MONETARY AND FINANCIAL TRENDS IN THE FOURTH QUARTER OF 2015, AS A CONSEQUENCE OF THE EXTERNAL SHOCK Following the drop in oil prices of approximately 50% in 2014, in context of strong appreciation of the dollar versus Euro and other foreign currencies, the impact of the external shock on the national economy intensified over the year 2015 with increased emphasis this quarter for some macro-economic indicators. Over the quarter, Gross Domestic Product (GDP) recorded a significant growth of 4.9% versus 2.5% for the same period of 2014. This performance resulted in the exceptional growth achieved by the hydrocarbon sector (+5% versus -7.9% in the fourth quarter 2014) and agricultural sector (10%). Growth was weaker in trade services sector (5.6% versus 7.4% in fourth quarter 2014) and the industry sector (3.2% versus 4.6% for the same period 2014); it was in contrast in sharp decline in the construction and public works sector (5.2% versus 12.3% in fourth quarter 2014). Overall, these evolutions have achieved an annualized growth of GDP of 3.9% (3.8% in 2014), and a non-hydrocarbon growth of 5.5% (5.6% in 2014. This year, the hydrocarbon sector resumed growth (0.4% versus -0.6% in 2014) after nine consecutive years of negative growth. 1. The sharp decrease in the average price of barrel of crude oil from $109.92 in the first half of 2014 to $58.23 in the first half 2015 ($50.52 in the third quarter and $43.49 in the fourth), led to an average price of $ 47.24 in the second half of 2015. In total, the average price of oil stood at $53.07 versus $100.23 in 2014. The drop in the price of oil (-47.05%) combined with a very slight decline in the quantities of hydrocarbons exported (-0.28%), resulting in revenues of hydrocarbon exports of $33.08 billion versus $58.46 billion in 2014. Such contraction of -43.41% in revenue confirms the amplitude of the external shock on the national economy which remains extremely vulnerable to hydrocarbons, Algeria s main export products. In quarterly terms, hydrocarbon exports increased from $8.71 billion in the first quarter to $9.53 billion in the second, declining considerably in the third and fourth, to only $7.58 billion and $7.26 billion respectively. It should be noted that in 2014, the average quarterly rate of hydrocarbon exports stood at $14.62 billion versus $15.95 billion in 2013. Non-hydrocarbon exports remain 1
structurally weak, declining to $1.48 billion ($1.67 billion in 2014) and below the country s potential in terms of diversification of exports. According to data issued by Customs, imports of goods (fob) which experienced an upward trend these last years, decreased in a context marked by strong depreciation of euro versus dollar (-16.55% in annual average). The imports posted $52.65 billion ($59.67 billion in 2014), or a reduction of 11.8%. The decline in imports is also effective in yearly and quarterly terms: after reaching $14.67 billion in the fourth quarter 2014, imports of goods increased from $13.53 billion in the first quarter 2015 to $14.06 billion in the second quarter, then declining significantly in the third and fourth to $12.60 billion and $12.46 billion respectively. The quarterly average level of imports of goods stands at $13.16 billion in 2015. The significant decline of imports (fob) concerns all groups of goods except agricultural equipment goods, the imports of which have relatively stabilized. Food consumer goods group recorded a significant decrease of $1.60 billion, posting $10.55 billion in 2014 and $8.95 billion in 2015. This decrease was mainly due to declining milk powder imports (-42.8%). Non-food goods group also experienced a considerable decrease over the period ($9.89 billion in 2014 and $8.24 billion in 2015, due mainly to the decreasing import bills of passenger vehicles (-$997 million) and medicines (-$212 million). The implementation of recent measures aiming at containing the surge of imports contributed to the decrease of imports in value. These measures include namely the tightening of requirements as regards standards and the implementation of the apparatus on framing of imports. At the same time, Bank of Algeria proceeded with the strengthening of requirements regarding the determination of the importer s creditworthiness. Bank of Algeria also reduced the prudential ratio of capital equity of banks over their commitments in respect of foreign trade, and intensified controls on foreign trade transactions, directly at bank branches. These measures relate to the control of features implemented with regard to internal control, especially as concerns ex post verifications of good faith of transactions with the rest of the world. As a result of the external shock and the still high level of imports, trade balance evolved from near equilibrium in 2014 ($+0.46 billion) to a deficit of $18.08 billion. Indeed, the oil shock was of such magnitude that the trade balance 2
