MONETARY AND FINANCIAL TRENDS IN THE FIRST THREE QUARTERS OF 2015, AS A CONSEQUENCE OF THE EXTERNAL SHOCK

Transcription

1 MONETARY AND FINANCIAL TRENDS IN THE FIRST THREE QUARTERS OF 2015, AS A CONSEQUENCE OF THE EXTERNAL SHOCK Oil prices in dollars fell 50% in the second semester of 2014, while the dollar appreciating sharply versus euro and other currencies. The fall has extended over the first nine months of 2015, with an emphasis in the third quarter. 1. The average price of barrel of oil fell from $ in the first semester 2014 to only $58.23 in the first semester 2015, followed by a decline in the third quarter to $ In respect of the first nine months of 2015, the average price posted $55.76 versus $ for the same period The drop in prices combined with a decrease of 3.09% of quantities of hydrocarbons exported in the first three quarters 2015 (4.57% in the first semester 2015 as compared to the same period 2014), and resulted in a level of hydrocarbon exports of only $25.79 billion in the period versus $46.86 billion a year earlier. Such contraction of 45% or -$21.06 billion confirms the magnitude of the external shock, which weighs on the national economy that remains still highly vulnerable to resources from hydrocarbons exports. In quarterly terms, exports of hydrocarbons rose from $8.71 billion in the first quarter 2015 to over $9.48 billion in the second quarter, to recede significantly in the third quarter to only $7.60 billion. It is to recall that for the same period of 2014, level of hydrocarbon exports stood at $15.62 billion. Non-oil exports which stabilized at $1.09 billion in the first three quarters, remain structurally weak and below the actual potential of the country in terms of export diversification. According to statistics issued by customs, imports of goods (FOB) which have experienced an upward trend these past years initiated a downward trend in the period in a context marked by sharp depreciation of euro versus US dollar. These imports totaled $39.70 billion in the period versus $45 billion for the same period 2014, or a decline of $5.30 billion (-11.78%). In quarterly terms, imports of goods increased from $13.42 billion in the first quarter of 2015 to $13.84 billion in the second quarter, then retreating significantly in the third quarter to $12.44 billion. It is to recall that for the same period 2014, the average level of imports of goods stood at $15 billion. 1

2 This significant drop in imports between the two periods concerned all groups of goods, except agricultural equipment that relatively stabilized in context of sharp depreciation of euro versus US dollar (-17.77% on average over the period). The group "food consumer goods" recorded the largest decrease in imports (-$1.49 billion, or from $8.27 billion in the period 2014 to $6.780 billion over the same period of The decrease was mainly due to decreasing imports of milk and milk powder (-$752 million). The group non-food goods "has experienced the second largest decline over the period, from $7.53 billion to $6.30 billion (-$1.23 billion), mainly as a result of decreasing imports in respect of passenger cars (-$737 million) and medicines (-$447 million). The implementation of recent measures to contain the surge of imports began contributing to the decline in imports. These measures include in particular the tightening of requirements for standards and the implementation of a framing device for imports. At the same time, the Bank of Algeria has strengthened the requirements in determining credit worthiness of the importer as regards bank domiciliation. Bank of Algeria also reduced the prudential capital ratio of banks in relation to their commitments with respect to foreign trade and intensified controls on foreign trade transactions directly at bank branches. These measures relate to the control of features implemented at banks for the purpose of internal control, especially ex post reviews of good faith of transactions with the rest of the world. Thus, under the effect of external shock and persistent level of imports, trade balance evolved from a surplus of $2.93 billion for the period 2014 to a deficit of $12.82 billion for the same period 2015 ($8.29 billion in the first half of 2015). The decline in imports of goods could only partially offset the decline of exports of hydrocarbons. Meanwhile, due to the decline in imports of services as compiled from data issued by banks, the deficit of the services excluding non-factor income item contracted in the reporting period to $5.39 billion from a deficit of $6.07 billion in the period of The significant transfer of dividends in the first quarter of 2015, in situation of declining revenues with respect to factor income was the main source of the widening of deficit of the net factor income item (primary income) which stood at $3.84 billion in the period of 2015 versus -$3.79 billion in the same period 2014, in situation of significant decline of production share of associates of the national company of hydrocarbons. The net current transfers item (secondary income) recorded substantial surplus in the period ($2 billion), 2

