Advisory Center for Affordable Settlements & Housing

Document Download Download
Document Type General
Publish Date 26/06/2014
Author Working is in progress in ACASH
Published By International Monetary Fund
Edited By Tabassum Rahmani
Uncategorized

Algeria Financial System Stability Assessment

The global crisis has had virtually no impact on Algeria’s financial system, which remains stable overall but thoroughly underdeveloped. Pervasive exchange controls, widespread public ownership, and an abundance of domestic funding have protected banks from external shocks. Financial sector reforms have been pushed to the back burner by the emergence of global financial and regional political turmoil, with the privatization of banks halted and consumer lending suspended. The authorities have made progress in a number of areas in implementing the recommendations of the 2007 FSAP update. Banking supervision was improved by introducing a risk-based bank rating system, and by tightening and adopting internationally accepted prudential standards. In addition, the central bank has taken on additional responsibilities in the area of financial stability and has published its first financial stability report. Moreover, the team’s stability analysis suggests only moderate vulnerability of the financial system to shocks. Stress tests indicate that credit and specifically loan concentration is the main banking sector risks and that public banks are most vulnerable. In particular, the public banks are highly exposed to large state-owned enterprises involved in the manufacturing, construction, and commerce sectors, which leaves them exposed to firm- and sector-specific shocks. However, Algeria’s external and fiscal buffers are substantial, owing to high oil prices, and past experience has illustrated that the state is able and prepared to provide a backstop to the banks.

The challenge facing Algeria is to grow the financial system in a safe and responsible way in support of economic growth and private sector development. The role of the state in the economy—historically large—is increasing further in response to regional political instability and a continued distrust of the private sector’s role in the economy. The economy’s low productivity growth and lack of diversification—associated with Dutch disease—remain important challenges. Non-hydrocarbon exports represent a mere 2 percent of total exports. The Algerian financial system has not been affected much by the global financial crisis owing to its limited international exposure. 2 There are sufficient domestic deposits to finance the limited levels of bank credit. Restrictive capital account measures limit outward investment by Algerian institutions, and in contrast to some other emerging markets, parent banks of foreign subsidiaries were not under major pressure. Preventively, the authorities put in place a set of measures that strengthened buffers. Amendments introduced in 2008 boosted minimum capital for banks from DA 2.5 billion to DA 10 billion; minimum capital for nonbank credit institutions was also increased. Public banks were further recapitalized, including through nonperforming loan (NPL) purchases. New accounting standards were introduced, and supervisory practices improved. In addition, the authorities imposed a consumer lending moratorium, to nip an incipient consumer credit boom in the bud and contain consumer debt.

Leave a Reply

Your email address will not be published. Required fields are marked *