MONETARY AND FINANCIAL TRENDS IN THE SECOND HALF OF 2012

Transcription

1 MONETARY AND FINANCIAL TRENDS IN THE SECOND HALF OF 2012 The year 2012 recorded a further slowdown in global economic conditions, related to the acuteness of the crisis of confidence, in particular as regards the euro area, despite a rebound in economic activity in the third quarter in which emerging countries played an important role. External demand in some emerging and developing countries was impacted by the contraction in economic activity in the euro area, in a situation of declining commodity prices (excluding fuels). In parallel, due mainly to unconventional measures of monetary policy, the fourth quarter of 2012 was marked by a stabilization of the financial markets, while the volatility of exchange rates has resumed. To some extent, the national economy was impacted by the slowdown in the global economic condition in 2012, in the context of increased social demand and inflationary pressures. Macroeconomic stability remains preserved, especially the external financial stability. 1. Evolution of the balance of payments After the improvement of the external financial position of Algeria in 2010 which followed the external shock of 2009, an enhanced viability of the external balance of payments has characterized the year 2011, driven by stronger oil prices, the annual average of which stood at $ / barrel versus $ / barrel in In 2012, the monthly average price of oil has fluctuated between $ and $ / barrel and decreased, on annual average, to $ / barrel versus $ / barrel in After reaching a high in the first quarter 2012 ($ / barrel), the quarterly average price remained relatively stable over the next three quarters, leading to a decline on six month average. It stood at $ / barrel in the second half versus $ / barrel in the first half of 2012 and $ / barrel in the first half of the previous year. The downward trend in oil prices in the second quarter combined with the appreciation of the dollar versus the euro. As a result, and despite a decrease of 3.3% in volume, hydrocarbons exports reached $ billion in 2012 ($ billion in 2011), of which 46.8% for the second half. This corresponds to a decrease of 11.9% compared to the first half, while the year 2011 recorded a relative stabilization in hydrocarbon exports in semi-annual data. For the year 1

2 2012, the share of liquid hydrocarbons increased from 66.3% in the first half to 70.7% in second half of the year. As for non- hydrocarbons exports, they stabilized in 2012 ($ 1.22 billion) compared to the level achieved the previous year ($ 1.23 billion), although the second half of the year under review recorded a better performance ($ 0.74 billion). This stabilization at a low level of non hydrocarbon exports below the "threshold" of $ 1.4 billion reached in 2008 confirms the low diversification of the national economy and calls on its external competitiveness, especially as the upward trend in imports persists. Imports of fob goods rose by 7.5% in 2012, reaching the level of $ billion ($ billion in 2011) versus $ billion in 2008, a year marked by a surge in the field (+44.2%). Import levels achieved in the first and second halves of 2012, respectively 2$ 3.64 and $ billion improved compared to those achieved in the second half of 2011 ($ billion); the year 2011 having recorded a significant rebound (15.48%) in the field. If such a rebound in imports of goods was mainly driven by strong growth in food and non-food products, up to 63% respectively, the increase recorded in 2012 would be mainly due to the significant expansion of imports of non-food consumer goods (25.3%), driven to a large extent by increased imports of vehicles. Imports of food stuff and industrial goods declined respectively by 8.4% and 15.7%. The increase in the level of imports of goods has resulted in the depletion of the excess of the trade balance in 2012 to $ billion ($ 28 billion in 2011), especially in the second half where hydrocarbon exports were lower and imports of goods increased. Regarding imports of nonfactor services they decreased in 2012 to $ billion ($ billion in 2011), the lowest level of the past five years. This favorable trend combined to a stabilization of resource income for nonfactor services, resulting in a decrease of nearly two billion dollars of the deficit of the nonfactor services item in This is a special performance especially as the deficit recorded during the year under review ($ 7 billion) is the lowest level of the past five years. In addition, the structure of imports of services indicates a slight increase in the "transport" item, while the "technical services" item contracted sharply (- 31.2%), an item which remains the largest imported service, followed by "transport" and "building and public works" items. As a result of the important transfers of partners of the National Company of Hydrocarbons and a decrease in revenues from investments abroad, the year 2012 recorded a widening of the deficit of the " income factor " item, the level of which almost doubled compared to The decrease in revenues of the 2

