MONETARY AND FINANCIAL TRENDS IN THE FIRST SEMESTER OF 2015
The purpose of this review is to present the main components that characterize the development of the situation of the external financial position during the first semester 2015, under the influence of the external shock. The evolution of the monetary position is analyzed in relation to the evolution of bank liquidity and Public Treasury s cash flow position. The trend in inflation is also addressed. 1. Oil prices, expressed in dollars, fell about 50% in the second semester of 2014, as the dollar appreciated sharply versus euro and other currencies. The fall in oil prices since mid-2014 started to impact the national economy as from the fourth quarter. Oil prices posted $100.2/barrel on annual average in 2014 versus $108.97 in 2013; the drop was extended during this semester. Indeed, the average price of oil fell from $109.92 in the first semester 2014 to only $58.23 this semester, or a decrease of 47.02%. However, and in quarterly terms, the average price per barrel recorded a slight rebound in the second quarter 2015, reaching $61.92 versus $54.31 in the first quarter this year. Alongside the fall in oil prices, quantities of hydrocarbons exported fell by 4.59% this semester, as compared to the same period of last year, although they have increased by 11.88%, between the first and second quarter 2015. The acuteness of the fall in oil prices combined with the contraction of quantities of hydrocarbons exported, thus resulting in a level of hydrocarbon exports of only $18.10 billion this semester, corresponding to a decrease of 43.1% as compared to the first semester 2014 ($31.79 billion). In quarterly terms, hydrocarbons exports increased slightly from $ 8.703 billion to $ 9.396 billion between the first and second quarter 2015, while remaining at levels well below those recorded during the same quarters 2014 ($15.553 billion and $ 16.241 billion). Non-hydrocarbon exports that have slightly increased from $648 million in the first semester 2014 to $812 million for the same period 2015 ($380 million and $432 million respectively in the first and second quarters 2015), remain structurally weak and below the country's potential for export diversification. Imports of goods (fob) which experienced an upward trend in recent years decreased, reaching $27.086 billion in the first semester 2015 versus $30.134 billion in the same period 2014, with a relative stabilization between the first quarter 2015 ($13.552 billion) and the second quarter 2015 ($13.534 billion). Imports of goods have therefore declined 10.11% in the period, compared to the same period 2014. This significant decline between the first semester 2014 and the same semester 2015 concerned all groups of goods, except imports of agricultural capital goods that remain relatively stable ($48 million dollars) in context of sharp depreciation of euro versus US dollar (-18.58%) over the period. The non-food consumer goods group recorded the Page 1
largest decline in imports, falling from $5.129 billion in the first semester 2014 to $4.286 billion this semester, or a decrease of $843 million. This decrease is mainly due to the decrease of imports of passenger vehicles (-$526.28 million) and medicines (- $358. 02 million). The "food goods" group experienced the second largest decline over the period, falling from $5.583 billion in the first semester 2014 to $4.896 billion in first semester 2015, or a decrease of $ 687 million. This decline is due in large part to the decrease in imports of milk powder (-$482.69 million or - 40.77%), in context of decreasing international prices for this product (-32.10% over the period, according to the price index of the United Nations Food and Agriculture Organization (FAO)). It should be noted that imports of cereal increased by 5.85% over the period, from $1.84 billion in the first semester 2014 to $1.95 billion this semester, despite a drop in world prices of 16.80% according to FAO s price index. Other products also experienced significant decreases in imports, but to a lesser extent: semi-finished products (-$540 million), energy (-$340 million), industrial equipment goods (-$273 million) and raw materials (-$173 million). The decrease in imports this semester, benefited to some extent, from the low prices of basic commodities and raw materials which started to fall in world markets since the second semester 2014. The implementation of recent measures to contain the surge of imports began contributing to the decline of imports. These measures included, in particular, the tightening of the standard requirements thereon and the implementation of the imports framing apparatus. At the same time, the Bank of Algeria has strengthened the requirements for determining the creditworthiness of the importer as regards bank domiciliation purposes. Bank of Algeria also reduced the prudential equity ratio of banks regarding their commitments under foreign trade and intensified controls on foreign trade transactions, directly at branches of banks. These measures relate to the control of devices