Sovereign Bond Issuance in Algeria

Bond issuance backed by Business Leaders :

Interim results mixed fortunes . . .

The purpose of this brief contribution is to ask questions starting with this one.  What are the provisional results of the Sovereign Bond Issuance in Algeria, operation endorsed and supported by the Forum of Business Leaders (FBL), as at June 30^th, 2016 ?

An introduction such as per Trading Economics, is necessary.  “Algeria recorded a Government Debt to GDP of 8.76% of the country’s Gross Domestic Product in 2014.  Government Debt to GDP in Algeria averaged 47.72% from 1991 until 2014, reaching an all-time high of 116.20% in 1995 and a record low of 8.32% in 2013.”

1. The bond launched by the Algerian Government in April 2016, so as to first try and limit past and actual budget deficit whilst recouping some of the massive amounts of liquidity outside the country’s conventional economy. It is set with a variable 5 to 5.75% interest rate and there is no capping limit that is fixed for this State debenture bond.

According to the Algerian Press Service (APS), the balance sheet as at end of June 2016 was at DZD251 billion, ($2.10 billion), with the majority of these subscriptions having been recorded in local bank branches and insurance companies offices, whilst the various governorates’ treasuries have collected about 1%.

2. The Forum of Business Leaders (FBL) which declared a total membership gross turnover of $30 billion in 2015, has managed to gather commitments of subscription to the Bond issue for an amount of DZD150 billion, or at the current rate $1.25 billion. Hoping that this campaign could still carry on mobilising more important commitments, this amount, if not inflated for reasons discussed earlier, would cover no more than one strategic product import.  This would also mean that Algeria, would still be dependent on hydrocarbons.
3. What is the percentage of the members of the FBL meaning private operators and non-public who have subscribed to this operation ?
4. What is the significance of this amount in relation to the balance of payment deficit anticipated for end 2016?
5. Doesn’t this amount duplicates with that amount of $2.10 billion announced by the APS ?

With regard to the promises of subscription of the FBL, the amounts reported by the press as that of the Algerian Trade Unions (UGTA) as at DZD25 billion and public banks and the institutions of the State have endorsed them and on their behalf to DZD45 billion, or 40% of the total ?

In the case of the state subsidised UGTA, interests are reported depending on whether the rate is 5 or 5, 75% between DZD144 and 125 billion centimes annually.

6. Is this amount not the result of generalised withdrawals from banks only to place these at a more advantageous rate; a transfer of the real sphere towards the real sphere while the objective was other ?
7. Further to the previous question, what is the share of the equity of policyholders always in relation to the private operators?
8. The information as reported in the Algerian Media indicates that out of 800 listed companies, only 380 of them took part and that the number of subscribers by commitment is 267 and are confirmed by the FBL, with the understanding that it is still a commitment and not a real subscription ? The private sector of the FBL represented 60% of the total pledges, i.e. $900 million.  And if the contribution of ten to fifteen private operators of insurance and mobile telephony operators were taken into account, there would be over 80% on these 60%.
9. The bond subscriptions are accepted as a guarantee for bank credit, in this context would it not mean ending up in a speculative operation that could increase the Public Treasury deficit; borrowing used to underwrite new loans through banks at 2 / 3%, while benefiting from a 5 to 5.75%.  Banks could before a lack of liquidity, be requesting the Central Bank to resort to monetary emission thus increasing inflationary pressure in the long term with possibility of the deficit exceeding $30 billion by end of 2016 ?
10. I recall that in many contributions during May and June 2016, reminding that the bond to be successful should:

• Firstly, the interest rate to be higher than the rate of inflation. Otherwise, the purchase of hard currency, gold or real estate would gain priority.
• Secondly, there is need to avoid the accelerated skidding (devaluation) of the Dinar which indirectly would impact both the production costs of public and private undertakings and the purchasing power of households. A devalued Dinar by 30% because of taxation would come down to consumers with an increase of more 50%.
• Thirdly, for greater transparency, the creation of an investment fund into which this loan would be channelled so as to avoid this capital goes to feed the budget deficit and alleviate the exhaustion of the Regulatory Fund revenue.
• Fourth, as a synthesis of actions, what is required is microeconomic and institutional reforms from which both mechanical illusion of the 1970s as well as a certain legalism meaning making laws to confront any problems, are to be avoided.

Algeria has experienced several Investment Codes, various organizations since political independence and devaluations from DZD5 a Dollar circa 1970/1980 to more than DZD110 a Dollar in June 2016.  Devaluation of the Dinar should have normally lead to a revitalization of non-hydrocarbon exports.  Algeria still a mono-exporter upto 97 / 98% of hydrocarbon and derivatives is proof enough that the way out of this can only mean going through profound reforms involving all components of society.

And finally, a national debenture bond is obviously supported by future generations who bear the costs, if its returning yields could not reimburse all capital and interests.

In the meantime, let us recognize that in 2016, for historic reasons of a constrained business environment, the private sector operating in the real sphere in Algeria having either limited financial means and / or being in bank overdraft situations, would perhaps explain the mixed fortunes provisional results.

Would not the recently made largest fortunes be from within the informal spheres, together with those important fortunes built abroad like purchase of assets or deposits in tax havens, all through informal financial intermediation at usury rates ?

Dr. Abderrahmane Mebtoul, University Professor, Expert International,  ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL  faro@farolco.onmicrosoft.com