3 income factor item is related to the persistence of the maintaining of the key rate of the FED to almost zero and that of the ECB to less than one percentage point. Correspondingly, the continuation of unconventional monetary policy by Central Banks of developed countries contributes to historically low interest rates. It should be noted here, that the fourth quarter of 2012 recorded a stabilization of the situation on financial markets due in particular to these unconventional measures of monetary policy. Another component of the current account balance is represented by the item "net transfers" which recorded a historical performance in 2012 ($ 3 billion), after a stabilization during the previous three years ($ 2.6 billion). Despite this improvement in net inflows of transfers, the foreign current account surplus - a pivotal element in the position of the external balance of payments of Algeria in the context of convertibility of the dinar for current transactions- contracted during the year under review to stand at $ billion ($ 19.8 billion in 2011), mainly due to the lower performance of the trade balance. If the performance in the external current account remained significant in 2012, the decrease in net inflows of foreign direct investments ($ 1.70 billion versus $ 2 billion in 2011) would be offset by a more favorable balance of the official capital. As a result, the overall balance of the balance of payments is estimated at $ 12 billion in 2012, supplying de facto the accumulation of official foreign reserves of the Bank of Algeria, but to a lesser degree compared to the previous year. Thus, with the flow of reserves and the valuation effect, the outstanding amount of foreign exchange reserves (excluding gold) reached $ billion at the end of June 2012 versus $ billion dollars at the end of December 2011 to settle at billion dollars at the end of December The flow of official reserves of foreign exchange for 2012 was mainly achieved in the first half of the year. With such a level of official foreign exchange reserves (excluding gold) at the end of December 2012, Algeria ranks among the top emerging countries in terms of foreign exchange reserves to gross domestic product ratio. This reflects the prudent macroeconomic management of financial resources surplus which enabled Algeria to cope with the major external shock of This particular performance, judging by the outstanding amount of foreign assets approaching the equivalent of 39 months of imports of goods and services at the end of 2012, led Bank of Algeria to continue the prudent management of official foreign exchange reserves by putting forward more rigorous monitoring and risk management, while achieving an acceptable level of performance. With the persistence of sovereign debt crisis in the euro area and consequential banking risks, Bank of Algeria took appropriate precautionary measures to preserve the capital of investments from any loss. Also, investments carried out 3

4 by Bank of Algeria in sovereign securities of the euro zone countries focus on least risky securities, while deposits with commercial banks are kept at a low level since the beginning of the international financial crisis. In addition, the deposits are more oriented towards Central Banks, to minimize to the maximum counterparty risk. In total, the net external financial position further consolidated during 2012 as the outstanding medium and long term external debt is estimated at billion dollars at the end of 2012 ($ billion at the end of 2011) in the context of stabilization of the short-term external debt to one billion dollars. This confirms the excellent sustainability of the external debt of Algeria in an international context marked by the persistence of acute sovereign risks. The strength of the external financial position and the prudent management of the official foreign exchange reserves are the two main pillars of the external financial stability of Algeria, while the policy of stabilizing the effective exchange rate of the dinar contributes. To the volatility of exchange rates of major currencies and its impact on emerging economies despite the initiation of stabilization in financial markets in the second half of 2012, Bank of Algeria has continued to conduct an active policy of exchange rate - managed float - with the objective of stabilizing the real effective exchange rate, according to the evolution of fundamentals. The annual average of exchange rate of the Algerian dinar versus the euro has slightly appreciated (0.05%) in 2012 compared to 2011, from EUR/DZDin 2011 to EUR/DZD in However, in terms of quarterly end of period variation, the exchange rate of the dinar versus the euro has appreciated by 3.37% in the fourth quarter of 2012 compared to the same quarter of 2011, when the rate moved from EUR/DZDin the fourth quarter of 2011 to EUR/DZDin the fourth quarter of With respect to the U.S. dollar, the annual average of the exchange rate of the Algerian dinar stood at USD/DZD in 2012 versus USD/DZD in 2011, a depreciation of approximately 6.45%. In terms of quarterly end of period variation, the fourth quarter of 2012 recorded a depreciation of the dinar of 2.69% only, compared to the same quarter of The rate increased from USD/DZD at the end of December 2011 to USD/DZD at the end of December The nominal effective exchange rate of the dinar stabilized in 2012 while the real effective exchange rate recorded an appreciation of 5.8% is annual average, mainly due to the expansion of the inflation differential between Algeria and its main partners. This differential stood at 6.22% in 2012 versus 1.61% in 2011, 4