implemented at banks for the purpose of internal control, especially ex post reviews of the "good faith" of transactions with the rest of the world. The decline in imports of goods only partially offset that of decline in exports of hydrocarbons. This resulted in a trade balance deficit of $8.18 billion this semester, versus a surplus of $2.31 billion in the same semester 2014. The trade balance recorded its third consecutive quarterly deficit in the second quarter 2015, estimated at $3.71 billion as compared to a deficit of $4.47 billion in the first quarter 2014 and $2.61 billion in the fourth quarter 2014. Therefore, the acuteness of the external shock that combined with a higher level of imports resulted in a trade balance position that shifted from a surplus of $2.31 billion in the first semester 2014 to a deficit of $8.18 billion dollars this semester. Page 2
Although, the trade balance recorded a relative stabilization in the first quarter 2015 compared to the same period 2014, the deficit in the nonfactor income services item contracted to $3.35 billion this semester versus $4.15 billion in the same period 2014. In addition to the slight increase in exports of services item over the period, shrinking of the deficit is mainly due to the decline in imports of services, including those related to the items building and public works and transportation and technical services. The significant decline in the production share of associates of the national company of hydrocarbons helped contain the increase in the deficit of net factor income item (primary income) which stood at $2.931 billion this semester 2015 versus $2.472 billion for the same period 2014. However, the significant transfer of dividends this first quarter, in situation of declining revenues under factor income item is the main source of the widening deficit. The net current transfers item (secondary income) continues to record substantial surpluses this semester ($1.28 billion), albeit lower than in the same period 2014 ($1.51 billion), in context of sharp depreciation of euro versus US dollar. Overall, the current account of the balance of payments shows a large deficit (-$13.17 billion) that is mainly due to falling oil prices and quantities of oil exported, on the one hand and the significant transfer of dividends of associates on the other hand. The current account already registered a deficit in the first semester 2014 (-$2.807 billion dollars) - before the drop in oil prices- this deficit expanding in the second semester 2014 to $6.63 billion. After registering surpluses in the first and second semester 2014 ($1.48 billion and $2.07 billion respectively), the capital and financial transaction account recorded a deficit this semester (-$1.216 billion). This deficit reflects a large shortfall this first quarter (-$2.660 billion), following the transfer of equity of $2.34 billion dollars, as part of a sale transaction by a non-resident to a resident, of shares held in a domestic company. This deficit was partially offset by a surplus of $1.444 billion registered this second quarter. In total, the overall balance of the balance of payments posts a deficit of $14.39 billion dollars versus a deficit of only $1.32 billion in the first semester 2014 (10.73 billion dollars in the first quarter and $ 3.66 billion in the second quarter 2015). Moreover, despite the fall in oil prices recorded in the second semester 2014, the overall deficit of the balance of external payments is contained to $4.56 billion this semester; the external shock starting to affect the national economy as from the fourth quarter 2014. Correlatively to unfavorable developments in the balance of external payments, the record deficit posted this semester, combined with the negative valuation effect and Page 3
resulted in foreign exchange reserves (excluding gold) contracting sharply, achieving $159.027 billion at end of June 2015 ($178.938 billion at end of December 2014 and $193.269 billion at end of June 2014. This indicates a sharp contraction in foreign exchange reserves between end of June 2014 and end of June 2015 (-$34.242 billion), as a result of the impact of the external shock on the balance of external payments of Algeria. However, the level of reserves remains adequate, enabling Algeria to cope with the external shock, in situation of very low external debt ($3.353 billion at end of June 2015). The impact of the external shock of large magnitude on economic fundamentals induced a depreciation of 22% of the average exchange rate of dinar versus US dollar this semester, compared to the same period 2015. However, the exchange rate of the dinar has appreciated slightly (0.60%) compared to euro. Nevertheless, the real effective exchange rate of the dinar remains appreciated in relation to its medium-term equilibrium level in June 2015, in a situation of a widening of inflation differential and tensions in foreign exchange markets. These tensions impacted significantly exchange rates of emerging and developing countries. To prevent any appreciation of the real effective exchange rate which would be damaging to macroeconomic stability in the medium term, the relative flexibility of the exchange rate of the dinar on the interbank exchange market would allow for the partial absorption of the effect of the fall in oil prices. Interventions of the Bank of Algeria on this market falling within this strategic objective. 