recorded its first deficit, following eighteen years of consecutive surpluses. The decline in imports could only partially offset the sharp contraction of hydrocarbon exports. At the same time, under the effect of declining imports of services as compiled from data issued by banks, the deficit in non-factor income services item has experienced a significant narrowing of $620 million between 2014 and 2015, amounting to $7.52 billion. This situation resulted in the decline of transports services and imports of technical services in context of relative stabilization in exports of services. Despite the important transfer of dividends in the first quarter, in situation of declining revenues of the factor income item which experienced a dwindling in its deficit ($4.44 billion versus $4.81 billion in 2014). The significant decline in the production share of associates of the national company of hydrocarbons was the main explanatory factor. Net current transfers item continued to record considerable surpluses ($2.56 billion), albeit declining, as compared to the same period of 2014 ($3.22 billion), in a context marked by sharp depreciation of euro versus the dollar. Thus, after recording a deficit of $9.28 billion in 204, after more than fifteen years of surpluses, the current account of balance of payments recorded a widening of its deficit to $27.48 billion in 2015, in context of sharp deterioration in the trade balance. The deficit being mainly due to the drop in oil prices on the one hand and to the important transfer of dividends on the other hand. As to capital account and financial transactions item, it also recorded a deficit of $0.06 billion after a surplus of $3.40 billion in 2014, following the transfer of shares in a company worth $2.34 billion, as part of a sale transaction by nonresidents to residents. In total, the overall balance of external payments established by the Bank of Algeria from different data sources, posts a deficit of $27.54 billion ($14.38 billion in the first quarter and $13.16 billion in the second quarter), versus a deficit of only $5.88 billion in 2014 ($1.32 billion in the first half and $4.56 billion in the second). The record deficit of 2015 combined with the negative valuation effect resulting in international reserves (excluding gold) contracting sharply, standing at $144.13 billion versus $178.94 billion dollars at end 2014 ($159.03 billion at 3
end June 2015). The reserves remain however appreciable and cover 27 months of imports of goods and services, in a situation of historically low medium and long term external debt (0.72% of GDP) and absence of external debt incurred by enterprises of the hydrocarbon sector. The impact of external shock of great magnitude on economic fundamentals led to a depreciation of 20% of the exchange rate of dinar versus US dollar and 3.8% versus euro. Given the strong depreciation of currencies of main trading partner countries vis-à-vis the dollar, the real effective exchange rate of the dinar remains above its equilibrium level. Therefore, the foreign exchange rate played to a large extent the role of external shocks absorber, thanks to its flexibility, backed by Bank of Algeria s interventions on the foreign exchange inter-bank market. Indeed, and in order to prevent any appreciation of the real effective exchange rate that would be damaging to the medium-term macro-economic stability, the relative flexibility of the exchange rate of dinar allows to partially absorb the impact of decreasing oil prices. The interventions of Bank of Algeria on this market are part of this strategic objective. 