5 resulting from the surge of inflation in consumer prices in the context of decelerating inflation in partner countries. In total, the intervention of the Bank of Algeria on the interbank foreign exchange market helped to mitigate the impact of volatility of exchange rates of major currencies on the national economy, namely, reducing the impact on domestic prices. 2. Monetary developments The year 2012 was characterized by a "peak" in inflation, despite a decelerating rate of monetary expansion. Monetary aggregate M2 only grew by 11.47% versus 19.9% for 2011, corresponding to the lowest rate in the past seven years except 2009, a year of major external shock. As to paper money, its growth rate declined by nearly 8 percentage points or 14.81% in 2012 versus 22.53% in In addition, paper money contracted in November and December. However, the upward trend of the Paper money/m2 ratio continued during 2012 reaching 26.7% at the end of the period. Despite a slower pace, the monetary expansion recorded in 2012 was more driven by the significant growth in credit to the economy compared to net foreign assets in the context of the low effect inherent to the contraction of the net financial position of the State. The still favorable nature of the balance of payments is evidenced by the increase in net foreign assets (7.3%), mainly in the first half of the year under review. This comforts the decisive role of the net foreign assets aggregate in the consolidated monetary situation especially as it exceeds since 2005 the money supply aggregate M2 and supplies in part the excess liquidity in the money market. In addition, the low contraction of the net financial situation of the State (-3.4%) in the monetary position at the end of 2012 is to be analyzed in relation to the strong expansion of deposits in CCP and Treasury (32.8%), mainly recorded in the first semester, knowing that the strong growth of current budgetary expenditures (personnel costs, current transfers,...) has certainly supplied the expansion of paper currency in This aggregate is highly correlated with household expenditures, especially as the year 2012 and the year before have been marked by a substantial increase in revenues. Despite the continued strong growth of budgetary expenditures for the second 5

6 consecutive year and the correlative overall deficit, the financial position of the State as a net creditor vis-à-vis the banking system remains very significant, as evidenced by the total outstanding of Treasury holdings with the Bank of Algeria (current account and Revenue Regulation Fund). Treasury deposits with the Bank of Algeria reached billion dinars at the end of 2012, equivalent to 36% of estimated gross domestic product. As a result, one of the main determinants of monetary expansion in 2012 is represented by the strong growth rate of credits to the economy (15.3% versus 14% in 2011), this rate even reaching 17% by incorporating repurchases carried out by the Treasury. At the end of 2012, bank credits to private enterprises reached billion dinars versus billion dinars at the end of 2011, so that credit to the private sector (including households) exceed the outstanding credits to the public sector. With the increase in the relative share of medium and long term credit to 68.6% (63.4% at the end of 2011), the dynamism of bank credit to the economy shows to some extent, the improvement of the structure and of financing conditions, particularly following the financial support provided by the State to Small and Medium Enterprises. After this quick review of the counterparties of money supply M2, the analysis of the structure of the latter provides, namely, information on the financial savings behavior of economic agents through the evolution of monetary aggregates. Sight deposits collected by banks declined by 3% in 2012 due to the strong contraction of sight deposits of the public oil company Sonatrach (- 37.9%) related namely to the self financing of the investment program. Sight deposits of public enterprises (excluding Sonatrach) with banks have by contrary recorded a slight increase (3.3%), while deposits of private enterprises and households rose sharply (17.8%). As a reminder, deposits in CCP and in Treasury which are essentially the fact of households have increased sharply in It should be noted here the new phenomenon of significant growth of term deposits in dinars (20%) is driven by the growth in term deposits of public enterprises and households in the context of strong expansion of the quasi money aggregate (19. 5%). The analysis of the structure of quasi money indicates a relative stabilization of deposits denominated in foreign currencies. Regarding the evolution of the structure of deposits with banks by legal sectors, it shows a "pendulum effect" represented by a contraction of 6.5% of public sector deposits versus an increase of private sector deposits (companies and households) (14.1%). 6

7 As a result, the structure of M2 indicates at the end of 2012, a decrease in the relative share of bank deposits to 61% (61.4% at the end of June 2011 and 63.6% at the end of 2011), while the share of deposits in CCP and Treasury records an increase to 12.4% versus 10.4% at the end of Regarding the share of money in circulation, it increased slightly (26.7% versus 25.7% at the end of June 2011). Indeed, the strong net monthly outflows of paper money (banknotes) continued during 2012, except for the months of November and December An inflationary surge of endogenous nature After the adjustment period, Algeria has experienced a long period of moderate inflation, that is to say more than ten years of inflation rates that were contained at less than 5%, except for the year 2009 (5.74 %) where imported inflation combined with the phenomenon of endogenous inflation. In early 2011, with the shock of domestic prices of some basic products, inflation rate was contained at 4.52% on annual average, in the context of rising trend of consumer prices in the second half. This upward trend continued with acuity in 2012 and this as from January, when the overall index of consumer prices brought up an abrupt and sudden rise (2.31%), equivalent to 5.5 times the monthly average increase in this index for the year The acceleration in the matter has resulted in the annual average rate of inflation to reach 5.91% as early as March, 7.29% in June and ending the year under review at 8.89%, a rate almost double that of the one recorded in 2011 (4.52%). In addition, year 2012 was characterized by a strong acceleration of inflation in prices of food (12.22%) and especially those of fresh agricultural products (21.37%), as inflation of consumer prices (excluding food) was only 6.09%. The inflationary phenomenon that emerged with particular acuteness in 2012 is essentially of endogenous nature and anchored on a very limited number of fresh products whose prices recorded a surge in the first quarter of 2012 that explain 96% of inflation on annual average of this category of products for year 2012 (21.37%). As regards sheep meat, its weight in the basket of goods in this category made up of eight items is 33.8%, the inflation gained in the first quarter of 2012 is 24.12%, or 79.7% of the average annual inflation of this good in 2012 (30.28%). It should be noted that the soaring price of sheep meat (30.28%) contributed 50.7% to the inflation for fresh food, 40% to the inflation of the food group and over 25.8% to the overall inflation in 2012, as its weight in the food group stands at 13.3% (5.72% in the overall index). What differentiates then the 7

