Monetary and financial trends in the fourth quarter of 2014 Oil prices have significantly contracted in the third and fourth quarters of 2014, in an international economic environment marked by fragile global recovery, increasing divergence of growth between major economies and persisting significant risks (geopolitical risks, financial risks, risk of deflation, low growth in potential output, risks associated with the normalization of monetary policies...). After having evolved between $107.3 and $115.3/barrel in the first semester of 2014, prices of barrel of Brent decreased from $115 in mid-june to less than $94 at the end of September and $57.9 at the end of December 2013. This significant drop in prices by nearly 50%, between June and December 2014 resulted to a large extent from the sustained increase in oil supply, namely from non-opec member countries, while world demand was lower than expected. This external shock of large scale had major negative macroeconomic consequences on oil exporting countries. In particular, these countries were recording since the second semester of 2014, the deterioration in the current account balances of their balance of payments and a contraction in margins of budgetary maneuvering - the budgetary equilibrium prices being high for most of these countries -. The strong appreciation of US dollar that was correlated to the drastic fall in the price of oil put an increased pressure on the exchange rates of several emerging countries, including oil exporting countries, while risks to financial stability were increasing significantly. 1. Like other oil-exporting countries, the national economy suffers from the decline in oil prices, a source of important vulnerability for the balance of payments and public finances. After evolving in the range of $108.35 to $113 in monthly average in the first semester ($109.92 in semester average), the price of Algerian oil stood at $100.97 on average in the third quarter, then fell to $77.06 in the fourth quarter. On monthly average, the price went from $113 in June to $96.02 in September and $65.83 in December, evidencing the effect of the external shocks, especially in the fourth quarter. Despite the decline of hydrocarbon prices during this second semester ($91.51 versus $109.19 in the same period of 2013), hydrocarbon exports posted $58, 34 billion in 2014 ($63.66 billion in 2013) of which $11.49 billion in the fourth
quarter ($16.83 billion in the fourth quarter of 2013). Thus, after having stabilized with respect to the level achieved in the first three quarters of 2013 ($46.86 billion), hydrocarbon exports recorded a contraction of 23.74% in the fourth quarter compared to the third quarter 2014. The decline in hydrocarbon prices combined with the continued contraction of quantities exported recorded these recent years (-1.74%). In contrast, non-hydrocarbon exports have experienced a significant increase in the fourth quarter, closing the year at $1.692 billion ($1.051 billion in 2013). Thus, with level of exports of $12.10 billion in the fourth quarter, $ 15.49 billion in the third quarter and $16.57 billion in the second quarter, exports totaled $60.04 billion in 2014, decreasing 7.2% compared to 2013. Meanwhile, imports of goods continued to increase, reaching $59.44 billion for the year 2014 ($54.99 billion in 2013), despite the decline recorded in the second semester of 2014. The fourth quarter was marked by the low level of imports ($14.49 billion) as compared to other quarters of 2014. As for 2013, the upward trend in imports in the first semester of 2014 ($30.10 billion) gave way to a downward trend in imports in the second semester 2014 ($29.34 billion). The surge in imports in 2014 is due to increases recorded by the following groups: "industrial capital goods", "semi-finished products" and "food products", namely in the second quarter. Indeed, imports of "industrial capital goods" that rank first with a relative share of 30.39%, recorded an increase of 18.58% in 2014, contributing up to 63.55% to the total increase in imports of goods. With a contribution of 34.97% to the total increase of imports, "semi-finished products" that rank second with a relative share of 20.52% increased 14.63% in 2014. With a relative share of 17.75%, ranking third, imports of "food products" experienced a significant increase of 17.06%), from $9.01 billion in 2013 to $10.55 billion in 2014. Within imports of food products, milk and milk products recorded a strong growth of 62.47%. Finally, imports of "non-food consumer goods" that rank fourth with a relative share of 16.57%, recorded a decrease of 6.55%, from $10.54 billion in 2013 to $9.85 billion in 2014, due notably to the decrease in imports of passenger cars. Meanwhile, imports of "energy and lubricants" that represent a share of 4.53% of total imports, decreased from $4.14 billion in 2013 to $2.69 billion in 2014, corresponding to a decrease of 34.94%. The continued surge of imports of goods for the fourth consecutive year and the drop in exports resulted in the sharp contraction in the trade surplus in 2014.The acuteness of the shock in the fourth quarter resulted in trade deficit of $2.39 billion, due to the sharp decline in hydrocarbon exports versus a surplus of $2.98 2
