Investors who had given up on modernization of the Algerian capital and currency markets during President Abdelaziz Bouteflika’s term latched on to glimmers of political and economic reform as Algerians took to the streets to insist that the ailing octogenarian not seek another term and hold competitive elections.

The history of popular revolt in Algeria dates back to the late 1980s after an Islamist party’s election victory was annulled, ushering in a civil war with tens of thousands killed under a harsh army crackdown. A state of emergency lasted for the next two decades, until the 2011 Arab Spring protests, when the military and single-party National Liberation Front government boosted social spending amid high oil export prices to address double-digit youth unemployment.

Almost all foreign direct investment in the North African country, at less than 1% of gross domestic product, is in hydrocarbons, while the state monopoly Sonatrach has joint ventures with European and Asian partners. Local bank and industry access and ownership restrictions have been in place since independence to ensure majority control by regime officials and favored business allies.

Foreign-exchange curbs in turn spawned an active parallel market, while a legal stock exchange was launched with World Bank help in the 1990s but later stalled since, despite consideration of listing partial state-enterprise stakes.

The ruling clique, including President Bouteflika’s brother, has justified mercantilist and protectionist stances under a siege mentality, to fight terrorism at home and preserve post-colonial sovereignty. Even with technocrats regularly in charge at the central bank and Finance Ministry, influential generals and politicians call the tune.

Independent figures are to form an interim government until a fresh election is organized under a proposed compromise to end mass unrest, and incremental commercial and financial openings could signal wider momentum for the country to enter the Maghreb investment mainstream.

Since the drop in oil prices in 2014, the Algerian economy has grown by 2-3% annually and international reserves have halved to US$95 billion. The International Monetary Fund’s 2018 Article IV report cited delays in urgent fiscal, monetary and structural overhauls. The budget and current-account deficits approach 10% of GDP, and inflation is projected at 7.5% this year with heavy liquidity injection from central-bank borrowing.

Fiscal consolidation through utility tax increases was originally planned, with balance envisaged early in the next decade, before the widespread demonstrations postponed action. State banks have adequate capital, but the bad-loan ratio is in double digits and the government owes money to companies without a payment timetable, to raise risks further. Interest-rate subsidies remain in place, and creditor rights and bankruptcy codes should be updated to increase small-business financing, the IMF urges.

Public debt is 40% of GDP, and the survey recommends both more vibrant domestic Treasury bill activity and maturity extension and consideration of external bond issuance. Modest exchange-rate depreciation could remedy overvaluation, and the official currency market needs bid-ask spreads in a competitive step that may shrink the 50% premium through the parallel network. To align the two better, surrender mandates for non-energy export earnings should be clarified and eased, with companies having more flexibility and tools to hedge US dollar and euro exposure.

Banking supervision lags, with the old Basel II rules just going into effect, and crisis intervention and resolution strategies are missing. The country is behind regional peers on the World Bank’s Doing Business rankings, with rigid labor practices and majority-ownership prohibitions major obstacles.

As aging post-independence leaders contemplate exits, this vast outstanding economic and financial policy agenda is pressing, with successors expected to deliver basic reforms as in Maghreb neighbors Morocco and Tunisia, and the broader region.

Kazakhstan

Frontier-market investors looking for parallels may find lessons in the surprise resignation in Kazakhstan of president Nursultan Nazarbayev, who had served in the post since the Central Asian republic broke away from the Soviet Union and also rotated technocrats with family and political allies in high-level positions.

The Kazakhstan Stock Exchange was up by 10% on the MSCI Index through February in anticipation of long-promised privatization offerings through the Astana International Financial Center, and possible reintroduction of private pension plans after the president and his team continued to communicate mixed messages.

Since the global financial crisis a decade ago, bank recovery has sputtered and the government was recently forced again to buy a big bad-loan portfolio from Tsesna Bank, as political and monetary system stagnation endured until internal and external prodding could hasten personal and policy departures.