8 inflationary impact of year 2012 is that 4.9 points out of points of food inflation and 2.22 points out of 8.89 points of the overall inflation is solely attributable to sheep meat. Besides, if inflation in the "miscellaneous group (13.42%) is significantly higher than the average inflation, the surge in price of all other groups of products is between 2.88% (Education - Culture) and 5.77% (clothing - footwear). In total, the analysis of the contribution of the different groups of products to the increase in prices shows that the drift in food prices contributes 62.80% to the peak of inflation recorded in 2012, while the rise in that of the "miscellaneous group contributes 14.93%. The strong inflation in 2012 is mainly generated by the price effect of these two groups as their respective contributions are much higher than the respective weights in the consumer price index (43.09% and 8.64%).. The peak of inflation recorded in 2012 combined with a deceleration of the rate of monetary expansion, especially as the monetary aggregate M2 grew at the lowest rate of the past seven years, except year 2009, a year of major external shock. In addition, the rate of growth of currency in circulation decreased by nearly 8 percentage points compared to year This deceleration of monetary inflation coupled in 2012 with a decrease in the price of raw materials (excluding fuels) estimated by the IMF at 9.8% while the exchange rate remaining relatively stable. In particular, on the global free market, prices of commodities imported by Algeria have all declined in 2012, between 5.6% and 16.25% on annual average. Also, numerous exemptions and tax reductions (VAT, customs duties) on imported agricultural products would also have acted in the same direction of price stability. Other causes that are more of organizational and behavioral facts fueled the phenomenon of endogenous inflation. The significant wage increases granted and the effect known as "resonance" of spreading to all economic actors fueled de facto inflation of prices of fresh products, while the high and persistent level of these prices play an important role in the formation of inflation expectations. The weak organization of wholesale and retail markets few organized wholesale markets of agricultural products, opaque price formation, absence of price advertising and billing, weak control on compliance with laws and regulations in force- facilitated abusive price increases, while dominant positions reinforce these practices. The almost exclusive use of cash in payments is correlative to the increase of transactions falling within the informal sector. 8

9 Finally, from the observation of the acceleration of inflation in the first quarter of 2012 which reached 5.91% in March 2012, the Bank of Algeria has: - Increased the amount of liquidity withdrawal to 250 billion dinars passing from 1100 billion dinars to 1350 billion dinars as of April 30 th, 2012; - Increased the rate of the minimum reserves requirement by two percentage points (from 9% to 11%) as of 15 May 2012 (beginning of the period of establishment of the reserve requirements). These monetary policy measures have contributed to better manage the surplus of liquidity in the money market, and thereby reduce its inflationary effect in situation of moderate growth in the money supply M2 (11.47%). Also, this rate is consistent with the quantitative objective adopted by the Council of Money and Credit for Preserving macroeconomic stability remains a key objective. Monetary policy plays an active role, especially as the Bank of Algeria continues to strengthen its instruments for the absorption of liquidity surplus in the money market. At the same time, the continued consolidation of financial stability is an important anchor for the necessary strengthening of banking intermediation in favor of a strong non-hydrocarbons growth. A qualitative leap is expected in terms of level of financial development, with the objective of efficient allocation of resources driven by a better assessment and risk management by banks. Significant efforts should be directed towards the promotion of productive investment, relying on the development of the capacity and efficiency of the absorption of the significant financial savings of private companies and households. Bank credits channel is potentially important in financing productive investment and non- hydrocarbons growth in Algeria, with a more enhanced role henceforth for commercial banks in the development of sound credits to the economy, widely disseminated. The years 2013 and 2014 should be demonstrative in this respect, in order to establish the non- hydrocarbons economy on the path to its true growth potential. 9