Outlook for 2011-15

• The president, Abdelaziz Bouteflika, will continue to dominate political decision-making until the end of his mandate in 2014. We expect tensions within the political leadership to persist, particularly over succession.
• The threat from Islamist militants will remain but is unlikely to destabilise the government. Civil unrest over poor economic and social conditions for many Algerians will be a more pressing concern for the government.
• The government is committed to a large five-year investment programme aimed at developing the skills base and improving infrastructure. We forecast small fiscal deficits, averaging 3.1% of GDP, throughout the forecast period.
• Real GDP growth will average 4.1% in 2011-15 on the back of government spending and investments in the energy sector. Weak demand in Europe for hydrocarbons and lower gas output will act as a damper on growth.
• Banque d'Algérie (the central bank) operates a managed float of the Algerian dinar. We expect it to gain ground on the euro in the forecast period, making imports of food in particular cheaper.
• Energy exports will continue to dominate the current account. The services and income deficits will expand as energy and construction companies repatriate profits. Nevertheless, we expect current-account surpluses in 2011-15.

Monthly review

• Said Bouteflika, the brother of the president, is reported to be selected as the head of a new political party. Said has neither confirmed nor denied the appointment.
• Algeria's place in the Economist Intelligence Unit's democracy index has improved slightly owing to a strong political culture and relatively free press. The strengthening of the executive keep it classified as authoritarian however.
• The energy minister has announced that Algeria will pursue an alternative energy strategy. Algeria plans to have 40% of electricity sourced from alternative sources by 2020.
• The sale of Djezzy, the local brand of Egypt-based Orascom Telecom, will probably go to arbitration, as neither the government nor Orascom appear able to find a middle ground on price or conditions for the sale.
• The government has not authorised BP, a British oil and gas company, to release data about its Algerian operations. The government's hindrance may mean BP will have a difficult time selling its gas operations in the country.
• The government expects growth of 4% in 2011. The government's forecast of large fiscal deficits seems unlikely, given the low budgeted oil price.

The president, Abdelaziz Bouteflika, won a third term in office in 2009, which will run until 2014. He faces challenges from across the Algerian political scene, as liberals and Islamists resent their exclusion from the political process, weakening the ruling three-party coalition known as the presidential alliance. A cabinet reshuffle in 2010 removed several allies of Mr Bouteflika from the government, with long-serving technocrats taking their places. Speculation continues about divisions within the ruling coalition and about whether disagreements within the country's leadership led to the replacement of the senior management at Sonatrach, the national oil company, in January 2010, following a corruption inquiry. The Economist Intelligence Unit expects rumours about further political change to continue during 2011-15.

The re-election of Mr Bouteflika required constitutional amendments to abolish the two-term limit for incumbents. Although the amendments were passed by an overwhelming majority in parliament, they were harshly criticised by liberal commentators in the local press on the grounds that they concentrate power in the hands of the president. The role of the prime minister was weakened by the constitutional amendments, but Ahmed Ouyahia, the current prime minister, appears to have a strong relationship with the president. There has been criticism that some policies, particularly economic ones, have been decided nearly exclusively by the president and the prime minister and presented to the cabinet without consultation. We expect Mr Ouyahia's role to become increasingly important. He is one of the few credible candidates to succeed Mr Bouteflika.

Social unrest will continue to be a concern, with riots in several cities and public- and private-sector workers organising frequent strikes. High unemployment, poor social conditions and a lack of economic initiative from the government will continue to add to disaffection and cause sporadic outbursts of social unrest. However, the government will continue to pay heed to the prominent role unions play in several key industries. Steel and port workers disrupted the economy in 2010, and the government's increasingly nationalist economic policies appear to have won the support of several major labour groups.

Price riots spread across the country

Algeria has become the second country in North Africa, after Tunisia, to be hit by riots by youths protesting at economic privation. Rising commodity prices, high youth unemployment, and resentment at authoritarian rule and elite corruption have proved to be a combustible mix across this region. But whereas Tunisia has suffered owing to its economic integration with a struggling EU, which has contributed to a halving of its growth rate, the Algerian government's failure to make more effective use of a massive oil and gas windfall is one of the principal underlying causes of the recent unrest in its major cities.

One of the main flashpoints has been the Bab el-Oued neighbourhood of the capital, Algiers, the site of many similar popular protests in the past, mostly notably in October 1988 when several hundred people were killed in what turned out to a defining moment in the country's slide into civil war in the subsequent decade. El Watan, a local French-language daily, quoted one protester as saying that the "apparatchiks are skimming billions and getting rich off our backs. We no longer want this life of a dog." In Oran, a major city in western Algeria, youths protested in the downtown area, blocking it off by burning tires and setting up barricades. Police and drivers were attacked with stones and Le Quotidien d'Oran, a local paper, reported the looting of sacks of flour from a depot. Most merchants shut down in the early afternoon of Wednesday for fear of looting. By the evening, police in Oran said that the situation was under control. Rumours of a flour shortage run contrary to statements in late December from the director of the Office algérien interprofessional de céréales, the state grain buyers, that the country had sufficient wheat stocks to cover demand until the end of the first quarter of 2011.

