Key View
- At Fitch Solutions, we think Bank of Algeria will keep monetary policy accommodative in 2023 as it chooses to support the dinar to control inflation.
- As a result, we see inflation decelerating from 9.7% in 2022 to 3.8% in 2023 despite loose monetary and fiscal policy, with the discount rate being kept at 3.00% throughout the year.
- A sharper-than-expected fall in energy prices could reduce the authorities’ ability to support the dinar, thus posing an upside risk to our inflation forecast.
At Fitch Solutions, we expect the Bank of Algeria (BoA) will keep the discount rate unchanged at 3.00% in 2023. Similarly, we think the reserve requirement ratio – which Bank of Algeria actively uses to control money supply – will remain at 2.00%. Both rates represent an all-time low as the authorities remain committed to supporting economic activity.
The BoA will opt to support the dinar in order to keep inflationary pressures under control. This follows repeated statements by officials stressing the importance of supporting citizens purchasing power and countering inflationary pressures. Indeed, increases in salaries, unemployment benefits and public pensions in the last year were mirrored by interventions to support the dinar since August 2022, with the currency appreciating by 8.4% since its 2022 lows (see chart below). This substantiates the BoA’s view that current inflationary pressures stem mostly from external shocks, with a recently released report by the bank stating that 59.0% of Algeria’s inflation is imported. As a result, we expect the BoA will continue to support the Algerian dinar to control inflation, while keeping monetary policy accommodative.
We revised down our inflation forecast from 4.4% to 3.8% in 2023 following a more bullish outlook for the Algerian dinar. We now forecast the dinar will end 2023 at DZD118.70/USD, up from our previous forecast of DZD131.80/USD (see chart above). This follows continued comments from President Abdelmadjid Tebboune citing the need to further support the dinar in order to increase citizens purchasing power. Indeed, inflation has been on a downward trajectory since its peak of 11.7% y-o-y in July 2022, coming in at 8.6% y-o-y in November 2022. Moreover, declining agricultural commodity prices will add to downside pressures on inflation given that food prices constitute 43.1% of the country’s CPI basket.
Ample reserves will allow BoA to continue to support the dinar. Algeria managed to increase its foreign exchange reserves by 34.1% in 2022 as a result of elevated energy prices, the first such increase since 2013 (see chart below). Our Oil & Gas team forecasts energy prices will remain elevated, with the Brent oil price averaging USD95.0 per barrel (/bbl) in 2023, slightly down from USD99.0/bbl in 2022. As a result, we expect Algeria to continue piling up foreign exchange reserves in 2023, forecasting an increase of 9.2% for the year, bringing the country’s reserves above pre-Covid-19 levels.
Lower-than-expected energy prices pose a downside risk to our dinar forecast but ironically upside risk to our inflation forecast. While not our core view, lower-than-expected energy prices resulting from a sharper-than-expected deceleration in global economic activity would give the BoA less leeway to support the dinar, thus posing a downside risk to our currency forecast. This would also prompt us to revise up our inflation forecast given a weaker-than-expected dinar.
This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.