billion in the first three quarters ($5.94 billion in the first three quarters of 2013). As a result, the trade surplus stood at only $0.59 billion in 2014 ($9.73 billion in 2013), the lowest trade surplus recorded since 1998. In addition to the sharp contraction in the surplus of the balance of trade, the deficit in "nonfactor income services" item widened to $8.13 billion in 2014, while that deficit was $6.99 billion only in 2013, due to the increase in imports of technical services and ones related to building and public works. Also, the deficit in the "factor income" item stabilized at $4.88 billion, in situation of declining revenues, in context of historically low interest rates in the euro area and the United States. Furthermore, net transfers improved, especially in the second semester of 2014, increasing from $2.79 billion in 2013 to $ 3.31 billion in 2014. Consequently, the year 2014 was characterized by a deficit in the current account of the balance of payments as from the first quarter, the scale of which doubled in the second quarter, then stabilized in the third quarter, before widening significantly in the fourth quarter. Indeed, the deficit recorded in the current account at $ 4.58 in the fourth quarter accounts for half of the deficit of the entire year 2014 ($9.11 billion), testifying of the effect of the drastic fall in oil prices in the last quarter, in situation of continued growth in imports. The significant surplus in the capital account of $3.23 billion, versus a deficit of $0.87 billion in 2013, in situation of lower net flows of foreign direct investments of $1.47 billion, slightly offset the current account deficit, so that the overall balance of external payments posted a deficit of $5.88 billion versus a deficit of only $0.13 billion in 2013; this deficit widened, particularly in the fourth quarter. As a result, official foreign exchange reserves (excluding gold) shrank to $178.938 billion at the end December 2014 versus $185.273 billion at the end of September 2014, after stabilizing in the first semester at $193.269 billion and $194.012 billion at end of December 2013. In spite of this decline, the level of official foreign exchange reserves (excluding gold) remains adequate in historically low levels of external debt ($3.735 billion at the end of December 2014, $3.666 billion at the end of September 2014, $3,396 billion at the end of December 2013). The net external financial position remains significant at the end of 2014 and should continue mitigate the impact of the external shock in 2015. In addition, the very low level of indebtedness in foreign currencies of companies of the hydrocarbon sector and of the banking sector contributes to limit the impact of the financial consequences of the external shock. However, if the external shock were to persist, resilience of the external position of Algeria could quickly erode, especially as the very high level of imports becomes unsustainable and 3
constitutes an additional risk to the external balance of payments over the medium term. The control of the absorption level becomes imperious. The resurgence of volatility recorded on international foreign exchange markets in the second semester of 2014 combined with the drastic fall in oil prices, and negatively affecting currencies of several emerging countries including oil exporting countries. In terms of the national currency, the annual average rate vis-à-vis the US dollar was at $80.5606 in 2014 versus $79.3809 in 2013, corresponding to a depreciation of 1.49%, while the annual average rate experienced an appreciation of 0.14% for the first three quarters of 2014. This can be explained by the depreciation of 6.08%, on quarterly average, in the fourth quarter of 2014 with respect to third quarter of the same year, as a result of the external shock. This is a small depreciation on yearly average, as compared to depreciations of currencies of some emerging countries. Indeed, the US dollar has appreciated significantly versus currencies of several emerging countries, particularly currencies of commodities exporting countries. At the same time, the annual average exchange rate of dinar versus euro depreciated by 1.39% in 2014 with respect to 2013, quoting 105.4374 in 2013 and 106.9064 in 2014, after depreciating by 2.78% in the first three quarters of 2014. As a result, the fourth quarter recorded a slight appreciation of dinar versus euro as compared to the third quarter, while appreciating by 2.4% in the fourth quarter of 2013. Despite the impact of the external shock in the fourth quarter, the Real Effective Exchange Rate (REER) appreciated slightly this year, compared to 2013, in situation of sharp depreciation of currencies of trading partner countries vis-àvis the dollar. Consequently, despite the widening of the deficit of the balance of external payments in the fourth quarter compared to the first semester, the REER of the dinar remains appreciated with respect to its equilibrium level determined according to economic fundamentals. 