Algeria was able to weather the economic crisis fairly well due to its reserve funds created by its Hydrocarbon sector.  In fact, the Hydrocarbon sector is its primary sector.  Algeria experienced 2.1% GDP growth in 2009 down from 3.0% in 2008, according to the World Bank.  Algeria’s economy is expected to grow 3.9% in 2010 and 4.0% in 2011.

Algeria also maintained a stable position, during this period, due to low external/internal debt and low inflation while being able to maintain reserve funds.  However, due to its heavy dependence on its Hydrocarbon sector, its revenues were hit significantly when the Hydrocarbon sector softened.  Therefore, there are signs of strain.

First, the government’s budget surplus has been hit drastically.  Algeria maintained a budget surplus of over 8% of GDP in 2008, but this may turn to a deficit of over 8% in 2009, according to the International Monetary Fund (IMF).

Second, inflation has risen to 5.8% caused by a rise in fresh food prices.  Without accounting for fresh food, inflation is only 1.4%.  While on the rise, Algeria is still experiencing single-digit inflation compared to double-digit inflation experienced in the last few years by other African countries like Kenya.

Third, Algeria’s current account balance went negative to -3.4% of GDP in 2009 while it was positive and exceeding 20% of GDP from 2006 through 2008.  In the short-term, the current account balance is expected to return positive with modest numbers of 2.7% of GDP in 2010 and 5.6% of GDP in 2011, according to the World Bank.

Amidst the strains, Algeria’s economy is growing.  Outside of the Hydrocarbon sector, Algeria’s growth was good in 2008 and 2009.  Non-hydrocarbon sectors grew at 6.1% in 2008 and may report 9% for 2009, according to the IMF. 

This growth was primarily due to a government program called the Public Investment Program (PIP).  In the short- to mid-term, the PIP will fuel the growth in Algeria’s economy.  For example, the construction sector, a beneficiary of the PIP, experienced 10% growth in 2008.  Expect growth in non-Hydrocarbon sectors to fall off when public spending, through the PIP, levels off or decreases.

Overall, Algeria’s economy is divided into three key sectors €” industry (62.5%), services (29.4%), and agriculture (8.3%).  The industrial sector activity is heavily dependent upon the oil and petroleum industry.

While Algeria’s short to mid-term outlook is good as long as there are no significant shocks, it cannot maintain or grow the economy in the long-term with government the primary engine of growth.  For the long-term, Algeria’s challenge is to diversify the economy and strengthen the private sector.

While the economy is favorable for business, the business environment has been more difficult for foreigners to navigate.  For example, Algeria has increased import restrictions and now requires foreign firms to enter joint ventures in which 51% is owned by Algerian nationals. 

The overall business environment, may hamper future investment and business opportunities.  However, high growth sectors like construction at present may provide significant rewards that outweigh the risks.