Medium and long term credit expansion, in a situation of a small reduction in collected deposits, is the main factor explaining the decline in public banks’ short term liquidity ratio to below the regulatory ratio of 100 percent. The oil price decline has engendered new challenges to financial stability in Algeria, notably with regard to the substantial impact on the balance of payments, which affects the external financial position and weighs on external financial stability, even if the banking sector has no external debt and is only marginally impacted by depreciation of the dinar, as banks can only have limited open foreign exchange positions. The resilience of the Algerian banking system to the external shocks in 2014 and 2015, supported by banks’ still comfortable financial soundness indicators, calls for more efficient resource allocation, notably to benefit productive investment. In view of the low levels of banking intermediation, the bank credit channel remains potentially important in financing nonhydrocarbon potential growth, as it places less dependency on the budget in the medium term. Based on audits of the banks, a wide stress testing exercise has been recently completed, allowing the assessment of the resilience of the banking sector in the face of recent economic developments. In the context of strengthening bank supervision, the new approach, more prospective and risk-based, will be more focused on the process of banks’ credit allocation with a view to containing both the re-emergence of risk concentration and increase in nonperforming loans.

Transition to a new investment financing pattern  In the context of structural excess savings over investment, which characterised the period 2000-2013, the structure of investment financing in Algeria during 2008-2014 showed a very high level of self-financing (84 percent), particularly with regard to the Government’s and the national oil company’s investments. Investment in the economy (excluding the hydrocarbon sector) has also been, to a large extent, self-financed (59.7 percent over 2008-2014), while the financial savings of private firms and households have significantly increased. In particular, the years 2010 and 2011 recorded a  BIS central bankers’ speeches  3  substantial increase in self-financing (71.4 percent and 24.1 percent respectively), which contributed to the significant recovery of investments in the non-hydrocarbon sectors. In the meantime, the relative share of medium and long term domestic bank credit in the financing of investments in the productive non-hydrocarbon sectors increased substantially between 2012 and 2014, up from 38.4 percent to 45.2 percent. Reflecting dynamic medium and long term bank financing, credit to the economy recorded strong growth in 2013 (20.3 percent) and 2014 (26.1 percent), following already high growth in 2012 (15.1 percent). Improved credit conditions, together with Government support measures with regard to credit to SMEs, which improved their access to bank credit as of 2010, have contributed to the sustained expansion of overall credits to the private sector, which recorded an average annual growth rate of 19.4 percent over the period 2001–2014.