2. As to public finances, the stock of financial savings of Treasury held in accounts with Bank of Algeria declined at the end of December2014 compared to the level at end of June and end of September, as the outstanding amount held in the accounts of Treasury (Revenue Regulation Fund, current account) is valued at 4,488.2 billion dinars at the end of December versus 5,643.2 billion dinars at end of year 2013. 4
The Treasury s financing capacity contracted by 1,155 billion dinars in 2014 versus 2013, reflecting the upward profile of disbursements in respect of budget expenditures, particularly equipment, in context of declining revenues collected from oil taxes, thus expressing the effect of the external shock that contributed to expand the overall deficit, after a consolidation in fiscal 2013. 3. Despite the deficit of the external balance of payments in 2014, mainly during the fourth quarter, net external assets rose by 3.35% in 2014 (0.61% in the first three quarters); the valuation effect having played significantly in the fourth quarter. The year 2014 is marked by the significant recovery in the pace of monetary expansion of up to 14.50% (8.41% in 2013), such expansion following two years of monetary deceleration. The relevant aggregate, namely money supply M2 (excluding deposits of hydrocarbons), increased at a slower pace (12.39%) than that of money supply in the broad sense M2, as deposits of the hydrocarbon sector rose sharply in 2014 versus a contraction of 20.15% over the previous year. Despite the advent of the external shock, the second semester recorded the bulk of this growth, comforting the cash flow position of the hydrocarbon sector. Monetary aggregate M1, after an increase of 7.40% only in 2013, rose sharply during 2014 (16.29%) or nearly 8% in semi-annual rate, reflecting the sustained recovery of the expansion of fiduciary money (14.13%) and that of sight deposits in banks (25.58%). The strong growth in sight deposits, especially in the second semester, accounted for most of the growth of monetary liquidity in 2014. In terms of quasi-money, after a slowdown in the pace of expansion in 2013 and an increase of 6.34% in the first semester, the outstanding amount rose by 10.51% in 2014 versus 10.74% in 2013, driven by the growth in term deposits of the hydrocarbon sector and nonbank financial institutions. As the main source of the strong recovery of the expansion of deposits collected by banks, sight and term deposits of the hydrocarbon sector increased by 61.96% during 2014. A very fast rate of expansion was recorded in the third quarter, followed then by a slight decrease in the next quarter. Driven mainly by the replenishment of the hydrocarbon sector s self-financing capacity, the rise in deposits of public enterprises as a result of the development of policy tools of banks is significant in 2014 (44.48%), while deposits of private companies increased by 10.23% only. Indeed, the increase in sight and term deposits in dinars of private companies is lower (10.51%) than deposits of public 5
enterprises (23.5%), while the growth in sight and term deposits of households of 8.87% only is driven by deposits in saving accounts (11.74%). In terms of counterparties of money supply, the monetary situation indicates a significant depletion of net claims of the State on the banking system, due mainly to the contraction of resources of the Revenue Regulation Fund in 2014. Despite the impact of the external shock, the financial position of the State as a net creditor vis-à-vis the banking system remains significant and contributes to the strong growth in the domestic credit aggregate as compared to the year 2013. Therefore, in a situation of very slow growth in net foreign assets, the credit channel emerges as the key source of monetary expansion over 2014. Indeed, the year 2014 recorded a strong pace of growth in credit to the economy of 26.05%, confirming the sustained rates of 20.26% and 15.06% achieved in 2013 and 2012 respectively, corresponding to very high growth rates in real terms. This upward trend reflects the dynamism of credit to the economy whose outstanding amount reached 6,499.43 billion dinars at the end of December 2014 versus 5,156.30 billion dinars at the end of December 2013. Growth of credit to the economy was stronger in the second semester of 2014 or 5,760.61 billion dinars at end of June 2014 and 6,182.82 billion dinars at end of September 2014. The analysis of the structure of credits by legal sector shows that at the end of December 2014, 