MONETARY AND FINANCIAL TRENDS IN THE FIRST QUARTER OF 2015 AS A CONSEQUENCE OF THE EXTERNAL SHOCK

Transcription

1 MONETARY AND FINANCIAL TRENDS IN THE FIRST QUARTER OF 2015 AS A CONSEQUENCE OF THE EXTERNAL SHOCK The purpose of this review is to present in broad outline the evolution of the situation of the external financial position during the first quarter 2015 as a consequence of the external shock. The monetary situation is analyzed in relation to the evolution of bank liquidity and Public Treasury s cash flow position. The upward trend in inflation is also addressed. 1. Oil prices, expressed in dollars have plummeted about 50% in the second half 2014, while the US dollar appreciated strongly versus euro and other currencies. The decline in oil prices since mid-2014 has impacted the national economy as from the fourth quarter This decline, which began in the fourth quarter 2014, was extended in the first quarter Indeed, the average price of barrel of oil fell from $109,55 / barrel in the first quarter of 2014 to $75.38 / barrel in the last quarter 2014 ($ in 2014), then to only $54.31/barrel in the first quarter of the current year. The drop in oil prices that combined with a contraction of quantities of hydrocarbons exported in the first quarter 2015 (- 8.99%) as compared to the same period of 2014, resulted in a level of hydrocarbon exports of only $8.7 billion for the quarter under review, or nearly half the amount achieved in the first quarter 2014 ($15.6 billion). As for non-hydrocarbon exports that have slightly increased, from $323 million in the first quarter 2014 to $419 million in the same quarter of 2015, they remain structurally weak and are still below the country's potential for exports diversification. Imports of goods (FOB), which have experienced an upward trend in recent years, decreased as witnessed by the level achieved at end-march 2015 ($13.3 billion), down 8.4% compared to the same period of 2014 ($14.5 billion). The evolution of imports of goods shows a decrease in imports for all equipment, except for agricultural equipment which remained relatively flat and industrial equipment which rose by $201 million between first quarter 2014 and first quarter At the same time, the largest decreases in import of goods during the period under review were for non-food consumer goods (- $425 million), energy group (- $427 million), and foodstuffs (- $223 million). With regard to imports of non-food consumer goods, their decline between first quarter 2014 and first quarter 2015 is mainly due to imports of passenger vehicles and medicines with respective declines (CIF) of $ million and $ million. As for the decline in imports of foodstuffs, it concerns primarily imports of milk and milk powder that fell from $ million (CIF) in the first quarter of 2014 to $ million in the same quarter of 2015, or a decrease of $ million. The decline in imports of goods partially offset the decline in exports of hydrocarbons. This resulted in a trade balance deficit of 4.2 billion dollars in the first quarter 2015 versus a surplus of $1.3 billion in respect of first quarter

2 The deficit in the nonfactor income services item remains relatively stable during the first quarter 2015 ($1.97 billion) compared to the same period of 2014 ($1.93 billion). This stagnation in the balance of services is due to the concomitant decline in exports and the decline in imports of services during the period under review. However, and despite the decline in the production share of associates of the national hydrocarbons company, the deficit in the factor income item (primary income) has largely widened in the period under review (-$2.3 billion) compared to the first quarter 2014 (-$1.2 billion), as a result of the transfer of accrued dividends. The net current transfers item continues to show appreciable surpluses in the first quarter 2015 ($635 million), though lower than in the same period of 2014 ($831 million). As a result, the current account of the balance of payments posts a large deficit of $7.78 billion in the first quarter of the current year, mainly due to falling oil prices and quantities exported, on the one hand, and to the significant transfer of accrued dividends on the other hand. The capital and financial operations account records also a deficit in the first quarter 2015 (- $2.94 billion) as against a surplus of $896 million in the same period of This deficit is related to the transfer of $2.34 billion as part of a sale transaction by non-residents of shares of capital of a company. In total, the overall balance of the balance of external payments shows a record deficit of $10.72 billion in the first quarter 2015 as against a deficit of only $98 million in the first quarter This deficit that resulted from external shock and widening capital account deficit and negative valuation effect caused that the official foreign exchange reserves (excluding gold) decreased to $ billion at the end of March 2015 versus $ billion at end-december This indicates a sharp contraction in official foreign exchange reserves, but the level remains suitable, enabling Algeria to cope with the external shock in situation of very low external debt ($3.383 billion at end of March 2015). In response to the impact of external shock of large magnitude on economic fundamentals, the exchange rate of dinar depreciated by 11% versus US dollar between end-december 2014 and end March The real effective exchange rate (REER) of the Algerian dinar, however, remains appreciated in relation to the medium-term equilibrium level, in situation of widening inflation differential and tensions in foreign exchange markets. 2. Public finances are impacted by the fall in oil prices since mid The impact on public finances that are heavily dependent on oil taxes is reflected in the widening budget deficit and faster erosion of resources of the Revenue Regulation Fund. Under the effect of declining revenues from oil taxes (- 28.2%) compared to the first quarter 2014, the financing capacity of Treasury shrank by billion dinars in the first quarter of 2015, falling to 3,916.5 billion dinars at end March 2015 (4,488.1 billion dinars at end-december 2014 and 5,088.6 billion dinars at end March 2014). Resources of the Revenue Regulation Fund were largely depleted to cover the budget deficit that widened in the first quarter 2015 (476.8 billion dinars); that budget deficit posting billion dinars in the first quarter At the same time, the outstanding amount of Government securities issued by way of tender on the money market stabilized in the first quarter 2015 at billion dinars versus billion dinars at end of