3 though decreasing compared to the period of 2014 ($2.33 billion), in a context marked by sharp depreciation of euro versus US dollar. Thus, after the deficit recorded in the first three quarters 2014 (- $4.61 billion), the current account of the balance of payments posted a substantial deficit in 2015 (-$20.05 billion), that is mainly due to falling prices and quantities exported of hydrocarbons and to the significant transfer of dividends. The capital and financial operations account also recording a deficit in 2015 (-$763 million), following the transfer of $2.34 billion as part of sale transaction by non-residents to residents of shares in a company. In total, the overall balance of the balance of external payments established by the Bank of Algeria from different data sources, posts a deficit of $20.82 billion in 2015 versus a deficit of only $ 3.02 billion for the same period For the record, despite the drop in oil prices in the second semester 2014, the overall deficit of the balance of external payments was contained at $4.56 billion. This record deficit combined with the negative valuation effect and resulted in official foreign exchange reserves (excluding gold) contracting sharply from $ billion at end 2014 to $ billion at end-june 2015 and at end September 2015 or a contraction of $32.57 billion over the periods 2014 versus The impact of the external shock of great magnitude on economic fundamentals induced a depreciation of 19.57% of the average rate of dinar versus US dollar and 2.16% versus euro over the two periods. The real effective exchange rate of dinar in September 2015 remains overvalued with respect to medium-term equilibrium level, in situation of widening inflation differentials and tensions in foreign exchange markets. The latter significantly impacting the exchange rates of emerging and developing countries. In order to prevent an appreciation of the real effective rate that would be damaging to the macroeconomic stability in the medium term, the relative flexibility of the exchange rate of dinar on the interbank foreign exchange markets allows to partially absorb the impact of falling oil prices. The interventions of the Bank of Algeria on the interbank market are part of this strategic objective. 2. Public finances, heavily dependent on oil taxation are impacted by the fall in oil prices since mid This is reflected in the widening budget deficit and erosion of resources of the Revenue Regulation Fund. 3

4 The trend towards widening of the overall deficit of the Treasury and erosion of resources of the Revenue Regulation Fund has accentuated in the first three quarters 2015, in context of weak revenues from oil taxation linked to persisting low prices of oil and high budget expenditures. Indeed, according to data issued by Treasury, revenues from oil taxes totaled 1, billion dinars at end- September 2015 versus 2, billion dinars in the same period Correspondingly, the overall balance of Treasury deteriorated further, reaching a deficit of 1,653.6 billion dinars (1,157.5 billion dinars at end-june 2015) versus a deficit of only billion dinars in the first nine months of As a result, the stock of financial savings of Treasury fell to 2,913.3 billion dinars at end- September 2015 (3,521.0 billion dinars at end June 2015). In total, Treasury resources have suffered a drastic fall of 1,972.8 billion dinars from end September 2014 to end September 2015, a reduction of 40.4% over one year, after several years of sustained efforts of budgetary savings. Meanwhile, the outstanding amount of Government securities issued by tender on the money market increased from billion dinars at end December 2014 to billion dinars at end-june 2015, reaching billion dinars at end of September Finally, the benefits of the prudent fiscal policy pursued during years of rising oil prices should be emphasized, resulting in substantial budget savings and low stock of public debt, thus facilitating adjustments in time of downturn in oil prices. However, an extended decline in oil prices would call on necessary fiscal consolidation. 3. In situation of deficit of the balance of external payments and widening budget deficit, the aggregate monetary situation compiled from monthly statements of banks and Bank of Algeria s is characterized by very low growth of money supply M2 (0.81%). This contrasts with the strong pace of growth achieved in the same period 2014 (12.06%). The very low growth in money and quasi-money is mainly due to the sharp decline in deposits with banks ( %). The sharper contraction of deposits of the hydrocarbon sector in the period (-39.10%) confirms the severity of the impact of the fall in oil prices on the financial position of the national company of hydrocarbons. After rising 5.46% in the first semester 2015, quasi money (term deposits in dinars and foreign currencies) increased 7.24% in the period. Despite the continued increase in fiduciary money (12.78%), which represents 29.9% of M2 at end-september 2015, the contraction of sight deposits was of such magnitude that money supply M1 registered a decrease of 1.92%.. 4