A statement from the Ministry of Commerce in reply to the demands of the protesters to bring prices for sugar and cooking oil in particular under control, said that "mass consumption products would continue to be subsidised by the state". The office of the prime minister announced a series of measures on January 8th that will exempt some commodities from value-added tax (VAT) and import duties as a means of lowering prices. These policies aren't new in Algeria; prior to the Islamic holiday of Ramadan this year, the government set up an agency to control the importation of meat into the country and to monitor its distribution. Nevertheless, there was still serious criticism in the press and among Algerians of massive price rises during the holiday.

Issad Rebrab, the head of Cevital, one of Algeria's largest private companies and a major food distributor, warned of further increases on the global markets of both sugar and cooking oil prices. Mr Rebrab said that he would make a proposal to the government to discuss "fixing" the prices of commodities in the local market, while stressing that fluctuations were due to international price movements and not speculative opportunism by wholesalers and retailers.

Social unrest is not uncommon in Algeria but the intensity and geographic spread of these riots is significant. Strikes are relatively frequent and can seriously disrupt economic activity in the country. In early January dock workers at the Algiers port ended a strike after they were threatened with dismissal by the Algiers Port Company, according to a statement on Algérie Presse Service, the official news agency. In 2010 protests by steel, rail, dock and oil industry workers hampered activity in the country and demonstrated the strong leverage unions have over the government. In the past few years, Algeria has announced several economic policies that promote domestic production over foreign involvement in the economy, even if the use of local resources is more expensive.

Youth unemployment, particularly among university graduates, is a major concern in all countries of the Maghreb. According to Algeria's official statistics agency, total unemployment has come down from over 30% to 10% in the past decade, but one in five people in the 16-24 age group were unemployed as of end-September 2010, and 22% of graduates were out of work. The government is attempting to cut down on these numbers through a massive investment programme, with elements specifically aimed at increasing the skills base of the population. However, with Algeria's economy dominated by the hydrocarbons sector, which is capital-intensive but requires relatively little labour, there are few opportunities at present or likely in the medium term to address this job shortage.

The military elite's influence over the political process during the 1990s has largely been curbed by Mr Bouteflika, but the military retains the ability to challenge the president's policies. The cabinet reshuffle removed several ministers whose zeal for economic reform was not particularly effective. The president has, however, played a key part in the gradual transformation of Algeria since he came to power in 1999, notably by using the authority of his office to marginalise senior members of the military old guard, le pouvoir, who used to be the major powerbrokers in Algerian politics, and strengthen civil leadership.

Sporadic attacks by armed Islamists will remain a security concern for Algeria. A small, radical Islamist organisation, al-Qaida in the Islamic Maghreb (AQIM, previously known as the Groupe salafiste pour la prédication et le combat), continues to carry out attacks on the state, including assaults on the military, state representatives and the offices of foreign businesses. The government has launched new operations to eliminate militant groups and is co-operating with its regional partners to exert control over the large Sahara region in which much of AQIM operates. Security installations around foreign-owned operations and the capital, Algiers, have been strengthened. However, we do not expect the militants to pose a serious threat to political stability.

Succession will be the dominant risk to domestic political stability towards the end of the forecast period. At present it is unclear who will take over the leadership after Mr Bouteflika's current term expires or if the 73-year-old president will be well enough to complete his term in office. Mr Ouyahia is a likely candidate to succeed the president, but the possibility of Mr Bouteflika's brother, Said, taking a larger role seems to have increased recently as he is reported to be the head of a new political party. Civil unrest is likely to moderate towards the end of the forecast period as living standards in Algeria improve and the country opens up to greater economic and political integration with its European and regional partners.

The next parliamentary election is scheduled for 2012, and we expect the results to be broadly similar to those in the previous election in 2007. The Front de libération nationale (FLN), historically Algeria's ruling party, will continue to lose ground as the dominant political force in the country and will probably see an internal shake-up before the election. Internal conflict within the party is growing, with reports of violent altercations between party members, and the status of the party secretary-general, Abdelaziz Belkhadem, looks increasingly untenable. The Rassemblement nationale démocratique, the party of the prime minister, and opposition parties, including the Front national algérien, a conservative party, will probably gain more seats in the next election. The presidential election is supposed to take place in 2014. Parliament ratified a change to the constitution in 2008 that allowed Mr Bouteflika to run for a third term; it is possible that it could be changed again to allow him to stand in the next election. Mr Belkhadem announced the support of the FLN for Mr Bouteflika for another term in late December 2010.

