MONETARY AND FINANCIAL TRENDS IN THE FIRST THREE QUARTERS OF 2014 December 2014 1
In an international economic environment marked by weak global recovery and persistent significant risks (geopolitical risks, financial risks, risk of deflation, low-growth in potential output, risks associated with the normalization of monetary policies...), oil prices have significantly contracted in the third quarter of 2014. The price of barrel of Brent, after having evolved between $107.3 and $115.3 in the first semester of 2014, decreased from $115 in mid-june to less than $94 at the end of September. This significant drop in oil prices by nearly 20% between June and September 2014 resulted to a large extent, from the sustained increase in oil supply while world demand was lower than expected. As for emerging countries and in order to address risks associated with financial volatility, particularly foreign exchange markets, some central banks had to intervene to mitigate the significant adjustments in exchange rates, drawing on official foreign exchange reserves. Correspondingly, several central banks (India, Turkey, Russia, Brazil,) have tightened their monetary policies in order to strengthen the macroeconomic framework. Oil-exporting countries are beginning to deal with upside risks for financial stability in relation to the deterioration of the external current account balances, experiencing less room for fiscal maneuvering, following the fall in oil prices as from the third quarter of 2014. 1. Like other oil-exporting countries, Algeria suffers from the shock experienced by the price of oil through its effects on the balance of payments and public finances. The price of Algerian oil, after evolving in the range of $108,35 to $113 in monthly average in the first semester of 2014, stood at $100.97 on average in the third quarter of 2014 ($109,92 in the first half of 2014). On monthly average basis, the price decreased from $113 in June to $96 in September, materializing the effect of the external shock. In spite of a slight decline in hydrocarbon prices during the first three quarters of 2014 ($106.65 versus $109.19 in the same period of 2013), hydrocarbon exports amounted to $46.87 billion during the period under review, then stabilized as compared to the level achieved in the first three quarters of 2013 ($46.87 billion). The price effect was offset by the recovery in quantities exported (+1.58% during the first three quarters of 2014), after a long period of contraction in exports. The stabilization of earnings from hydrocarbon exports during the period under review and despite a decline in the third quarter 2014, combined with the significant increase of non-hydrocarbon exports, reaching $1.13 billion during 2
the first three quarters of 2014 versus $1.05 billion under the whole previous year. Exports totaled $48 billion during the period under review, increasing slightly as compared to the first three quarters of 2013. Meanwhile, imports of goods continued to rise to $44.92 billion in the first three quarters of 2014 ($30.10 billion in the first semester of 2014) versus $41.7 billion during the same period of 2013. The decline in imports of goods in the second half of 2013, that followed the upward trend in the first semester of 2013 gave way to an upward trend in the first semester of 2014 of $30.10 billion on quarterly average, then to be reduced in the third quarter of 2014 to $14.82 billion versus $15.57 billion in the second quarter. The surge in imports in the first three quarters of 2014 being due to increases recorded namely in the second quarter by the following groups: "industrial capital goods", "semi-finished products" and "food products". Indeed, imports of "industrial capital goods ", which rank first with a relative share of 29.3%, recorded an increase of approximately 11.7% over the period under review, thus contributing up to 42.7% to the total increase of imports of goods. With a contribution of 29.4% to the total increase of imports, "semifinished products" that rank second with a relative share of 20.3%, have increased by 11.6% over the period under review. With a relative share of 18.1% ranking them third, imports of "food products" have been marked by a significant increase, from $6.91 billion in the first three quarters of 2013 to $8.13 billion for the period under review. Finally, imports of "non-food consumer goods" that rank fourth with a relative share of 16.4% have, for their part decreased from $7.73 billion in the first three quarters of 2013 to $7.38 billion over the same period of 2014. The surge in imports of goods in situation of external shock led to a contraction in the trade surplus of the balance of payments during the period under review. Trade surplus decreased from $5.98 billion in the first three quarters of 2013 ($3.667 billion in the first semester of 2013) to $3.08 billion during the same period of 2014 ($2.35 billion in the first semester of 2014). In addition to the contraction of the balance of trade, the deficit of "non-factors income services" item widened from $5.20 billion in the first three quarters of 2013 to $6.04 billion for the period under review. This resulted from the increase in imports of technical services and imports related to building and public works items. Also, the deficit in the "factors income" item stabilized at $3.79 billion during the period under review, in a situation of declining revenues in this regard, in context of historically low interest rates in the Euro area and 3