5 Unlike the contraction of money supply as defined in M1, money aggregate M2 (excluding deposits of the hydrocarbon sector) increased 3.37%. This indicates that the contraction of resources over the period derives exclusively from the extent of the external shock on the domestic economy. Given this situation of external shock and the correlative contraction of resources, changes in the structure of money supply M2 point an increase in the share of fiduciary money to 29.9% in the period (26.7% at end 2014). This component of financial savings of households and businesses is an opportunity for banks in terms of strengthening financial intermediation. The analysis of counterparties of money supply points a sharp decrease in net claims of the State on the banking system (-75.03% at end-september 2015), a rate twice that achieved in This confirms the significant widening of deficit of Treasury as result of the continuation of public spending despite the external shock. Although corresponding resources were contracting, loans to the economy continue to improve in the period 2015 (+13.35%), versus 19.91% in the same period In view of the upsetting external shock, rate of growth of credit to the economy does not seem to be sustainable without banks resorting to refinancing with the Bank of Algeria. The analysis of the structure by legal sectors of loans at end September 2015 shows that 52.43% of loans are granted to the public sector and 47.57% to private sector, of which 6.09% to households. Based on monthly statements of banks and data issued by the credit registry, loans granted to public sector reached 3,865.3 billion dinars at end-september 2015 versus 3,382.3 billion dinars at end-december 2014, an increase of 14.28% that is half that achieved in Loans to private sector reached 3,058 billion dinars at end-september 2015 versus 2,717.7 billion dinars at end-december 2014, an increase of 12.5%, the same as that achieved in the same period Credits granted to households reached billion dinars at end-september 2015 versus 386 billion dinars at end of September 2014, an increase of 11.19%. Such credits contributed only 5.21% to the overall growth of credits. Moreover, the structure of loans by maturity indicates that at end of September 2015, short-term loans represent 24.79% of total loans (27% at end-september 2014). Loans granted in the medium and long term for their part represent 75.21% of total loans at end-september 2015 versus 73% at end-september At end September 2015, the overall liquidity of banks amounted to 1,828 billion dinars (2, billion dinars at end-june 2015 and 2, billion dinars at 5

6 end-december 2014). Thus, after a sharp contraction in the first semester 2015 (-625, 92 billion dinars), bank liquidity further deteriorated. The sharp decline in deposits of the oil sector with the banking system is the primary reason, in context of persistence of external shock. Under the effect of the contracting liquidity of some banks, the interbank money market recorded an increase in the transactions that reached billion dinars at end-june 2015 ( billion dinars at end March 2015, 96.5 billion dinars at end December 2014). However, the third quarter 2015 recorded a decrease in trading volume (170.5 billion dinars). Also, in view of the decline of excess liquidity and in order to further stimulate the interbank money market, the Bank of Algeria started to gradually reduce reverse transactions. Banks and financial institutions are expected back, from the first quarter of 2016, to refinancing operations with Bank of Algeria, notably through rediscounting. 4. The average annual inflation that hit a ten-year high of 8.9% in January 2013 started a downward trend from February of that same year, and continuing for the next following 19 months. The inflation reached a minimum of 1.5% in August 2014 and has since resumed, posting 5.3% in September The structural inflation, which excludes goods with volatile prices (fresh agricultural products) is also on an upward trend since February 2014, reaching 4.2% on annual average to September From the standpoint of adequacy of supply to demand, particularly in terms of fresh agricultural products (vegetables, fruits, meat, poultry, milk), it should be noted that the average increase in the supply of fresh agricultural products is close to the average nominal increase in the demand for such products. As a result, the high average annual inflation of 8.6% for such products cannot be explained by an inadequate supply. In other words, the magnitude of inflation in 2015 cannot be explained by the mismatch of supply and demand, the expansion of money supply -which rose at historically low rates-, nor the trend in world prices of imported commodities. It is rather appropriate to investigate underlying causes in markets dysfunctions, particularly as regards the market of fresh agricultural products characterized by limited traceability of transactions and poor regulation. Finally, the opposite trend in prices -increasing in Algeria and declining in Europe- has resulted over a period of one year of enlargement of 4.3% of the inflation differential on annual average, bringing inflation to 5.3% in September