47.98% of credits were granted to the private sector. At that date, credits to private companies reached 2,717.93 billion dinars (2,591.05 billion dinars in June 2014 and 2,373.92 billion dinars at the end of December 2013), increasing by 14.49%, while credits to households increased by 15.25%. Medium and long term credits represent 75.28% of total credits at the end of December 2014, of which 24.15% in medium term credits and 51.13% in long term credits, versus 23.81% and 48.58% respectively at end of 2013, in situation of continued depletion of the relative share of short-term credits (24.72% at the end of 2014 and 31.76% at the end of 2012). In particular, long-term credits grew at a faster rate (32.65%) than the rate of credits to the economy (26.05%). The long term outstanding amount of credits increased from 2,505.05 billion dinars at the end of 2013 to 3,322.89 billion dinars at the end of 2014, while the increase in long-term credits to private companies remains significant at 19.04%, in situation of improvement in their access to bank credits. The dynamism of bank credits to the economy, carried by facilitation measures taken in early 2013 and implemented by the State in 2011 in the framework of the development of healthy credits to SMEs is even more significant in real terms in 2014 as compared to years 2012 and 2013. The improvement in the structure 6
and the financing conditions (extension of maturities and lowering in costs) contributed over the past three years to the dynamism of credits towards the economy, particularly SME s and to stimulate non-hydrocarbon economic growth. Anchored on the stable nature of banks resources, in situation of persisting excess of liquidity on the money market and the refinancing prospects of Bank of Algeria, bank credit channel remains potentially important in terms of financing productive investment and non-hydrocarbon growth potential. Hence, the scope of banking intermediation in favor of inclusive non-hydrocarbon growth aims at achieving in medium-term a target ratio of credits towards investment and SME s, relative to non-hydrocarbon GDP. For this purpose, banks will have to diversify their funding instruments, while pursuing effectively the improvement of analysis, measurement, monitoring and control of credit risks. In this new context marked by the external shock that may affect short-term resources of banks, the latter must develop policy tools by promoting attractive financial products that would post positive real returns. The year 2014 being characterized by the continuation of the disinflation process that began in February 2013, after the "peak" of inflation of 2012. The average annual inflation quoted 2.92% in December versus 3.26% a year earlier, in slight decrease of 0.34% on year over year basis. Despite this downturn, the rise in inflation is evidenced in the second semester 2014, in which the dynamics of consumer prices takes on an upward trend as from the month of September. With a weight of 43.09% in the index of consumer prices, food goods item registers since February 2013 a bullish trend in inflation - 1.26% through August 2014, then 1.61% through September, followed by a peak of 3.90% through December 2014. These trends were mainly driven by rising prices of "fresh agricultural products" item as from September 2014 (1.08%). The contribution to overall inflation of the food goods item is estimated at 62.90% through December 2014, an increase of 16.94 percentage points compared to 2013.The contribution of fresh agricultural products item to the overall food inflation is estimated at 66.47% through December 2014. The contribution per group highlights that three out of the eight groups whose cumulative weight is 55.06%, contribute up to 87.69% to the overall inflation. Such groups include "food products" (62.90%), "clothing and footwear" (14.46%) and "education, culture and leisure" (10.33%). 7
Core inflation, as measured by the evolution in the index excluding fresh food item is estimated at 2.21% (-0.82% compared to December 2013). The inflation is on upward trend for the third consecutive month after declining continuously for 26 months (August 2012 - October 2014). Overall, despite the increase in inflation in the fourth quarter, the inflation rate for 2014 recorded at 2.92% is short of the target ratio of 4% set by the Council of Money and Credit. The degree of monetary stability remains significant this year, in the relative good performance of import prices. As part of the preservation of monetary stability, the Bank of Algeria absorbs effectively the excess liquidity in the money market and contributes to monitor inflation, using appropriate monetary policy instruments, of which, the withdrawal of liquidity, overnight deposits facility and compulsory reserves. Finally, in the context of strengthening the financial stability framework, the year 2014 experienced a major reform of the prudential system. 8