There are an abundance of articles written nearly everyday related to the travails of the Eurozone and its inability to generate growth among the majority of its member states, but very little is said about the impacts on other countries on the periphery of this region. Peripheral countries tend to be heavily dependent on their export trade to Europe, and nearly all have had to adjust their respective fiscal plans for the possibility of negative growth going forward. Algeria, however, is one exception to the rule. Future prospects, though muted, remain on the positive trend built over the past decade.
Wedged between Morocco to the west and Tunisia and Libya to the east, Algeria has had a better time of it than its neighbors due to a number of factors. Annual GDP growth has been steady during the new millennium, reaching a high of 6.9% in 2003 and a low of 2.0% in 2006, averaging approximately 4.0% for the entire period. Algeria also managed to skirt the global recession that has disrupted financial affairs in most all developed economies of the world, due in part to its petroleum related industry and oil and gas exports.
Forecasts for 2012 have been as high 3.5%, but the slowdown in Europe has been reason enough to ratchet back those figures recently to 2.7%. In the meantime, the nation’s currency has depreciated nearly 10% versus the U.S. Dollar over the past twelve months, leading many to question what fundamental forces are causing this result when prospects are so favorable. The chart history for the Algerian Dinar (“DZD”) is presented below:
An article on Forextraders.com discussing the “Fundamentals of Currency Evaluation” is a good place to start to find insights that address these changes. There are a host of fundamental factors that impact the market’s valuation of a nation’s currency when it “floats”, rather than be “pegged” to some other index. The Dinar does float on a daily basis. Government fiscal policy and the monetary policy of its central bank are key components that impact exchange rates, while actual economic data provides its own set of influences.
A brief review of each of these factors follows:
- Fiscal Policy: As the global economy has subsided, the government has chosen to maintain subsidies for food, transportation, and housing. Higher projected public spending has already lead to pressure on prices, as noted by rising inflation, especially in food prices. Inflation erodes purchasing value of a currency, and thereby weakens it on a global exchange rate basis;
- Monetary Policy: The Central Bank of Algeria has kept its benchmark discount rate at 4% for the past few years to encourage business investment in both public and oil related companies. This policy has resulted in a dependence on the price of oil on the global market, which tends to fluctuate often. In fact, the depreciation of the Dinar has “mirrored” to a great extent the history of oil prices for the past year. Oil prices rose but declined significantly over the past month;
- GDP Growth: Algeria has a legacy of a state-controlled economy that over time needs to be diversified to promote more growth an employment. Despite the positive results achieved, unemployment remains high and government deficits are growing. Growth in the private sector must be encouraged to ensure continued investment, growth, and stability. Currency appreciation will follow these actions as a natural result.
Algeria has continued its positive growth posture, due in part to the actions of its central bank, but challenges persist if further progress is to be achieved.
By Tom Cleveland, http://www.forextraders.com
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