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Algeria and Libya Business Forecast Report Q4 2014

  • August 2014
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views
The Algerian economy will grow by 3.2% in real terms in 2014 and 3.4% in 2015, on the back of robust domestic demand and public investment activity. Our outlook on the hydrocarbon sector remains more downbeat, and we do not expect a return to growth this year after eight consecutive years of contraction. We expect Algeria to post its first current account deficit since 1998 this year, remaining in the red for the rest of our ten-year forecast period. Although extensive foreign exchange reserves and an insignificant level of external debt should provide considerable buffers for the time being, the country's deteriorating trade dynamics presents a substantial risk to macroeconomic stability over the longer term. The victory of Abdelaziz Bouteflika in Algeria's presidential election which took place on April 17 will ensure a continuation of the political status quo. Recent protests by the opposition will not translate in immediate risks for the country. However, the lack of structural reform
to the economy will contribute to increasing political challenges over the longer term.

Although the Algerian government has called for more foreign investment into the country, we expect FDI inflows to remain sparse in the years ahead. Foreign investors will remain deterred by numerous restrictions and Algeria's weak business climate, and we do not anticipate any comprehensive liberalisation of the economy.

Core Views
As a result of ongoing political violence, a significant degree of productive capacity (both physical and human) throughout the Libyan economy has been lost. Road, housing and utility infrastructure have suffered considerable damage and will take years to repair under even the most stable of political environments. Moreover, given the importance of the hydrocarbon industry, damage to oil production and refining infrastructure will pose significant long-term challenges. Libya's political climate will remain volatile through H214 and 2015, as competing militias compete for control over the country's vast resource wealth. A lack of institutional capacity will hamper reconstruction efforts. Libya lacks the institutions necessary to carry out much-needed investment projects.

The economy's growth potential will depend on three key variables:
the speed and scale of oil production; the state of the underlying security environment; and the state of the utilities sector – in particular, the provision of a stable supply of electricity. Rapid growth rates from 2015 will mask key structural weaknesses in the country.

Major Forecast Changes
We project real GDP in Libya to fall by 28.2% in 2014. We have revised downward our forecast from a 12.0% contraction previously, as political instability will result in declining oil exports and falling government spending. We forecast that the economy will return to growth of 38.0% in 2015, as very low base effects will lead to a sharp increase in oil exports.

Table Of Contents

Algeria and Libya Business Forecast Report Q4 2014
Executive Summary - Algeria... 11
Core Views.11
Major Forecast Changes....11
Key Risk To Outlook11
Chapter 1.1: Political Outlook - Algeria.. 13
SWOT Analysis... 13
Domestic Politics ... 14
Weak Prospects For Political Reform..14
Prospects for political reform in Algeria remain weak despite recent government -led proposals to change the constitution.
Table: Political Overview...14
Long-Term Political Outlook. 16
Stagnation Or Upheaval: Government's Unpalatable Choice....16
Algeria's political stability faces challenges from Islamic radicalism, high unemployment and an unclear leadership future. While we
believe that economic reform is vital for future growth, the political consequences are unclear.
Chapter 1.2: Economic Outlook - Algeria.... 19
SWOT Analysis... 19
Economic Activity .. 20
Strong Public Investment To Support Growth...20
The Algerian economy will grow by 3.2% in real terms in 2014 and 3.4% in 2015, on the back of robust domestic demand and public
investment activity.
Table: Economic Activity20
Investment Climate. 23
No Uptick To Foreign Investment Ahead..23
Although the Algerian government recently called for more foreign investment into the country, we expect FDI inflows to remain sparse
in the years ahead.
Monetary Policy . 25
Inflation Close To Bottoming Out....25
We have scaled down our inflation forecasts for Algeria, and now project annual CPI to average only 2.5% in 2014 (from 4.5
%previously), before accelerating to 4.0% in 2015.
Table: Monetary Policy..25
Chapter 1.3: 10 Year Forecast - Algeria. 27
The Algerian Economy To 2023. 27
BE Reforms Crucial For Long-Term Growth..27
Achieving Algeria's long-term economic potential is far from certain, with Algiers' position towards foreign investment remaining a key
unknown variable in the business environment outlook.
Table: Long-Term Macroeconomic Forecasts...27
Chapter 1.4: Business Environment - Algeria. 29
SWOT Analysis... 29
Executive Summary - Libya. 31
Core Views.31
Major Forecast Changes....31
Key Risk To Outlook31
Chapter 2.1: Political Outlook - Libya 33
SWOT Analysis... 33
Domestic Politics ... 34
On The Brink Of Civil War..34
Prospects of a return to full-blown civil war in Libya are high. As a result, we have lowered the country's Short-Term Political
Risk Rating. The economic situation will remain dire, and lawlessness in the country will contribute to increasing risks to regional
Table: Political Overview...34
Long-Term Political Outlook. 35
Fragile Federalised State To Emerge...35
Libya will remain nominally united over the coming decade, but we expect a fragile federalised state to emerge from a violent transition.
The country will face multiple challenges to fundamental stability, and risks of a return to full-blown civil war are elevated.
Chapter 2.2: Economic Outlook - Libya. 39
SWOT Analysis... 39
Economic Activity... 40
Political Instability Worsening Economic Crisis40
Libya's GDP will contract by 28.2% in real terms in 2014, a result of declining oil exports and elevated political instability. We see the
economy returning to growth of 38.0% in 2015, the result of an uptick in oil exports and very low base effects.
Table: Economic Activity40
Fiscal Policy .. 42
Budget Deficit Widening Dramatically..42
We forecast Libya's budget to come in deficit of 30.2% of GDP in 2014 and 17.3% in 2015, from our estimate of a 1.8% deficit in 2013.
The government will avoid a full-blown fiscal crisis this year. However, it will be forced to use its foreign currency reserves to finance
spending, which will result in declining ability to cushion against volatility in global oil prices over the coming years.
Table: Fiscal Policy42
Chapter 2.3: 10 Year Forecast - Libya.... 45
The Libyan Economy To 2023.... 45
Rapid Growth Rates Mask Structural Weakness....45
Relatively rapid real GDP growth rates in Libya over the coming decade will mask key structural weaknesses in the economy.
The expansion will remain highly dependent from the energy sector, however elevated political instability will result in volatility in
output. Efforts to diversify the economy away from crude and to improve private sector activity will be unsuccessful, ensuring that
unemployment levels stay elevated and investors shy away.
Table: Long-Term Macroeconomic Forecasts...45
Chapter 2.4: Business Environment - Libya.... 47
SWOT Analysis... 47
Chapter 3: BMI Global Assumptions. 49
Global Outlook.... 49
US Revision Drags Down Forecast.49
Table: Global Assumptions49
Table : Devel oped States , Real GDP Growt H, %..50
Table : Emerging Mar kets , Real GDP Growth , %.51

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