7 MONETARY AND FINANCIAL TRENDS IN THE FIRST THREE QUARTERS OF 2015, AS A CONSEQUENCE OF THE EXTERNAL SHOCK Oil prices in dollars fell 50% in the second semester of 2014, while the dollar appreciating sharply versus euro and other currencies. The fall has extended over the first nine months of 2015, with an emphasis in the third quarter. 1. The average price of barrel of oil fell from $ in the first semester 2014 to only $58.23 in the first semester 2015, followed by a decline in the third quarter to $ In respect of the first nine months of 2015, the average price posted $55.76 versus $ for the same period The drop in prices combined with a decrease of 3.09% of quantities of hydrocarbons exported in the first three quarters 2015 (4.57% in the first semester 2015 as compared to the same period 2014), and resulted in a level of hydrocarbon exports of only $25.79 billion in the period versus $46.86 billion a year earlier. Such contraction of 45% or -$21.06 billion confirms the magnitude of the external shock, which weighs on the national economy that remains still highly vulnerable to resources from hydrocarbons exports. In quarterly terms, exports of hydrocarbons rose from $8.71 billion in the first quarter 2015 to over $9.48 billion in the second quarter, to recede significantly in the third quarter to only $7.60 billion. It is to recall that for the same period of 2014, level of hydrocarbon exports stood at $15.62 billion. Non-oil exports which stabilized at $1.09 billion in the first three quarters, remain structurally weak and below the actual potential of the country in terms of export diversification. According to statistics issued by customs, imports of goods (FOB) which have experienced an upward trend these past years initiated a downward trend in the period in a context marked by sharp depreciation of euro versus US dollar. These imports totaled $39.70 billion in the period versus $45 billion for the same period 2014, or a decline of $5.30 billion (-11.78%). In quarterly terms, imports of goods increased from $13.42 billion in the first quarter of 2015 to $13.84 billion in the second quarter, then retreating significantly in the third quarter to $12.44 billion. It is to recall that for the same period 2014, the average level of imports of goods stood at $15 billion. 1

8 This significant drop in imports between the two periods concerned all groups of goods, except agricultural equipment that relatively stabilized in context of sharp depreciation of euro versus US dollar (-17.77% on average over the period). The group "food consumer goods" recorded the largest decrease in imports (-$1.49 billion, or from $8.27 billion in the period 2014 to $6.780 billion over the same period of The decrease was mainly due to decreasing imports of milk and milk powder (-$752 million). The group non-food goods "has experienced the second largest decline over the period, from $7.53 billion to $6.30 billion (-$1.23 billion), mainly as a result of decreasing imports in respect of passenger cars (-$737 million) and medicines (-$447 million). The implementation of recent measures to contain the surge of imports began contributing to the decline in imports. These measures include in particular the tightening of requirements for standards and the implementation of a framing device for imports. At the same time, the Bank of Algeria has strengthened the requirements in determining credit worthiness of the importer as regards bank domiciliation. Bank of Algeria also reduced the prudential capital ratio of banks in relation to their commitments with respect to foreign trade and intensified controls on foreign trade transactions directly at bank branches. These measures relate to the control of features implemented at banks for the purpose of internal control, especially ex post reviews of good faith of transactions with the rest of the world. Thus, under the effect of external shock and persistent level of imports, trade balance evolved from a surplus of $2.93 billion for the period 2014 to a deficit of $12.82 billion for the same period 2015 ($8.29 billion in the first half of 2015). The decline in imports of goods could only partially offset the decline of exports of hydrocarbons. Meanwhile, due to the decline in imports of services as compiled from data issued by banks, the deficit of the services excluding non-factor income item contracted in the reporting period to $5.39 billion from a deficit of $6.07 billion in the period of The significant transfer of dividends in the first quarter of 2015, in situation of declining revenues with respect to factor income was the main source of the widening of deficit of the net factor income item (primary income) which stood at $3.84 billion in the period of 2015 versus -$3.79 billion in the same period 2014, in situation of significant decline of production share of associates of the national company of hydrocarbons. The net current transfers item (secondary income) recorded substantial surplus in the period ($2 billion), 2