Algeria will continue to be a major regional ally of the West in the campaign against Islamist militancy, and will be the main military force behind efforts to weaken AQIM in its Saharan and Sahel neighbours. Relations with the EU will be stable, as Algeria supplies some 25% of the EU's gas imports and security of supply from Russia remains a concern. Relations with France will continue to be strained by underlying resentment about French actions during the colonial era and attitudes after independence, but will remain important, given that France is Algeria's largest trading partner and hosts a large Algerian diaspora. However, recent French-supported military operations against AQIM will create concern in the Algerian military over what it perceives to be foreign intervention in Algeria's backyard. Algerian-US relations will continue to be focused on dealing with militant Islamism, and on oil exports from Algeria. Russia has also signed military equipment deals with Algeria, notably to supply fighter aircraft.

Regional relations will continue to be difficult so long as there is no resolution to the dispute over Western Sahara. Algeria supports the main group campaigning for the independence of the territory, but Morocco is committed to maintaining sovereignty over Western Sahara. An open confrontation between the two countries is highly unlikely, and Algeria does have diplomatic relations with Morocco, despite a closed border. However, the dispute will make any meaningful Maghreb-wide economic co-operation unlikely.

Algeria will maintain tough restrictions on foreign investment in 2011-15 in an effort to protect its national economic interests and to promote domestic industries. Since 2009 the government has taken an increasingly restrictive line towards foreign investment in the country through a variety of measures including a tougher tax regime, a limit of 49% on foreign ownership and policies to reduce the amount of imports coming into the country. The hydrocarbons sector will receive preferential treatment, with projects likely to get under way again in the first half of 2011 after major upheaval in 2010, when the chief executive of Sonatrach and much of the leadership were removed, following charges of corruption, and the energy minister was replaced.

The privatisation or consolidation of small state-owned firms is unlikely to proceed with much enthusiasm over the forecast period. Limited capital market financing for domestic private firms and foreign-ownership caps mean there are few possible buyers of public enterprises in any case. A rumoured sale of a stake in Algérie Télécom, a state-owned operator, was quickly denied by the technology and communications minister. The state will assume a large role in the telecommunications sector as the government proceeds with its acquisition of the local mobile-phone operations of Egypt's Orascom Telecom. Algeria's private sector is comparatively small because of the security problems of the 1990s, the underdevelopment of financial services and excessive bureaucracy. The government is attempting to address these issues, but private-sector leaders have complained of the increasing role of the state in industry and of difficulties in obtaining bank finance or property.

The government will continue to restrict private credit to consumers, despite the IMF's recommendation that an expansion of credit was crucial to Algeria's growth prospects. At present, credit is extended only for mortgages and not for consumer goods such as cars. Most Algerian banks are highly liquid, having taken significant government deposits since 2004, and a credit reference bureau does exist, but we do not expect a relaxation of the consumer credit policy over the next 12 months.

Fiscal policy in the forecast period will be dominated by the state's ambitious five-year, US$280bn investment plan. This spending will focus on developing the non-hydrocarbons sector, improving infrastructure, expanding the local skills base and supporting small- and medium-sized enterprises. According to the government, these expansionary budgets will be funded exclusively from domestic sources. The government is committed to avoiding borrowing on international markets and will be able to cover the costs by drawing on the reserves in its oil stabilisation fund, the Fonds de régulation des recettes, which are around AD4trn (US$52bn). The government had pledged to invest US$150bn in a previous five-year plan but was unable to spend all the money, some of which has now been allocated to the 2010-14 plan. The government's patchy record of completing projects on budget does not instil much confidence that this new, larger programme will be implemented fully.

We estimate that Algeria recorded a small budget deficit in 2010 of 1.9% of GDP as back-dated pay rises for public servants were balanced by higher oil and gas revenue than in 2009. The government's draft budget for 2011 envisages a budget deficit of AD3.6trn, equivalent to nearly 30% of GDP. However, the government routinely uses conservative oil price assumptions, and we do not expect Algeria to meet all its spending commitments and therefore to record much smaller deficits. We forecast that the fiscal account will record annual average deficits of around 1.9% of GDP in 2011-12 as higher oil prices will offset increases in spending, and will average 3.2% of GDP thereafter, as the government turns its spending programme towards capital expenditure. Low forecast gas prices and sluggish investment in hydrocarbons will dampen government revenue in the forecast period.

The official policy aim of Banque d'Algérie (BdA, the central bank) is to control money supply expansion in order to contain inflation, although it does not publish its monetary growth target. High deposits from Sonatrach will keep liquidity in Algerian banks elevated and cause broad money (M2) to expand relatively modestly in the forecast period. The BdA will also need to use sterilisation policies to dampen the inflationary effects of rapid money supply growth. Much of the government's investment programme is likely to be financed through government-controlled banks, increasing the overall supply of credit to the economy but crowding out private borrowers and inhibiting some asset sales or retail purchasing. The BdA is expected to keep interest rates low, to encourage the development of the banking sector, preferring price controls to counteract inflationary pressures stemming from robust domestic demand.