3 3. In situation of deficit of the balance of external payments and widening budget deficit, the monetary position in the first quarter 2015 is characterized by a contraction of money supply M2 (-1%). The contraction of money and quasi-money liquidity, in a situation of contraction in net foreign assets (-1%), results from the sharp decline in sight bank deposits (-9.52%), including deposits of the national hydrocarbons company; the quasi money (term deposits in dinars and deposits in foreign currencies) rising by almost 3.30%. Despite the continued growth of fiduciary money (3.05%) which represents 27.8% of M2 at end March 2015, the contraction in sight bank deposits was of such magnitude that money supply M1 recorded a higher decrease (-2.81%) than that of M2. The money aggregate M2 excluding deposits of the hydrocarbon sector has also contracted (-0.54%). This means that the contraction of resources in the first quarter 2015 came not only from the extent of external shock but also to some degree from other cyclical factors that led to the decline in deposits of private companies. Due to the external shock situation and the correlative contraction in resources, changes in the structure of money supply M2 point an increase of the relative share of fiduciary money in the first quarter 2015 to 27.8% through March 2015 (26.8% through end 2014 and end 2013). To mitigate the impact of the external shock on policy instruments, banks must drain a fraction of fiduciary money in circulation by providing new financial products and attractive rates of return. These measures fall within the necessary development of financial inclusion, particularly through high quality basic banking services that shall be supported by modern payment systems. Also, one of the normative tasks of local banks is to develop term resources devoted to the financing of economic growth. The analysis of counterparties of money supply highlights a sharp decrease in the first quarter 2015 in net claims of the State on the banking system (-30.27%), or at a very high annual rate as compared to year This confirms the significant widening of the deficit on transactions of the Treasury, in a situation of maintaining unchanged the disbursements profile, in spite of the external shock. Despite the contraction of resources that resulted, credits to the economy continued to grow at a pace of 4.23% during the quarter under review. This rate of growth of credits does not appear to be sustainable without resorting to refinancing from the Bank of Algeria. By legal sectors, credits granted to the public sector increased 3.94% in the first quarter 2015 versus 4.54% for the private sector. Consequently, the share of credits granted to the private sector increased slightly to 48.09% at end March At end of March 2015, the overall liquidity of banks stood at 2, billion dinars versus 2, billion dinars at end of December Also, the first quarter 2015 recorded a sharp contraction in bank liquidity ( billion dinars), mainly due to the decrease in deposits of non- hydrocarbon sectors and to a small extent to the decrease in deposits of the national hydrocarbons company. Although, the excess of bank liquidity is declining in first quarter 2015, Bank of Algeria continues to absorb that excess on the money market. At end March 2015, an amount of 1, billion dinars has been absorbed, of which 1, billion dinars through the 3

4 instrument of reverse transactions. The amount remaining in current accounts of banks totaled 1, billion dinars at end of March 2015, exceeding the objective of mandatory reserve requirement for the period from March 15 to April , set at 1, billion dinars. Under the influence of contraction of liquidity of some banks, the interbank money market recorded an increase in traded volumes or billion dinars at end March 2015, versus 96.5 billion dinars at end of December Also, given the depletion of excess liquidity and in order to further stimulate the interbank market, Bank of Algeria started to gradually reduce reverse transactions operations. Banks and financial institutions are expected to return to refinancing with the Bank of Algeria in the second half of the current year, particularly through the instrument of rediscounting. 4. The overall liquidity of banks which was more resilient to external choc in the second half 2014 contracted in the first quarter, in situation of rising inflation since September 2014, after the disinflation process initiated in February The inflation rate, in annual average, increased from 1.60% through September 2014 to 2.92% through December 2014, reaching 4.06% through March As for the national index, the inflation rate increased from 3.82% through December 2014 to 4.62% through March In terms of contribution to annual inflation through March 2015, the largest contributions are to be allocated to the following groups: food and non-alcohol beverages (62.5%) and clothing and footwear (10.8%), the contribution of transports and communications group remaining negative (-0.9%). The inflation of fresh agricultural products group represents 71.94% of food inflation and 44.95% of the overall inflation and rising 5.47% and 3.13% respectively, compared to December In the food group, the sub-groups potatoes, vegetables, fruits and fresh fish have a cumulative contribution of 66.56% with a total relative weight of 20.58%. Also, these sub-groups contribute up to 41.58% to the overall inflation for a weighting of 8.87% only of the consumer s basket. The year on year inflation in consumer prices recorded an increase of 5.49% compared to March This upward trend is driven mainly by the inflation in annual change of the six groups ( clothing and footwear, food and non-alcoholic beverages, health and personal care, furniture and furnishings, education- culture- leisure, and miscellaneous ), whereas inflation remains very low for the other two groups ( housing and expenses, transport and communication ). In March 2015, the inflation rate in annual average of the price index with high import content achieved 1.41%, an increase of 2.38% with respect to March 2014.The inflation rate of regulated commodities declined 2.9% to stand at a threshold of 0.15%. 4

5 Finally, core inflation on annual average (excluding fresh agricultural products) reached 2.91% through March 2015, increasing 1.76% through September 2014 to 2.21% through December 2014; the underlying inflation rate remaining however lower than the overall inflation for the months of October 2014 through March