9 though decreasing compared to the period of 2014 ($2.33 billion), in a context marked by sharp depreciation of euro versus US dollar. Thus, after the deficit recorded in the first three quarters 2014 (- $4.61 billion), the current account of the balance of payments posted a substantial deficit in 2015 (-$20.05 billion), that is mainly due to falling prices and quantities exported of hydrocarbons and to the significant transfer of dividends. The capital and financial operations account also recording a deficit in 2015 (-$763 million), following the transfer of $2.34 billion as part of sale transaction by non-residents to residents of shares in a company. In total, the overall balance of the balance of external payments established by the Bank of Algeria from different data sources, posts a deficit of $20.82 billion in 2015 versus a deficit of only $ 3.02 billion for the same period For the record, despite the drop in oil prices in the second semester 2014, the overall deficit of the balance of external payments was contained at $4.56 billion. This record deficit combined with the negative valuation effect and resulted in official foreign exchange reserves (excluding gold) contracting sharply from $ billion at end 2014 to $ billion at end-june 2015 and at end September 2015 or a contraction of $32.57 billion over the periods 2014 versus The impact of the external shock of great magnitude on economic fundamentals induced a depreciation of 19.57% of the average rate of dinar versus US dollar and 2.16% versus euro over the two periods. The real effective exchange rate of dinar in September 2015 remains overvalued with respect to medium-term equilibrium level, in situation of widening inflation differentials and tensions in foreign exchange markets. The latter significantly impacting the exchange rates of emerging and developing countries. In order to prevent an appreciation of the real effective rate that would be damaging to the macroeconomic stability in the medium term, the relative flexibility of the exchange rate of dinar on the interbank foreign exchange markets allows to partially absorb the impact of falling oil prices. The interventions of the Bank of Algeria on the interbank market are part of this strategic objective. 2. Public finances, heavily dependent on oil taxation are impacted by the fall in oil prices since mid This is reflected in the widening budget deficit and erosion of resources of the Revenue Regulation Fund. 3

10 The trend towards widening of the overall deficit of the Treasury and erosion of resources of the Revenue Regulation Fund has accentuated in the first three quarters 2015, in context of weak revenues from oil taxation linked to persisting low prices of oil and high budget expenditures. Indeed, according to data issued by Treasury, revenues from oil taxes totaled 1, billion dinars at end- September 2015 versus 2, billion dinars in the same period Correspondingly, the overall balance of Treasury deteriorated further, reaching a deficit of 1,653.6 billion dinars (1,157.5 billion dinars at end-june 2015) versus a deficit of only billion dinars in the first nine months of As a result, the stock of financial savings of Treasury fell to 2,913.3 billion dinars at end- September 2015 (3,521.0 billion dinars at end June 2015). In total, Treasury resources have suffered a drastic fall of 1,972.8 billion dinars from end September 2014 to end September 2015, a reduction of 40.4% over one year, after several years of sustained efforts of budgetary savings. Meanwhile, the outstanding amount of Government securities issued by tender on the money market increased from billion dinars at end December 2014 to billion dinars at end-june 2015, reaching billion dinars at end of September Finally, the benefits of the prudent fiscal policy pursued during years of rising oil prices should be emphasized, resulting in substantial budget savings and low stock of public debt, thus facilitating adjustments in time of downturn in oil prices. However, an extended decline in oil prices would call on necessary fiscal consolidation. 3. In situation of deficit of the balance of external payments and widening budget deficit, the aggregate monetary situation compiled from monthly statements of banks and Bank of Algeria s is characterized by very low growth of money supply M2 (0.81%). This contrasts with the strong pace of growth achieved in the same period 2014 (12.06%). The very low growth in money and quasi-money is mainly due to the sharp decline in deposits with banks ( %). The sharper contraction of deposits of the hydrocarbon sector in the period (-39.10%) confirms the severity of the impact of the fall in oil prices on the financial position of the national company of hydrocarbons. After rising 5.46% in the first semester 2015, quasi money (term deposits in dinars and foreign currencies) increased 7.24% in the period. Despite the continued increase in fiduciary money (12.78%), which represents 29.9% of M2 at end-september 2015, the contraction of sight deposits was of such magnitude that money supply M1 registered a decrease of 1.92%.. 4

