While nearly all of Algeria's foreign trade and investment continues to revolve around the hydrocarbons sector, this picture is set to change. In a series of agreements discussed or concluded in the past six months, authorities have focused on promoting foreign investment in local value-added activities, which should help to diversify sources of national income and reduce dependence on oil and gas.
Algeria has emphasised the potential of the non-hydrocarbons economy for some time, but recent developments, including a decline in global oil prices, have lent an added urgency to these efforts. For the first half of 2013, the value of oil exports fell by $2.1bn, or 7%, year-on-year, contributing to a decline in the trade surplus, which dropped from $13.9bn to $7.6bn, according to the National Centre for Customs Statistics (CNIS).
Hydrocarbons production levels also dipped in the first half of 2013 due to a temporary pause in operations at the In Amenas gas plant, which was the site of a terrorist attack in January. In Amenas accounts for an estimated 10% of Algeria's natural gas production when operating at full capacity.
The global market is becoming tighter as well. Consumption growth in Europe, Algeria's largest export destination, is slowing and even once global prices and national output improve, OPEC members predict they may lose some market share in 2014 as US production of shale gas increases.
As a result, the country is looking to diversify activity into the secondary and tertiary sectors, in part to help stabilise revenues but also to spur job creation.
Manufacturing has been one of the key areas of this push. Industrial production has become a major economic driver in Morocco and Tunisia, both of which have attracted significant investments from foreign producers in the aeronautics and automotive component segments. Algeria has been looking to catch up, announcing last year the establishment of a new Renault factory that would churn out 25,000 vehicles beginning in 2015.
In July of this year, two German motor manufacturers, DEUTZ and DEFGA, signed agreements with local firms for the production of tractor and vehicle engines. Combined, the two deals call for the supply of 7500 engines for construction and agricultural machinery, as well as an unspecified number of engines for military vehicles. According to statements from the parties involved, these partnerships will facilitate the transfer of technology and training to local employees, providing a boost to industrial activity.
In an effort to diversify its economic relationships away from its traditional European partners Spain, Italy and France, Algeria is also developing partnerships in Asia. China has come to play a greater role in the Algerian economy in the past decade, with increased trade between the two countries, a number of road construction and other infrastructure projects awarded to Chinese firms, and the establishment of reciprocal study programmes. Algeria is the fifth-largest recipient of Chinese FDI in Africa, following South Africa, Sudan, Nigeria and Zambia.
The relationship with China will likely continue to be dominated by energy exports and the import of finished goods. However, Algeria is also working to channel the countries' growing economic ties into local value-added industries. Most recently, Algeria inaugurated an "innovation centre" for long term evolution (LTE) technology research and development in partnership with the Chinese telco equipment firm Huawei.
Algerian officials have also identified South Korean businesses as potential investors. During a July meeting between the Algerian Ministry of Industry and the South Korean ambassador, the minister of industry, Chérif Rahmani, called on South Korean operators to contribute their technological expertise to the development of industrial operations, particularly in chemical, pharmaceutical and mechanical manufacturing. A joint Algerian-South Korean task force has been charged with developing future investment proposals and a number of firms, including Samsung, are already active in the country. A Samsung Electronics factory in Setif, operational since 2010, manufactures flat-screen televisions, washing machines and refrigerators.
The oil and gas industry has allowed the state to amass considerable financial reserves. Ongoing efforts to stimulate both foreign and domestic investment in high-potential sectors such as manufacturing, mechanics, pharmaceuticals, tourism, agriculture and telecoms should help open up new avenues for revenue, as well as provide the capital inflow and knowledge transfers necessary to jumpstart growth.
© Oxford Business Group 2013
