Mohammed Laksaci: Financial system developments in Algeria -
resilience and risks in the face of the international financial crisis and its
spillover effects
Speech by Dr Mohammed Laksaci, Governor of the Bank of Algeria, at a Meeting with the
Algerian Bankers Association, Algiers, 22 January 2009.
* * *
Algeria's strong macroeconomic performance over the past nine years and the gradual
strengthening of the banking sector's stability have contributed to establishing a relative
resilience to external shocks. Key achievements include:
•
sound management of international reserves (no investments in risky assets),
paying due attention to the strategic objective of safeguarding asset portfolios
against any loss of capital;
•
significantly reducing external debt, in 2005 and 2006, after strictly limiting external
borrowing since early 2000. By end 2008, total medium and long term debt stood at
only $4 billion (less than 3% of GDP). Furthermore, banks' external liabilities
represent less than 1% of their total liabilities, and banks are required to deposit
their end-of-day foreign exchange balances at the central bank which manages the
country's overall exchange position;
•
saving part of the fiscal revenue windfalls, with an annual budget saving averaging
23% of GDP during the period 2005-2008. By end 2008, savings in the stabilization
fund (FRR) , totaled DA 4113 billion ( equivalent to $57,8 billion);
•
domestically financing the economy's large investments, in the context of excess
saving rates over investment rates;
•
developing the bond segment of the financial market, with access limited to
domestic investors;
•
Advancing the restructuring of the banking sector following failure and bankruptcy of
small private banks which resulted in withdrawing their licences over 2003-2006
while compensating depositors through the Deposits Guarantee Fund.
The strengthened macroeconomic stability, as evidenced by subdued inflation (4.4 % in 2008
despite the surge in world commodity prices) and a real exchange rate of the Dinar near its
equilibrium level, as well as important foreign exchange reserves ($143 billion, by end 2008)
and low external debt, have constituted sound safeguards against the inherent shocks of the
current international financial crisis. In addition, indirect monetary policy instruments (deposit
auctions, marginal deposit facility, ...) have been successfully used to limit the impact of
structural excess liquidity on inflation.
Although the direct contagion impact of the international financial crisis on the Algerian
banking system is limited, in view of its small exposure to international financial markets,
increased attention is directed to further strengthening and preserving its soundness. In this
regard, the required minimum capital for banks and financial institutions have recently been
substantially increased to strengthen their resilience and increase their lending capacity.
Despite the structural nature of the excess liquidity since 2002, growth of credit to the
economy has been relatively moderate (14% in 2008). For a better contribution to the
diversification of the economy, banks are expected to enhance their efforts in financing the
development of SMEs while further improving credit and operational risk management.
The role of banks in investment financing is crucial given the limited development of the
financial markets. The 2009 government budget provides for appropriations to strengthen
public banks' capital base. Government financial support to the public banks (bailing out of
public banks' portfolios and strengthening of their capital assets) averaged 2.6% of GDP for
the period 1991-2002 and 1.7% for the period 2005-2006.
The Bank of Algeria will continue to pay due attention to potential risks arising from the
deepening international financial and economic crisis, particularly risks to the banking sector.
In this respect, particular attention will be attached to the flexible use of available monetary
policy instruments and to maintaining a flexible exchange rate policy to reflect the economy's
fundamentals.
At the same time, banking supervision will continue to be strengthened, in accordance with
the ongoing initiatives of the Basel Committee. Following the modernization and
consolidation of banks' reporting system and the recent increase in required minimum
capital, sustained efforts are being devoted to strengthen the operational and regulatory
frameworks of the banking sector over the first half of 2009 (conformity of bank assets,
liquidity and credit risks management, ...), in accordance with international standards. In this
regard, a stress testing system, introduced in 2007, already contributes to better assessing
banks' risk management and evaluating adequacy of capital assets to potential risks. In view
of the large number of foreign banks presently operating in Algeria, continued efforts are
being made to develop bilateral cooperation on their supervision.
In conclusion, prudent management of resources and continued strengthening of the
financial and banking system stability allow Algeria to consider its medium term economic
objectives with a relative confidence. However, the deepening of the international financial
crisis and its drastic spillover effects on the world economy is already affecting the country
through a number of channels, notably:
• a reduction in its savings capacity. The sharp decline in oil prices is drastically
reducing hydrocarbon export receipts and consequently government's savings
capacity. A prolonged weakness of oil prices would inevitably erode the financial
wealth accumulated in the stabilization fund with a correlative reduction in
international reserves;
•
a reduction in the yields on the investment of international reserves, as a
consequence of low interest rates in international markets.