2. Public finances are impacted by the fall in oil prices, as from mid-2014. The impact of the external shock on public finances -heavily dependent on oil taxes- is reflected in the widening of budget deficit and erosion of resources of the Revenue Regulation Fund. As a consequence of lower revenues from oil taxes, Treasury's financing capacity shrank by 747.4 billion dinars in the second semester of 2014, decreasing from 5,235.6 billion dinars at the end of June 2014 to 4,488.2 billion dinars at the end of December 2014. Resources of the Revenue Regulation Fund were largely depleted to cover the overall deficit of the Treasury which widened considerably in 2014 as compared to year 2013. Thus, the amount outstanding of the Revenue Regulation Fund posted 4,408.5 billion dinars at end of December 2014 versus 5,155 billion dinars at end of June 2014. The trend towards a widening of the overall deficit of Treasury and erosion of resources of the Revenue Regulation Fund has increased in context of weaker revenues from oil taxes, in relation to persisting low prices of oil and consistently high budgetary spending. Indeed, revenues from oil taxes totaled 1,254.9 billion dinars this Page 4
semester versus 1,518.3 billion dinars in the second semester 2014 and 1,870.0 billion dinars in the first semester 2014. Correspondingly, the overall balance of public Treasury deteriorated further, reaching a deficit of 902.8 billion dinars at end of May 2015 versus 463.0 billion dinars at end of June 2014. As a result, resources of the Revenue Regulation Fund fell to 3,441.3 billion dinars at the end of June 2015. In total, resources of the Revenue Regulation Fund underwent a drastic erosion of about 1,714.6 billion dinars between end of June 2014 and end of June 2015, or a reduction of 33.3% of its balance over the year, following several months of sustained efforts in budgetary savings. At the same time, the amount outstanding of government securities issued by way of tender on the money market rose from 775.11 billion dinars at end of December 2014 to 844.19 billion dinars at end of June 2015, while redemption bonds were redeemed in the amount of 60.1 billion dinars this semester. 3. In a situation of deficit of the balance of external payments and widening budget deficit, the monetary position this semester is characterized by the stabilization of money supply M2 (0.04%) as compared to the rate achieved in the same period 2014 (7.68%). After a contraction in the first quarter of 1%, a slight increase in money and quasi money aggregates characterized this semester, despite the sharp decline in sight bank deposits at banks (-10.10%). The sharper contraction of deposits of the hydrocarbon sector (-14.09%) confirms the acuteness of the fall in oil prices. However, quasi money (term deposits in dinars and foreign currencies) increased 5.46% this semester versus 6.34% in the same period 2014. Despite the continued progression of fiduciary money (5.27%), which represents 28.2% of M2, the contraction of sight bank deposits was of such magnitude that the money supply M1 registered a decrease of 2.27%. Unlike the contraction of money supply in the sense of M1, the money aggregate M2 (excluding deposits of hydrocarbon sector) increased by 0.95%. This clearly shows that the contraction of resources this semester is due exclusively to the magnitude of the external shock on the domestic economy. In this situation of external shock and corresponding contraction of resources, changes in the structure of money supply M2 show an increase in the relative share of fiduciary money to 28.2% through June 2015 versus 27.8% at end of March 2015 and 6.8% at end 2014. This component of financial savings of households and businesses represents an opportunity for banks in terms of strengthening financial intermediation. Also, to mitigate the impact of external shock on policy instruments of banks, banks must drain a fraction of fiduciary money in circulation by offering new financial products and attractive rates of return. This being part of the necessary development of financial inclusion, including in particular through basic banking services of high standards that would be supported by modern payments systems. Indeed, one of the Page 5