11 Unlike the contraction of money supply as defined in M1, money aggregate M2 (excluding deposits of the hydrocarbon sector) increased 3.37%. This indicates that the contraction of resources over the period derives exclusively from the extent of the external shock on the domestic economy. Given this situation of external shock and the correlative contraction of resources, changes in the structure of money supply M2 point an increase in the share of fiduciary money to 29.9% in the period (26.7% at end 2014). This component of financial savings of households and businesses is an opportunity for banks in terms of strengthening financial intermediation. The analysis of counterparties of money supply points a sharp decrease in net claims of the State on the banking system (-75.03% at end-september 2015), a rate twice that achieved in This confirms the significant widening of deficit of Treasury as result of the continuation of public spending despite the external shock. Although corresponding resources were contracting, loans to the economy continue to improve in the period 2015 (+13.35%), versus 19.91% in the same period In view of the upsetting external shock, rate of growth of credit to the economy does not seem to be sustainable without banks resorting to refinancing with the Bank of Algeria. The analysis of the structure by legal sectors of loans at end September 2015 shows that 52.43% of loans are granted to the public sector and 47.57% to private sector, of which 6.09% to households. Based on monthly statements of banks and data issued by the credit registry, loans granted to public sector reached 3,865.3 billion dinars at end-september 2015 versus 3,382.3 billion dinars at end-december 2014, an increase of 14.28% that is half that achieved in Loans to private sector reached 3,058 billion dinars at end-september 2015 versus 2,717.7 billion dinars at end-december 2014, an increase of 12.5%, the same as that achieved in the same period Credits granted to households reached billion dinars at end-september 2015 versus 386 billion dinars at end of September 2014, an increase of 11.19%. Such credits contributed only 5.21% to the overall growth of credits. Moreover, the structure of loans by maturity indicates that at end of September 2015, short-term loans represent 24.79% of total loans (27% at end-september 2014). Loans granted in the medium and long term for their part represent 75.21% of total loans at end-september 2015 versus 73% at end-september At end September 2015, the overall liquidity of banks amounted to 1,828 billion dinars (2, billion dinars at end-june 2015 and 2, billion dinars at 5

12 end-december 2014). Thus, after a sharp contraction in the first semester 2015 (-625, 92 billion dinars), bank liquidity further deteriorated. The sharp decline in deposits of the oil sector with the banking system is the primary reason, in context of persistence of external shock. Under the effect of the contracting liquidity of some banks, the interbank money market recorded an increase in the transactions that reached billion dinars at end-june 2015 ( billion dinars at end March 2015, 96.5 billion dinars at end December 2014). However, the third quarter 2015 recorded a decrease in trading volume (170.5 billion dinars). Also, in view of the decline of excess liquidity and in order to further stimulate the interbank money market, the Bank of Algeria started to gradually reduce reverse transactions. Banks and financial institutions are expected back, from the first quarter of 2016, to refinancing operations with Bank of Algeria, notably through rediscounting. 4. The average annual inflation that hit a ten-year high of 8.9% in January 2013 started a downward trend from February of that same year, and continuing for the next following 19 months. The inflation reached a minimum of 1.5% in August 2014 and has since resumed, posting 5.3% in September The structural inflation, which excludes goods with volatile prices (fresh agricultural products) is also on an upward trend since February 2014, reaching 4.2% on annual average to September From the standpoint of adequacy of supply to demand, particularly in terms of fresh agricultural products (vegetables, fruits, meat, poultry, milk), it should be noted that the average increase in the supply of fresh agricultural products is close to the average nominal increase in the demand for such products. As a result, the high average annual inflation of 8.6% for such products cannot be explained by an inadequate supply. In other words, the magnitude of inflation in 2015 cannot be explained by the mismatch of supply and demand, the expansion of money supply -which rose at historically low rates-, nor the trend in world prices of imported commodities. It is rather appropriate to investigate underlying causes in markets dysfunctions, particularly as regards the market of fresh agricultural products characterized by limited traceability of transactions and poor regulation. Finally, the opposite trend in prices -increasing in Algeria and declining in Europe- has resulted over a period of one year of enlargement of 4.3% of the inflation differential on annual average, bringing inflation to 5.3% in September