In a year of dramatic political change, Algeria and Morocco are the only two major economies in the North Africa region to remain relatively unscathed. But although both regimes have stayed intact as those around them have collapsed, the economies of the two countries have not been unaffected by the political turmoil.

Algeria and Morocco share characteristics with their neighbours that give their governments no reason to believe they should be immune from the popular uprisings engulfing the region.

 Underlying political issues

Both countries have a parliamentary system and elections have largely been free and fair. But in practice, they are autocratic in nature, with executive power concentrated in the hands of President Bouteflika in Algeria and King Mohammed VI in Morocco. Civil society is much more developed in Morocco than Algeria, but rights are still limited. Neither regime has been able to satisfy longstanding demands for greater political participation and improved standards of living.

In Algeria, prospects for growth will depend on oil earnings and investment in the non-hydrocarbons sector

In 2010, the unemployment rate was more than 10 per cent in Algeria and 9 per cent in Morocco, while joblessness among the young in both countries is estimated to be considerably higher. Despite the benefits of substantial oil and gas revenues, average gross domestic product (GDP) per capita in Algeria is less than $7,000 a year, while that in Morocco, which does not benefit from such a wealth of natural resources, is about $3,000 a year.

The combination of rapidly rising food prices at the beginning of the year and the success of protest movements in neighbouring countries, has resulted in Algeria and Morocco experiencing considerable civil unrest in recent months. In February and March, hundreds of protesters marched in the capital Algiers and other key Algerian towns demanding regime change. Political demonstrations in several cities in Morocco in mid-May, attracted thousands of protests.

Algeria GDP by sector, 2009
(Percentage)
Oil and gas  32
Agriculture 9
Industry 5
Construction and public works 11
Services 37
Other 6
GDP=Gross domestic product. Source: Central Bank of Algeria

In both cases, demands for economic reform have been every bit as strong as those for political change. In recent weeks, Algeria has seen a wave of strikes in almost every segment of the economy, from students and teachers to oil and gas workers and policemen. Trade unions in Morocco, which joined labour day protests on 1 May, have meanwhile distanced themselves from the 20 February movement, which is demanding political change. But they continue to press for social and economic concessions.

Hydrocarbon reserves and production in Algeria
Oil production (thousand barrels a day) 1,811
Oil reserves* (billion barrels) 12.2
Oil proven reserves* (share of world total) 0.9
Gas production (billion cubic metres a day) 81.4
Gas proven reserves* (trillion cubic metres) 4.5
Gas proven reserves* (share of world total) 2.4
*At end of 2009. Source: BP Statistical Review of World Energy

Despite the disjointed nature of the protests in both countries, neither regime is prepared to take the risk of the movement for political change on the one hand and for socio-economic progress on the other forming a united front of the kind that helped to topple the regime of President Ben Ali in Tunisia in January. The authorities in Algeria and Morocco have been quick to offer financial concessions in an effort to soothe the protest movements. 

Financial concessions

In early January, Algiers lifted the 5 per cent import duty and 17 per cent value added tax (VAT) on basic foodstuffs, including sugar and cooking oil, until 31 August. It also announced measures to regulate the price of selected food and industrial products. In early May, the cabinet approved its draft mid-year budget, formalising the changes and extending the suspension of duties and VAT until the end of 2011.

Morocco enjoys a strong track record of macroeconomic management and years of solid growth

Maria Malas-Mroueh, Fitch Ratings

Algeria’s interim budget increased expenditure by 25 per cent to help cover the food subsidies, a public sector pay rise and new measures to accelerate the creation of jobs and the construction of housing for young people. Similarly, in Morocco, a 10 per cent rise in the minimum wage and an increase in public sector salaries came into effect on 1 May in the latest of a series of economic concessions made by the government since the beginning of the year.

The burden of this additional spending will weigh heavily on the fiscal balance of the two countries. The deficit in Morocco’s general government balance is expected to increase from 2.6 per cent in 2010 to 3.1 per cent in 2011, compared with a surplus of 5.5 per cent as recently as 2006, according to US’ rating agency Fitch Ratings. Algeria’s balance, which had already fallen from several years of surpluses to a deficit of 3 per cent in 2010, is expected to remain in the red, with a deficit of 2 per cent in 2011.