normative tasks of local banks is to develop term resources dedicated to the financing of economic growth. Analysis of counterparties of money supply points to a sharp decrease in net claims of the State on the banking system of -50.93% this semester, a very high annual rate as compared to year 2014. This confirms the significant widening of the deficit of Treasury s transactions, in situation of maintaining the same disbursements profile under public spending, despite the external shock: even though resources were contracting, credit to the economy continued to grow during this period at a rate of 8.70% versus 11.72% in the same period 2014. This rate of growth of credit does not seem to be sustainable in the long run without banks resorting to refinancing from Bank of Algeria. By legal sector, credits granted to the public sector grew by 8.55% versus 8.58% for the private sector. Consequently, the share of credits to private sector stabilized this semester at 48%, in situation of contracting bank liquidity. At the end of June 2015, the overall liquidity of banks amounted to 2,104.96 billion dinars (2,186.83 billion dinars at end of March 2015 and 2,730.88 billion dinars at end of December 2014). Thus, this semester recorded a sharp contraction in bank liquidity (-625.92 billion dinars) due to the sharp fall in deposits of the hydrocarbon sector, while the non-hydrocarbon sectors recording a contraction in the first quarter. Although, the excess of bank liquidity is declining, Bank of Algeria continues to absorb the excess on the money market: an amount of 996.90 billion dinars was absorbed, of which 679 billion dinars through the instrument of "liquidity withdrawals". The amount remaining in current accounts of banks totaled 1,108.07 billion dinars this semester, exceeding the objective of mandatory reserve requirement for the period from June 15 to July 14, 2015 set at 1,035.26 billion dinars. Under the effect of the contracting liquidity of some banks, the interbank money market recorded an increase in the volume traded, or 370.50 billion dinars (315.50 billion dinars at the end of March 2015, 96.5 billion dinars at end of December 2014). Also, given the depletion of excess liquidity and in order to further boost the interbank market, Bank of Algeria has begun to gradually reduce liquidity withdrawal operations. Banks and financial institutions are expected to return by end 2015 to refinancing with Bank of Algeria, in particular through the instrument of rediscounting. 4. The overall liquidity of banks, more resilient to external choc in the second semester 2014, contracted this semester as a result of the rising inflation that initiated in September 2014, following the disinflation process that started in February 2013. The Page 6
inflation in annual average increased from 1.60% through September 2014 to 2.92% through December 2014 and to 4.06% through March 2015, reaching a pic of 4.97 % in June 2015 -the largest annual increase for the last 21 months -. As for the national index, the inflation rate posted 3.82% through December 2014, 4.62% through March 2015, closing this semester at 5.18% on annual average. In terms of contribution to annual overall inflation through June 2015, the largest contribution (61%) is to be allocated to the group Food and non-alcoholic beverages whose relative weight is 43.1% and increasing 19.11% in one year. As for services, they contributed 15.06% to the overall inflation and declining by 34.24% as compared to June 2014. Manufactured goods contributed 23.94% to the overall inflation, increasing by 15.13%. Three groups out of the eight groups contribute jointly 79.58% to the overall inflation, namely "food", "footwear and clothing" and "miscellaneous" groups, for a cumulative weight of 59.18% of the global basket. Inflation of fresh agricultural products represents 72% of food inflation and 43.92% of the overall inflation, rising 2.1% compared to end 2014. In the food group, the subgroups "Potatoes," "Vegetables" and "Fruits" have a cumulative contribution of 66.24% with a total relative weight of 19,59%. The sub-group "potatoes" contributes to both overall inflation and food inflation, amounting to 19.10% and 31.31% respectively, for respective weights of 1.48% and 3.43% only. The Year on Year inflation of consumer prices this semester with respect to the same semester 2014 reached 4.5%, rising 1.72%. Prices rose 5.32%, up 4.11%, an inflation driven mainly by food (+6.59%), namely fresh agricultural products (9.23%), in particular potatoes (+58.73%) and vegetables (+14.68%). The inflation rate on annual average of the price index with high import content and weighing 23.4% of the consumer price index reached 2.75% this semester (1.41% through March 2015), a rise of 4.31% corresponding to a Year on Year increase of 4%. On the other hand, inflation of regulated commodities posted 1.5% only, in Year on Year average through June 2015. Core inflation in annual average (excluding food products) posted 3.67% through June 2015 (2.88% through March 2015 and 2.04% through December 2014). Inflation excluding fresh agricultural products posted a moderate rate of 3.63% and remains lower than the overall inflation since October 2014. Core inflation continues its upward trend for the ninth consecutive month, though remaining lower than the overall inflation. Page 7
Finally, in view of the divergent inflation developments in Algeria as compared to that of its main trading partners, the inflation differential in annual average which is to the detriment of Algeria posted 3.17% in June 2015. Page 8