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We expect economic growth in Algeria to average 4.2% in 2011-15, below potential given the country's resource endowment and demographics. Growth will be led by the state's investment package as the government tries to lessen the economy's reliance on hydrocarbons. In 2010 higher exports and minimal import growth will have helped the economy to expand by 3.9%. In 2011 a fall in international demand for energy, as a result of what we forecast will be a weaker economic performance in Europe, will keep growth moderate at 3.5%. The non-hydrocarbons sector will continue to expand throughout the forecast period, although its share of overall GDP means that this will not add significantly to overall growth in the economy.

Recent policies to limit imports and restrict credit will keep private consumption below potential given the relative wealth of the country, compared with regional peers. Infrastructure projects, such as expanding the housing stock and major road construction, are officially under way but are often subject to delays despite the availability of local, largely government, funding. Government spending has supported the economy in a difficult international environment, and expansion of the civil service and increases in public-sector wages will continue. Lagging investment in the energy sector, Algeria's economic engine, will drag on export growth. Restrictions on foreign investment will also keep international energy companies from investing in major projects.

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Domestic price pressures will remain high in 2011-12 (inflation will have averaged 4.4% in 2010) owing to robust domestic demand and monopolistic players controlling a number of product markets. A weaker euro should mean that some of Algeria's food imports, particularly from France and other euro zone trading partners, will become cheaper, but the uncompetitive import market will keep domestic prices high. We expect prices of wheat, of which Algeria is one of the world's largest importers, to rise by around 15% next year. Other factors adding to price pressures are high government spending, restrictions on imports and industrial action forcing the government to meet wage demands over and above the recent 25% increase in the minimum wage. The latter will lead to price rises and higher nominal wages at all salary levels. We expect inflation to average 4.2% in 2011 and 4.3% in 2012 as food stocks have been built up after a few years of good harvests. Inflation will begin to creep up again in 2013-15 as the government's investment strategy takes hold.

The BdA will continue to operate a managed float of the Algerian dinar, the aim of which is to maintain exchange-rate stability, particularly with the US dollar and the euro. A weaker euro:dollar rate in the forecast period will mean that the dinar will gain ground on the single currency, appreciating from an average of AD91.04:EUR1 in 2011 to AD81.46:EUR1 in 2015. However, the BdA may intervene to weaken the currency to limit imports of European goods and favour local producers. The dinar will weaken slightly against the dollar in 2011, averaging AD76.50:US$1 before appreciating to AD71.81:US$1 in 2012. Over the forecast period, the dinar will appreciate less rapidly against the dollar than it will against the euro. The central bank retains substantial foreign reserves to be able to maintain or lower the value of the dinar as it deems necessary.

We expect Algeria's trade account to post surpluses throughout the forecast period. Despite stronger domestic demand and higher commodity prices, especially for food and construction materials, the import bill has been contained by the government's stringent measures to cut down on import spending since 2009, as well as by a stronger dinar against the euro. Lower gas prices, mainly because of a currently well-supplied European spot market, mean that Algeria's export performance will not match that seen in 2008 until the later years of the forecast period. The trade surplus will average US$25.9bn in 2011-15.

Remittances will remain an important non-merchandise inflow but will be dwarfed by non-merchandise outflows, as efforts to develop the hydrocarbons, power, water and construction sectors continue to draw in foreign inputs. Profit repatriation, largely associated with the energy sector, will be the main debit on the income account, ensuring it remains in deficit despite earnings from Algeria's massive foreign assets (official and unofficial). We expect the current-account surplus to average 3.8% of GDP in 2011-12, lower than our estimate for 2010. It will then average around 2.3% of GDP over the remainder of the forecast period.

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Reports emerged in the national press in late 2010 that a political party is being set up under the leadership of Said Bouteflika, the brother of the president, Abdelaziz Bouteflika. Said Bouteflika "has accepted to be the president" of a new party, known as the Rassemblement pour la concorde nationale (RCN), on the condition that 2m signatures are collected in his support, reported Le Quotidien d'Oran, a local daily, on November 30th. According to the paper, the party was created at a meeting in Laghouat, in the Atlas mountains, 400 km south of the capital, Algiers, on November 25th. The collection of signatures has already begun and several branches of the party have been created across the country, said the paper. Said Bouteflika has neither confirmed nor denied the reports, according to an article in El Watan, another local daily, on December 1st.

Speculation first emerged that Said Bouteflika was being groomed as a potential successor to his brother in mid-2009, when the local press reported that a new political party was in the process of being created under his leadership (July 2009, The political scene). Then, as now, there was no official confirmation of the reports, and the leaders of the two main parties in the government coalition, the Front de libération nationale (FLN) and the Rassemblement national démocratique (RND), dismissed the reports. In its recent report, Le Quotidien d'Oran said that the party has "not yet secured official approval," and was refused permission to hold its first general assembly in its chosen venue in Laghouat.