the United States. Furthermore, net transfers have improved from $ 2.15 billion in the first three quarters of 2013 to $2.33 billion over the same period of 2014. Consequently, the period under review was characterized by a deficit of the current account of balance of payments of $4.43billion which has widened in the second quarter. It then stabilized in the third quarter, despite the external shock; the average price of oil having contracted by 8.43%, as compared to the second quarter. The significant surplus in the capital account ($1.41 billion versus $0.21 billion in the first three quarters of 2013), in a situation of lower flows with respect to net direct foreign investments ($1.11 billion for the period under view), slightly offset the current account deficit, so that the overall balance of foreign payments posted a deficit of $3.02 billion versus a deficit of $0.64 billion only for the first three quarters of 2013. Under the impact of the external shock and the capital account deficit, the overall deficit of the external balance of payments widened in the third quarter of 2014. As a result, official foreign exchange reserves (excluding gold) shrank to $185.273 billion at the end of September 2014, after stabilization in the first semester ($193.269 billion at the end of June 2014 versus $194.012 billion at the end of December 2013) that followed progression in this regard in the second semester of 2013. In spite of this adverse trend, the level of foreign exchange reserves remained adequate, allowing Algeria to cope with the external shock that characterized the year 2014, especially as the historically low level of the outstanding external debt ($3.666 billion at the end of September 2014 versus $3.396 billion at the end of December 2013) contributes to the net external financial position. In addition, the very low level of indebtedness in foreign currencies of companies of the hydrocarbon sector and local banks helps limit, at least in the short term, the financial impact of the external shock. Moreover, the volatility recorded on the International foreign exchange markets from May-June 2013 and its resurgence in January 2014 and in the third quarter of 2014, negatively impacted currencies of several emerging countries including oil- exporting countries. As regards the national currency, its average rate vis-à-vis the US dollar during the first three quarters of 2014 stood at $79.0194 versus $79.1291 under the same period of 2013, representing an appreciation of 0.14%. The average rate in the first half of 2014 of dinar versus US dollar recorded a sharp appreciation 4
(2.31%) compared to the second half of 2013. In quarterly average, the average rate depreciated by 1.68% in the third quarter of 2014 compared to the second quarter of the same year. At the same time, the average exchange rate of dinar versus euro depreciated by 2.78% in the first three quarters of 2014, as compared to the same period of 2013, quoting 104,2136 in 2013 and 107.1112 in 2014. The depreciation was higher in semi-annual pace, or 4.32% in the first half of 2014 (USD/DZD 107.4874) relative to the same period of 2013 (USD/DZD 103.0376). This is a small depreciation versus euro, as compared to depreciations of currencies of some emerging countries. Despite the impact of the external shock as from the third quarter of 2014, the real effective exchange rate appreciated by 0.16% on average over the first three quarters of 2014 as compared to the same period of 2013, in situation of sharp depreciation of currencies of trading partner countries vis-à-vis the US dollar. Consequently, despite the widening of the deficit of the external balance of payments in the third quarter as compared to the first semester, the real effective exchange rate of the dinar remained appreciated by 5.11% through September 2014 with respect to its equilibrium level determined according to economic fundamentals. 2. In terms of public finances, the stock of financial savings of Treasury held in accounts with the Bank of Algeria has declined as at end of September 2014 compared to end of June 2014, since the outstanding amount held in the accounts of the Treasury (current account, Revenue Regulation Fund) is valued at 4886.1 billion dinars at the end of September 2014 versus 5,235.6 billion dinars at the end of June 2014 (5,643.2 billion dinars at the end of 2013). Compared to December 2013, the financing capacity of the Treasury contracted by 757.10 billion dinars over the first nine months of the current year. This reflects the upward profile of disbursements in respect of budget expenditures including equipment, in a context of declining revenues collected from oil taxes. This expresses the effect of the external shock which contributed to expand the overall deficit of the Treasury, after the consolidation registered in 2013. 3. The deficit of the external balance of payments in the first three quarters of 2014 induced a very small increase in net foreign assets (0.61%), in context of significant recovery of the pace of monetary expansion to 12.06% (6.77% for 5
the same period of 2013), after two years of deceleration in the matter, and widening of the deficit of Treasury. The relevant aggregate, namely money supply M2 (excluding deposits of the hydrocarbon sector), increased at a lower rate (9.73%) than that of money supply in the broad sense M2, as the deposits of the hydrocarbon sector rose sharply (64.4%) during the period under review, versus a contraction of 29.47% over the first three quarters of 2013. Despite the impact of the external shock, the third quarter of 2014 recorded the bulk of this growth. Analysis of the structure of the money aggregate M2 shows that money supply as defined by M1 that increased by 5.91% only over the first three quarters of 2013 and by 8.28% in the first semester of 2014 increased sharply in the third quarter of 2014 at the rate of 14.17% through September 2014 as compared to December 2013. The sustained recovery of the