Algeria’s foreign reserves decline despite high oil price

Analysts predicted Algeria’s foreign reserves would shrink due to import bills.
Sunday 01/07/2018
Containers sit stacked at a port terminal in Algiers. (Reuters)
Containers sit stacked at a port terminal in Algiers. (Reuters)

TUNIS - Algeria’s foreign currency reserves shrunk $7.3 billion in the first five months of 2018 despite soaring oil prices. The drop, analysts said, was due to increased defence spending and the appreciation of the US dollar, which caused the stock of foreign currencies to decline.

Last December, Algeria’s reserves stood at $97.3 billion but totalled $90 billion by the end of May, Algerian Prime Minister Ahmed Ouyahia announced. He said reserves were expected to decline to $85 billion by the end of the year “due to import bills of goods and services.”

Ouyahia urged the country to stop reserves from declining, cautioning that oil and gas prices were likely to fall in the future.

Oil and gas exports account for more than 95% of Algeria’s foreign currency earnings. Oil prices went up their largest amount in nearly two years after some of the world’s major oil producers agreed to boost crude production less than many market analysts and investors expected.

OPEC ministers concluded a gathering on June 22 with a promise to boost output about 600,000 barrels a day, less than the 1 million barrels market watchers had predicted. However, the move was cheered by Algeria and other countries, which say they feel more confident the global glut that dragged oil prices to less than $30 a barrel was not about to return.

Oil prices surged more than 4% to $68.58 a barrel on the US market, while the price of Brent, the international benchmark, rose 3.4% to $75.55 per barrel. That was the biggest one-day jump since November 2016, when OPEC agreed to cut oil output for the first time in eight years.

Oil prices have risen this year as the global economy grew and unexpected supply outages hit Libya and other producers.

OPEC said its members reached an agreement with non-OPEC partners to loosen compliance with production curbs set in 2016 to increase market volume. The 2016 cuts helped boost oil prices to a three-and-half year high earlier this year.

Algeria’s high-quality Saharan Blend crude oil sold at an average of $75 per barrel over the past five months.

“Algeria needs to see oil prices steadying above $75 per barrel as it can benefit further from additional output capacity by the end of the year,” said Algerian energy analyst Ali Kefaifi.

Analysts predicted Algerian foreign reserves would shrink despite the rise in oil earnings due to import bills, which are expected to increase despite government measures, such as a ban on importing more than 800 products that took effect in January, to cut them.

Economist Hassan Haddouche and other experts predicted Algeria’s foreign currency reserves would drop by more than $17 billion, year on year, in December despite gains from oil prices. They cited high imports, defence spending and the rising value of the US dollar against the euro as the main reasons reserves would fall.

“This trend will lead us without risks of error to a level of reserves of slightly more than $88 billion at the end of the first half of this year,” said Haddouche. “The level of reserves will be in reality close to the threshold of $80 billion at the end of the year.” He estimated the country had spent around $3 billion on weapons imports during the first five months of the year.

Algeria’s foreign currency reserves were long kept in US dollars following independence but the Central Bank has since diversified, keeping half of the reserves in euros and the other half in dollars. As a result, a shift in the currencies’ values can significantly affect reserves, a phenomenon known as the valorisation effect.

“The valorisation effect would cause Algeria’s foreign reserves to decline by $2 [billion] or $3 billion by the end of this year if the US dollar is to continue its strengthening experienced in the first half of this year,” said Haddouche.

Recent developments indicate US currency has more momentum than the euro, analysts said. The US economy is expected to benefit from President Donald Trump’s tax reforms and other stimulus policies.

Algerian experts warned that reserves would fall sharply even when oil prices climb. They said the country would have less oil to export because of domestic consumption and would not maximise production due to nationalist economic policies that are prohibitive to foreign investors.