It is unlikely, though, that such reports would be allowed to emerge if they were completely groundless. The 2009 reports were widely interpreted as a move to test the political waters for reaction to Said Bouteflika as a potential successor to his brother, and the story's re-emergence can be seen in a similar light. The earlier reports engendered little support for the idea of a dynastic presidency, and question marks remain over the credentials of Said, who has limited political experience and almost no public profile. But the timing of the more recent developments, coming at a time of crisis for the FLN, the country's largest party, suggests that this could be the start of a more sustained campaign on his behalf. Following the amendment of the constitution at the end of 2008 to allow the president to stand for a third presidential term, there are few obvious candidates to succeed him. The prime minister, Ahmed Ouyahia, has developed a strong political career and is believed by many to be the heir apparent, but the strength of the regime's support for the presidency of someone who is a technocrat lacking in military or political pedigree is not certain. No assumptions can be made at this stage about the succession, but if the president can remain in good health there are three and a half years left of his current mandate, giving ample time for Said Bouteflika to establish a presence on the political scene.

The Economist Intelligence Unit's democracy index ranks Algeria 125th out of 167 countries, putting it among the 55 countries that are considered "authoritarian". These regimes account for 32.9% of the countries we cover, and 36.5% of the total population. Algeria scores lower than Morocco (116th) but better than Egypt (138th), Tunisia (144th) and Libya (159th), its North African peers. Algeria scores particularly poorly for political participation, the functioning of government and the electoral process, but receives better scores for political culture and civil liberties. There is a vocal and vociferous press which offers lively debate, both in French and in Arabic, and there is a degree of protection of freedom of speech and the right to demonstrate and go on strike for workers that belong to trade unions, which compares favourably with the situation in neighbouring Tunisia and many of the countries in the Middle East. However, fundamentally speaking, the substance of democracy-including a political culture based on trust and healthy levels of political participation-is mainly absent in Algeria. This is manifested in low levels of political participation beyond voting (and even turnout at elections is low for many elections, especially local elections), and very low levels of public confidence in state institutions. The generalised political apathy and a lack of genuine choice in the recent presidential election contribute to keeping the scores for political participation and electoral process low. The score for the functioning of government is held back by excessive bureaucracy, obscure decision-making processes and an overall lack of transparency with regard to governance.

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Since we conducted the last survey in 2008, the constitution was changed to allow the president, Abdelaziz Bouteflika, to run for a third term. Political decisions appear to be increasingly concentrated in the hands of the president and prime minister, with even the cabinet now playing a seemingly perfunctory role. Moreover, the president's health is a matter of continual concern as his absence from the day to day operations of government generally means there will be no political activity. Algeria's parliament is elected for five year terms, but its ability to enact policy and legislate is weak. There is no clear successor in place for Mr Bouteflika but the prospect of the prime minister, Ahmed Ouyahia, or Mr Botueflika's younger brother, Said, becoming president appears to be more credible.

Government depends on hydrocarbon revenues to keep population quiescent

Protests and clashes with government forces are becoming increasingly frequent and largely stem from economic demands for better housing, services and more jobs. The government's ability to contain social dissent through an extensive spending programme depends on revenue it accrues from hydrocarbons exports. Should there be a serious dip in oil or gas prices in the forecast period, protests and clashes with the government may be more regular.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy that reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures.

Our index of democracy covers 167 countries and territories. The index, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are inter-related and form a coherent conceptual whole. Each category has a rating on a 0 to 10 scale, and the overall index of democracy is the simple average of the five category indices.

The category indices are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regimes:

• full democracies-scores of 8 to 10;
• flawed democracies-score of 6 to 7.9;
• hybrid regimes-scores of 4 to 5.9;
• authoritarian regimes-scores below 4.

Algeria wants to be producing as much electricity in 20 years' time from new and renewable energy sources as it currently produces from gas, according to a statement by the president on December 5th. Mr Bouteflika instructed the government to prepare a "genuine national development plan" for new and renewable energy that would enable the goal to be attained. The next day, the energy and mining minister, Youcef Yousfi, said that the ministry will present an "extremely ambitious" renewable energy plan to the government "in a few weeks". The plan will cover solar, wind and geothermal energy, said Mr Yousfi, quoted on the state news agency, Algérie Presse Service.

The target is ambitious, and Mr Yousfi admitted that it would be a "huge challenge". But there is no doubt that the government is serious about its renewable energy agenda. Gas output has fallen in 2010, and the combination of new export infrastructure due to come on stream between 2011-14, rapidly rising domestic electricity demand and sluggish progress in oil and gas exploration means that Algeria is in need of alternative sources of power supply. There is also a strong lobby within the government that argues that rather than maximising gas output, the government should be managing output in order to ensure the preservation of oil and gas resources for as long as possible. Mr Yousfi said at the end of November that the government planned to intensify oil and gas exploration, but that the aim was to guarantee the country's energy security "in the very long term".