expansion of fiduciary money (14.14%) and that of sight deposits in banks (19.51%) over the first three quarters of 2014 accounted for most of the growth of the money and quasimoney aggregate. After a deceleration in the pace of expansion in 2013 and stabilization in the first quarter of 2014, the quasi-money aggregate rose by 7.36% at the end of September 2014 compared to December 2013, as a result of the sharp increase in the second quarter of 2014. As the main source of the strong recovery of deposits collected by banks, sight and term deposits of the hydrocarbon sector grew by 64.43%. This explains the significant contribution of the deposits of public enterprises in the development of policy tools of banks in situation of replenishment of self-financing capacities. The increase in sight and term deposits in dinar of private companies was weaker in the first three quarters of 2014 (6.9%), in situation of growth in sight and term deposits of household (6.56%). The monetary situation indicates a shrinking of net claims of the State on the banking system, due mainly to the contraction of resources of the Revenue Regulation Fund. However, the financial position of the State as a net creditor vis-à-vis the banking system remains significant in situation of external shock and contributes to the recovery of the pace of monetary expansion. Despite this contribution in situation of very low growth in net foreign assets, the credit channel emerges as the key source of monetary expansion during the period under review. 6
Indeed, the strong pace of growth in credit to the economy recorded in 2013 (20.26%) is confirmed by the pace recorded in the first three quarters of 2014 (19.91%) and to the high and sustained rates achieved in the second and third quarters of 2014. The bank credit to the economy reached 6,182.82 billion dinars at the end of September 2014 versus 5,760.61 billion dinars at the end of June 2014 and 5,156.30 billion dinars at the end of December 2013. This upward trend reflects the dynamism of credit to the economy and in particular, the facilitating access measures of private enterprises to bank credit. The analysis of the structure of credit by legal sector shows that at the end of September 2014, 49.50% of credits were granted to the private sector. On that date, credits to private enterprises reached 2,674, 6 billion dinars (2,373.9 billion dinars at the end of 2013) and increased by 16.43% as compared to the level at the end of September 2013 (2,297.07 billion dinars). Medium and long terms credits represented 73.02% of total credits at the end of September 2014, of which 21.96% in medium term credits and 51.07% in long term credits, versus 23.81% and 48.58% at the end of 2013, respectively. In particular, long-term credits increased from 2,505.05 billion dinars at the end of 2013 to 3,157.49 billion dinars at the end of September 2014 or an increase of 26%. Also, the dynamics of medium and long terms credits to private companies, which is explained by the increase in the access to bank credits, reflects the effect of improvement of the structure and financing conditions (extension of maturities and lowering in costs). The facilitation measures taken by the State in early 2013 have made more effective the apparatus of support implemented by the State in the framework of the development of healthy credits to SME s in order to stimulate economic growth outside of the hydrocarbon sector. Driven by these measures of support and facilitations, the dynamism of bank credits to the economy is even more significant in real terms compared to 2013. The bank credit channel remains potentially important in financing productive investment and non-hydrocarbon growth potential, judging by the increasing role, as from years 2013 and 2014, of commercial banks in the development of healthy credits to the economy. The resources of banks becoming stable and rising, in situation of persisting excess of liquidity on the money market militate strongly for a banking intermediation in favor of inclusive growth outside of the hydrocarbon sector with the aim of achieving in medium-term a target ratio of investment credit relative to non-hydrocarbon GDP. Banks will also need to 7
diversify their funding instruments, while pursuing effectively the improvement of analysis, measurement and control of credit risks, in the new context marked by the external shock which may affect their future resources. Finally, after the "peak" of inflation in 2012, the disinflation process, which began in February 2013, confirmed in the first three quarters of 2014. In fact, the annual average of the index of consumer prices rose by 1.60% through September 2014, after quoting 1.98% through March 2014 and 1.51% through June 2014. In terms of National Index, the later remained slightly above, quoting 3.05% through March 2014, 2.56% through June 2014, and 2.77% through September 2014. In terms of contribution to inflation through September 2014, the highest contributions came from the following groups: "Food and soft drinks" (47.4%), "clothing and footwear" (26.02%), "health and personal care" (13.3%), "education-culture and leisure" (10, 7%). As for the underlying inflation (excluding fresh agricultural products), it reached on annual average, 1.76% through September 2014 versus 1.74% through June 2014, 2.13% through March 2014 and 3.03% through December 2013; the underlying inflation rate remaining above overall inflation. As part of preservation of monetary stability, the Bank of Algeria absorbs effectively the excess of liquidity in the money market and thus helps control inflation through appropriate monetary policy instruments (withdrawals of liquidity, overnight deposit facilities and compulsory reserves). 8