Overall, economic growth in both countries will be constrained by the domestic and regional political environment. But beyond that the drivers for growth diverge. In Algeria, prospects for GDP growth will depend on oil earnings and investment in the non-hydrocarbons sector. In Morocco, growth will be influenced by the country’s vulnerability to high oil prices and its ability to attract international investment. 

Oil income in Algeria

Algeria is fortunate that at a time when it has been forced to boost spending, oil prices have also increased. A 6 per cent decline in hydrocarbons output in 2009 meant that Algeria’s GDP growth fell to just 2.4 per cent in 2009, before recovering to an estimated 3.3 per cent in 2010. The increase in oil prices resulting from lost supply from Libya and stronger global demand in 2011 is expected to result in a surge in the current account to 6.5 per cent of GDP in 2011, from 3.5 per cent in 2010. Overall, the economy is expected to expand by 3.6 per cent in 2011, with growth held back by dampened consumer spending and reduced private investment.

Since 2009, the Algerian government has introduced a series of economic policies, which limit the scope for foreign companies to invest in the country. They include the introduction of a 49 per cent upper limit to the share an overseas firm can hold in a local joint venture; limitations on the repatriation of dividends; a tougher tax regime; and additional conditions for companies wishing to import goods or services into the country.

As a result, foreign investment outside the hydrocarbons sector has fallen dramatically. The number of investments proposed by foreign firms fell from 102 in 2008 to just four in 2009, according to Agence Nationale de Developpement de l’Investissement, the local investment agency. There were no more than a handful of proposals in 2010 and few are expected in the coming year, according to industry sources.

As a result, the prospects for non-hydrocarbons growth in Algeria in the medium term will rely heavily on the government’s plan to invest $286bn in infrastructure between 2010-14. The programme is expected to underpin a sustained period of GDP growth of about 4 per cent a year. But the government’s failure to complete its 2005-09 spending programme, which at $150bn was considerably smaller, means there is a great deal of scepticism over its ability to deliver the programme in full.

Morocco, an importer of hydrocarbons, is expected to show some resilience in the face of rising global oil prices. Its economy was already under strain in 2009-10 due to the secondary effects of the downturn in the Gulf and Europe on the kingdom’s construction market and tourism industry.

GDP growth slowed from 5.6 per cent in 2008 to 4.9 per cent in 2009 and 3.2 per cent in 2010. A gradual pick-up in the construction and tourism sectors is expected to underpin growth of 4.7 per cent in 2011 and 5.2 per cent in 2012, according to Fitch. It is the only country in the Middle East and North Africa region that has not been downgraded by the agency since 2011.

“The country enjoys a very prudent and strong track record of macroeconomic management and years of solid growth, which is very difficult to achieve in the region,” says Maria Malas-Mroueh, a director in Fitch Ratings’ sovereign team.

“There has been an investment in public infrastructure and an effort to diversify into higher value-added sectors, such as outsourcing and car parts.” 

Gradual recovery for Morocco

In the context of regional political uncertainty, rising energy prices and a world economy that is still recovering from the crisis of 2008-09, the forecast growth rate is impressive.

But it remains a long way off the 7.8 per cent growth enjoyed by Morocco in 2006, before rising commodity and energy prices, and later the global downturn, began to bite. The recovery from these setbacks will be a gradual one. Ambitious plans for a series of new tourist resorts along the Moroccan coast, known as Plan Azur, have fallen far behind schedule, while others remain on hold pending the recovery of the European and Middle East companies that had signed up for the projects, say sources close to the market.

Morocco GDP by sector, 2010
Agriculture and fishing 16
Industry 15
Construction and public works 5
Trade, hotels and restaurants 12
Transport and communication 11
Financial services 5
Services 26
Other 10
GDP=Gross doemstic product. Source: Ministry of Finance

“It’s not because investors don’t want to come, it’s because they have to focus on their main market,” says Rachid Alami, a director at Upline Securities, a local brokerage service.

“They need first to reorganise their strategy and stabilise their historic market. On the other hand, it’s a good time to invest in Morocco at the moment, because in a couple of years you won’t be able to get the same value.”