Algeria may also choose to export renewable energy to Europe in the longer term. Europe's energy strategy is geared to increasing the proportion of alternative sources in its own energy mix and it sees Algeria and other countries in the south and east Mediterranean as potential sources of supply. Speaking at a meeting of the Gas Exporting Countries Forum on December 2nd, Mr Yousfi said that Europe's renewable and nuclear energy drive meant that the vision for gas demand in Europe, Algeria's largest export market, was "frankly not very clear". At a meeting with Mr Bouteflika in Berlin on December 8th, the German president, Angela Merkel, said that Germany wishes to "co-operate more closely" with Algeria on solar and renewable energy, and gave her backing to the Desertec programme, a multi-billion-dollar scheme to supply 15% of Europe's electricity demand from solar and thermal power facilities across the Sahara by 2050 (December 2009, Economic performance). But the Algerian government is committed to increasing the role of local companies in the economy and has shown a reluctance to contemplate the involvement of foreign firms in the ownership of the proposed plants. The government's renewable targets will be facilitated by the creation of an institute of renewable energy in Hassi R'Mel to support skills development in the sector, according to a cabinet message. The government will also encourage the development of Algeria's own design and manufacturing capabilities, including the construction of turbines, said Mr Yousfi.

In late November the government took another step closer to purchasing Orascom Telecom Algeria (OTA) when bids were opened from ten companies for the financial advisory on the deal. Altimo, a Russian telecommunications holding company and major shareholder in VimpelCom, has said that the continuing uncertainty over the future of OTA will not affect a proposed merger between VimpelCom and Weather Investments (now operating as Wind Telecom), which is the major shareholder in OTA's Egyptian parent, Orascom Telecom Holding.

Orascom sale still on hold in Algeria

Bids for the financial advisory contract on the deal for the Algerian government to buy Orascom Telecom Algeria (OTA) have been submitted by a mix of international financial institutions, law firms and accountants. The lowest prices were submitted by Curtis Mallet Prevost Colte & Mosle, a US law firm, with the more expensive including those from Rothschild and Renaissance Capital, British and Russian investment banks respectively. The successful company, which will be chosen on the basis of a combination of technical and financial criteria, will carry out due diligence on OTA, value the company and execute the sale. The winning bidder will also help the government choose a partner to operate OTA's mobile-phone business, Djezzy.

Contrary to earlier reports, the chief executive of a Russian consortium, Alfa Group, Alexei Reznikovich, said in early December that the protracted sale of Djezzy will not affect VimpelCom's appetite to merge with Weather Investments (now called Wind Telecom), which controls OTA. Altimo, which is the telecommunications investment arm of Alfa Group, has a 44.7% share in VimpelCom. There had been intense speculation that the company was reluctant to back a merger if OTA were not part of the deal, but Mr Reznikovich told reporters that Algeria's proposed purchase of OTA would not prevent the merger going ahead, and that he would welcome collaboration between VimpelCom and the Algerian government. The Weather deal will close "in the middle of the first half" of 2011 as long negotiations with banks to refinance US$24bn in debt, which VimpelCom would carry if the deal goes through, can be brought to a successful resolution, said Mr Reznikovich.

But the two deals are unlikely to dovetail as neatly as Mr Reznikovich suggests. VimpelCom shareholders are unlikely to want to close the Weather deal without more clarity on Djezzy's future, and in particular its value. VimpelCom values Djezzy at US$7-8bn, whereas the government is understood to want to pay no more than US$2-3bn. The Orascom chairman, Naguib Sawiris, has stated that the government is attempting to run down the value of OTA ahead of the planned sale, a claim supported by telecoms analysts with knowledge of the Algerian market.

The resolution of Djezzy's future is likely to take several months. Orascom has been trying to sell its local business since early in 2010, and there have already been delays to the award of the financial advisory, which bidders expected to be made by the end of November. The tender was the "third or fourth" time bids had been requested by the government, according to one bidder. The bidders themselves have suggested widely ranging timescales to prepare the sale, from two months, proposed by Ahmed Mansour & Associés, a Tunisian accounting firm, to six months, suggested by Rothschild. According to the post and communications minister, Moussa Menhamadi, the deal will go ahead in the first half of 2011, but this could well be subject to further delays.