2. Public finances are impacted by the fall in oil prices since mid-2014. The impact of external shock on public finances, heavily dependent on oil taxation, is reflected in the widening budget deficit and erosion of resources of the Revenue Regulation Fund. The trend increased throughout the year in relation to persisting low hydrocarbon exports revenues and consistently high budgetary spending. Indeed, according to data issued by Treasury, revenue from oil taxation totaled 2,273.5 billion dinars versus 3,388.4 billion dinars in 2014. The overall budget balance, thus deteriorated further, reaching a deficit of 2,824.5 billion dinars (16.8% of GDP) versus 1,375.4 billion dinars in 2014 (8% of GDP) and the stock of financial savings fell to 2,151.6 billion dinars (4,488.2 billion dinars at end 2014). Resources of Treasury underwent a drastic erosion of 2,336.6 billion dinars, or a reduction of 52.1% over a year, following several years of sustained efforts in budgetary savings. The outstanding amount of government securities issued by way of tender on the money market rose from 775.1 billion dinars at end of December 2014 to 811.3 billion dinars at end of June 2015, reaching 998.0 billion dinars at end December 2015, or an increase of 222.9 billion dinars (+28.8 %) in context of repurchases of non-performing loans of 84.14 billion dinars. 4
Finally, benefits of prudent budgetary policy pursued during rising oil prices and low public debt, led to a stock of budgetary savings that facilitated adjustments in times of low revenues from oil taxation. However, an extended decline in oil prices calls for urgent strong fiscal consolidation. 3. In a situation of deficit of balance of external payments and widening budget deficits, the aggregate monetary position compiled from monthly reports of banks and Bank of Algeria is characterized by near zero growth in the money supply M2 (0.13%), following a stabilization in the first half of the year (- 0.13%). This contrasts with the strong pace of monetary expansion in 2014 (14.62%) and 2013 (8.41%). The stabilization of the outstanding money and quasi-money liquidity is due to the substantial decline in sight deposits in banks (-12.38%), following strong growth in 2014 (25.14%). A more pronounced contraction of deposits of the hydrocarbons sector in 2015 (-41.09%), especially in the second half confirms the severity of the fall of oil prices on the financial position of the national company of hydrocarbons. Contraction of sight deposits with banks and Treasury was of such magnitude that money supply M1 recorded a decrease of 3.56%, despite the sustained growth of fiduciary money (12 28% in 2015 and 14.20% in 2014). On the other hand, quasi-money (term deposits in dinars and foreign currencies) grew 8.81%, following increases of 10.62% in 2014 and 10.74% in 2013. This aggregate showing some resilience to external shock. In total, the money aggregate M2 excluding deposits of the hydrocarbon sector increased by only 2.77% (12.50% in 2014). This indicates clearly that the contraction of resources derived from the magnitude of the external shock on the domestic economy and materialized in the sharp decline of the growth rate of revenues of the non-hydrocarbon sectors. In this situation and the corresponding contraction of resources, changes in the structure of money supply M2 shows an increase in the share of fiduciary money to 30% at end 2015 (26.7% at end 2014). This component of financial savings of households and businesses represents an opportunity for banks in terms of strengthening financial intermediation. Analysis of counterparties of money supply points to a sharp drop in net claims of the State on the banking system, reflecting the use of the Revenue Regulation Fund induced by the significant widening of the deficit of Treasury and new repurchases of non-performing loans of banks held on public enterprises (305.3 billion dinars). Given the sharp contraction in Treasury resources, credit to the economy including repurchases of non-performing loans continued to grow at a rate of 16.57% versus 26.15% in 2014. Given the severe external shock, the rate of growth of credit to the economy does not seem to be sustainable in the long run without banks resorting to refinancing from the Bank of Algeria in 2016. 5
Analysis of the structure of credits by legal sector excluding repurchases of nonperforming loans shows that 50.69% of credits are granted to the public sector and 49.31% to the private sector, of which only 6.39% to households. On the basis of monthly statements of banks, data from the central risk registry and data on repurchases of non-performing loans, credits to public enterprises reached 3,688.2 billion dinars versus 3,382.3 billion dinars at end 2014, or an increase of 9.04%. Credit granted to the private sector (businesses and households) amounted to 3,588.3 billion dinars versus 3,121.7 billion dinars at end 2014, an increase of 14.95% almost identical to that recorded in 2014 (14.69%). Credits granted to households reached 465.1 billion dinars versus 404.0 billion dinars at end 2014, an increase of 15.13%. Credits granted to households are mainly