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
35% 32.2%
30%
23.9%
25%
21.8%
18.7%
20%
16.3%
15.0%
13.8%
15%

10%

3.2%
5%

0%
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
Jan-Jun Jan-Jun
In US$mn 2003 2004 2005 2006 2007*
2007* 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 data
Source: 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*
Other Non Hydrocarbon Exports 2.2%
Natural Gas
14.2%

Liquefied Natural
Crude Oil
Gas
41.8%
10.8%

Liquefied Petroleum
Gases
7.5%
Refined Petroleum
Products
9.6% Oil Condensates 14.0%
*Provisional



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

US
Others 29.4%
31.4%

France Italy
7.4% 13.8%
Canada
Spain
8.4%
9.6%
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
US$mn
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
2003 2004 2005 2006 2007*
Energy Raw Materials Semi Finished Products Agricultural Equipment
Industrial Equipment Consumer Goods Food

*Provisional



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-2007
France
19.1%

Others
41.6%

China
9.2%

Italy
8.7%

Spain
Turkey 6.1%
Germany US
4.2%
5.5% 5.6%
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
Jan-Jun Jan-Jun
In US$bn 2003 2004 2005 2006 2007*
2007* 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 44.3
Hydrocarbons 24.0 31.5 45.6 53.6 59.3 27.0 41.7
Other 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/A
Credit 1.6 1.9 2.5 2.6 2.84 1.42 N/A
Debit (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/A
Credit 0.8 1.0 1.4 2.4 3.3 1.61 N/A
Debit (3.5) (4.6) (6.5) (6.9) (5.7) (2.6) N/A
Of which:
Interest Payments (1.2) (1.3) (1.0) (0.8) (0.2) (0.1) N/A
Profit 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
*Provisional
Source: 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
Jan-Jun Jan-Jun
In US$bn 2003 2004 2005 2006 2007*
2007* 2008*
Current Account 9.6 11.9 21.1 28.2 29.5 13.3 22.3
Capital 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
*Provisional
Source: 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
US$mn
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
2004 2005 2006 2007
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.


Algeria Economic & strategic Outlook 12/2008

Algeria Economic & strategic Outlook 12/2008

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