The government's preferred outcome for the sale also remains unclear. One possible course of action is for it to buy a share of Djezzy and agree that VimpelCom can own the balance and operate the firm. But the government could also decide to select a different partner, either by direct negotiation or through an open tender. In this case, MTN Group, a South African company which attempted to buy Djezzy in April, may restate its interest, and other telecoms groups may also choose to bid. Orascom Telecom, OTA's Egypt-based parent, is meanwhile still locked in a dispute with the government over the alleged non-payment of taxes. The government's claim that Orascom owes US$230m in taxes for 2008 and 2009 is "unfounded", according to a recent statement by the company, and it will take "all necessary legal steps" to challenge the assessment. In late December Mr Sawiris said that Orascom may file for international arbitration in 2011.

The government has still not authorised the request of BP, a UK-based oil major, to release data on its assets in Algeria to the UK-Russian joint venture, TNK-BP, according to sources close to the deal. BP is understood to have requested permission to release data on three fields; Bourarhet, In Salah and In Amenas. The government has refused to allow BP to share data on Bourarhet, and has delayed a decision on the other two fields while it considers whether it wishes to purchase the acreage, according to a source with knowledge of the negotiations. Statoil, a Norwegian energy company that holds an interest in the two fields along with BP and the state energy company, Sonatrach, is also understood to have expressed an interest in acquiring BP's share in In Salah and In Amenas, which BP is understood to value at an estimated US$3bn.

There are a number of reasons why Algeria might wish to increase the share of Sonatrach in the two assets. Sonatrach is a minority shareholder in In Salah, and holds a 50% share in In Amenas, which is not consistent with a 2006 amendment to the hydrocarbons law that stipulates Sonatrach must have a majority stake in upstream oil and gas contracts. The government is also understood to be considering a case for developing In Salah into a strategic gas hub for newly developed gas from the south-west, or Nigerian gas through the Trans-Saharan Gas Pipeline (TSGP). The TSGP is not a realistic prospect in the medium term, but is still understood to be under consideration, and In Salah lies on the pipeline's proposed route. In a deal that is unique to the In Salah acreage, Sonatrach shares gas-marketing rights with BP for all gas extracted from the province, terms which the government would be keen to renegotiate if it were to become a hub for gas from elsewhere in the country.

Political considerations will also play a role. There is a powerful lobby in Algeria that is keen to see the state increase its ownership in the economy at the expense of international investors, and the influence of this group has been increasingly apparent in the past two years. The deal is also complicated by the fact that the Alfa Group has a stake in both VimpelCom and TNK-BP. Algeria has proved reluctant to pursue a closer relationship with Russia. A strategic deal between Sonatrach and a Russian gas company, Gazprom, was allowed to lapse, having achieved nothing, and Russia's agreement to forgive Algerian debt in return for a multi-billion-dollar arms deal turned into an embarrassment when Algeria returned a shipment of faulty MiG fighter aircraft to Russia. The recent visit of Russia's president, Dmitry Medvedev, in which he pressed the case for both VimpelCom and TNK-BP, is understood to have made little impression on the Algerian government (November 2010, The political scene). All options remain on the table, according to sources close to the BP deal. Sonatrach's preferred solution may be to increase its share to a majority stake in the two projects, while allowing Statoil or a third party to buy the balance.

The government projects economic growth of 4% in 2011, according to the 2011 budget, adopted by the Assemblée populaire nationale (parliament) in November, slightly higher than the Economist Intelligence Unit's own forecast of 3.5%. The government plans to spend AD6.6trn (US$86.3bn) and projects current revenue of AD3trn, leaving a deficit equivalent to 28% of GDP. The budget forecasts imports of US$37.6bn, exports of US$42.2bn, and non-hydrocarbons growth of 6% in 2011. The government is unlikely to run a deficit in 2011 however. The budget is based on an average oil price of US$37/barrel, but oil analysts forecast that the average oil price in 2011 is likely to be at least double that figure. We forecast oil prices in 2011 averaging US$82/b. Rising oil prices created a trade surplus of US$14.8bn in the first 11 months of 2010, up from US$4.7bn for the same period of the previous year, according to the latest data from the Centre national de l'informatique et des statistiques (CNIS, the state customs agency). Exports increased by 27% year on year over the same period, to US$51.3bn, whereas imports increased by a meagre 1.9%. A 26.2% increase in hydrocarbons export revenue was the main contributor to the strong export performance.

According to the latest annual report of the Banque d'Algérie (BdA, the central bank), the economy grew by 2.4% in real terms in 2009, despite a sharp decline in oil and gas receipts last year. Hydrocarbons income dropped by 6%, following declines of 0.9% in 2007 and 2.3% in 2008. The fall in oil and gas revenue was due to a combination of reduced output in line with tighter OPEC quotas and weaker prices on the international market. The volume of oil exports made by Sonatrach dropped by 17.2%, while the company's gas exports fell by 14.7%, a reflection of Algeria's trading partners cutting their orders to the minimum permissible under take-or-pay agreements and a fall in spot deals. The total value of exports in 2009 was US$45.2bn, a 42.5% drop compared with the previous year. The fall in hydrocarbons revenue meant the government suffered a fiscal deficit of AD668.8bn, equivalent to 6.6% of GDP.