mortgages, suggesting that the increase in housing supply should contribute to the promotion of financial inclusion to the benefit of households. Besides, the structure of credits by maturity excluding repurchases indicates that short-term credits account for 23.51% of total credits versus 24.73% at end 2014 and medium and long-term credits account for 76.49% of credit granted versus 75.27% at end 2014. The ratio of bank credits over deposits collected in dinars, which posted 69.5% at end 2013 increased to 74.7% at end 2014 and to 83.7% at end-2015; indicating a decrease in the surplus of funds raised by banks compared to credit granted. The evolution of credit, especially medium and long term credit in situation of stabilization of collected deposits in dinars is the main reason for the decline in the short-term liquidity ratio of public banks. Indeed, deposits in dinars, monetary deposits and guarantees collected by banks, which increased in 2013 (7.53%) and 2014 (17.49%), recorded a slight drop in 2015 (-0.18 %) due to a sharp contraction of deposits of the hydrocarbon sector (-41.09%) and slower growth in deposits of non-hydrocarbon sectors (4.11% versus 14.20% in 2014). Therefore, the liquidity of banks declined throughout 2015 (-32.9%) to 1,833 billion dinars, following relative stability in 2014 (2,731 billion dinars at end 2014). Bank liquidity further deteriorated in 2015, impacted by the sharp drop in deposits collected from hydrocarbons sector as well as from non-hydrocarbon sectors. As a consequence of the contracting liquidity of some banks, the interbank money market recorded an increase in the volume traded (315.5 billion dinars at end March, 370.5 billion dinars at end June versus 96.5 billion dinars only at end 2014. However, in the third quarter the volume decreased (170.5 billion dinars), followed by a relative stabilization at end 2015 (150.5 billion dinars). Also, given the depletion of excess liquidity and in order to further boost the interbank money market, Bank of Algeria started to gradually reduce liquidity 6
withdrawal operations. Banks and financial institutions are expected to return to refinancing operations with Bank of Algeria by end 2016. 4. The significant disinflation recorded in 2013 and 2014 came to a halt in 2015. In annual average, inflation is again on the rise, reaching 4.4% for the national consumer price index (CPI) and 4.8% for the CPI of the Greater Algiers, in respective increases of 0.6% and 1.9% with respect to 2014.The index base year is 2001 with a level of 100 points. These indexes increasing to 186.466 and 176.1 respectively at end 2015. Structural inflation, which excludes goods with volatile prices such as fresh agricultural product is also increasing in trend since February 2014, reaching 4.8% on annual average in December 2015 versus 2.7% in June 2015 and 2.2 % in December 2014. In 2015, as in previous years, prices of imported agricultural products continued to decline at double-digit annual average rates, notably the price of wheat (- 25.8% to 225 dollars per ton) and milk powder (2,508 dollars per ton (-35.2%). For other goods, year-on-year decreases in prices varying from -2.9% (sunflower oil) to -26.6% (U.S. wheat). The national index of unit value of imported foodstuffs fell 2.5 % to -0.2 %, contrary to the global index which increased 2.9 % in annual average. In 2015, products with high import content and relative weight of 23.4%, contributed about 7.2% to the growth of the CPI, a sharp increase from the previous year in which the contribution was negative at -0.7%. In 2015, the historically low monetary expansion (M2) of 0.1% and the sharp deceleration from 14.6% achieved in 2014), seems not to be the source of the upward momentum of inflation, in situation of limited depreciation of the nominal effective exchange rate of the dinar. Consequently, the extent of inflation this year could neither be explained by the expansion of money supply, the rate of which was almost zero, nor by the inadequacy of supply to demand, nor changes in world prices. It is rather appropriate to investigate underlying causes in market dysfunctions, particularly as regards the market of fresh agricultural products, characterized by limited traceability of transactions and poor regulation. Finally, the opposing trends in prices, increasing domestically and decreasing in the Euro area, have resulted over a period of one year of enlargement of the inflation differential on annual average to 4.8% (2.8% at end 2014). 7
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