Non-hydrocarbons income grew by 9.3% in 2009, attributable to increasing consumer spending and an excellent harvest brought about by good weather conditions and government loans and subsidies to the agriculture sector. The 2010 harvest is not expected to be as strong as the record 6.1m tonnes yielded in 2009, but a strong harvest is expected in 2011 after the Institut national du sol, irrigation et drainage (INSID) published data showing higher rainfall in September and October, a crucial growing period, than during the same period of 2009.

Renault, a French car manufacturer, is planning to establish a production plant in Algeria, after the investment promotion minister, Mohammed Benmeradi, confirmed in late November the resumption of talks between the firm and the government. The plant, which is scheduled to open in 2012, would produce 75,000 cars a year. Talks with Renault have been on and off for a number of years, but if a deal is agreed it would be a step forward for the local manufacturing sector. Volkswagen, a German competitor to Renault, has also expressed interest in setting up a plant in Algeria. A report in L'Expression, a local French language daily, said the amount of the investment would be around US$150m. According to the same report, the plant would be expected to produce passenger vehicles initially but then add in production of commercial vehicles.

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Land area

2,381,741 sq km

Population

34.4m (January 1st 2008; Office national des statistiques estimate)

Main towns

Population of main urban areas in '000s (mid-2006 Economist Intelligence Unit estimates)

Greater Algiers (incl capital): 4,825

Oran: 1,150

Constantine: 810

Annaba: 580

Climate

Temperate on the coast, hot and dry in the south

Weather in Algiers (altitude 59 metres)

Hottest month, August, 22-29°C; coldest month, January, 9-15°C (average daily minimum and maximum); driest month, July, 1 mm average rainfall; wettest month, December, 140 mm average rainfall

Language

Arabic (official); Berber language (Tamazight) and French are also used

Measures

Metric system

Currency

Algerian dinar (AD) = 100 centimes or 20 douros

Time

GMT in the winter months; GMT plus one hour in the summer

Public holidays

All Muslim holidays are observed in accordance with the lunar calendar, and the dates are therefore approximate: Prophet's birthday (February 26th 2010) Eid al-Fitr (September 9th-10th); Eid al-Adha (November 15th-16th); Islamic New Year (December 7th). Other public holidays: New Year's Day (January 1st); Labour Day (May 1st); Independence Day (July 5th); Anniversary of the Revolution (November 1st)

Official name

People's Democratic Republic of Algeria

Legal system

Based on the constitution of 1976, revised in 1989 and 1997

Legislature

Bicameral: the lower house, the Assemblée populaire nationale, with 389 members, was first elected in June 1997; the upper house, the Conseil de la nation, which has 144 seats, was formed in December 1997, with two-thirds of its members elected through municipal polls and the remainder appointed by the president

National elections

May 17th 2007 (legislative); April 9th 2009 (presidential); November 27th 2007 (provincial and municipal councils); next presidential election due in April 2014 and legislative election in 2012

Head of state

President, currently Abdelaziz Bouteflika, elected for a third term on April 9th 2009; Mr Bouteflika is also defence minister

Executive

Council of Ministers presided over by the prime minister, who is appointed by the head of state. A new government was formed following the May 2007 election. In May 2010 there was a major cabinet reshuffle

Main political parties

Front de libération nationale (FLN), previously the sole legal party; Rassemblement national démocratique (RND); Front des forces socialistes (FFS); Rassemblement pour la culture et la démocratie (RCD); Mouvement de la réforme nationale (Islah, Islamist); Mouvement de la société pour la paix (MSP; Islamist); Parti des travailleurs (Labour Party)

The government

Prime minister: Ahmed Ouyahia

Deputy prime minister: Nourredine Yazid Zerhouni

Minister delegate at the Ministry of Defence: Abdelmalek Gueneiza

Key ministers

Agriculture: Rachid Benaissa

Defence: Abdelaziz Bouteflika

Energy & mining: Youcef Yousfi

Environment, territorial planning & tourism: Cherif Rahmani

Finance: Karim Djoudi

Foreign affairs (minister of state): Mourad Medelci

Health & population: Djamal Ould Abbes

Housing: Nourredine Moussa

Industry, small- & medium-sized enterprises & investment promotion: Mohammed Benmeradi

Interior & local government: Dahou Ould Kablia

Justice: Tayeb Belaiz

Labour & social security: Tayeb Louh

National education: Boubekeur Benbouzid

National solidarity: Said Barkat

Parliamentary affairs: Mahmoud Khedri

Post & information & communication technologies: Moussa Benhamadi

Prospective planning & statistics: Abdelhamid Temmar

Public works: Amar Ghoul

Trade: Mustapha Benbada

Transport: Amar Tou

Water resources: Abdelmalek Sellal

Central bank governor

Mohammed Laksaci