3.2.4 . Non-Resident Deposits Cover of Reserves
It is important to note here, that the lack and incomplete
information on non- resident foreign currency deposits in the Algerian banking
system, pushed us to used the foreign currency deposits as a proxy in order to
calculate this indicator for the period 2000-2009.the results are presented in
the table4.
Table 4
Forgein Currency Deposits Cover of Reserves
(2000-2009)
|
Years
|
Forgein Currency Deposits
(DZD billion) (1)
|
The exchange
rate (USD/DZD)
(2)
|
Forgein Currency Deposits
(US $ billion) (3)
|
Foreign Reserves
(US $ bllion) (4)
|
The Ratio
(4/3)
|
|
2000
|
116.9
|
75.3
|
1.55
|
11.9
|
7.67
|
|
2001
|
154.4
|
77.2
|
2
|
18
|
9
|
|
2002
|
168.8
|
79.7
|
2.11
|
23.1
|
10.94
|
|
2003
|
170.8
|
77.4
|
2.2
|
32.9
|
14.95
|
|
2004
|
218.8
|
72.1
|
3.3
|
43.1
|
14.22
|
|
2005
|
231.7
|
73.4
|
3.15
|
56.2
|
17.84
|
|
2006
|
240.8
|
73.7
|
3.28
|
77.8
|
23.71
|
|
2007
|
229.5
|
69.2
|
3.31
|
110.2
|
33.29
|
|
2008
|
251.2
|
64.6
|
3.88
|
143.1
|
36.88
|
|
2009
|
265.7
|
72.5
|
3.66
|
148.9
|
40.68
|
Source: author's calculations using data available from bank of
Algeria statistics.
The table 4 shows that this indicator has marked strong
development. After it was covers more than seven times the deposits in hard
currency in 2000, it rose significantly in 2009 to reach more than 40 examples
of these deposits.
At the end of this section ,our analysis shows that Algeria
current levels of foreign reserves are still comfortable and safe, as it
exceeds all international norms and standards. So, this adequacy also allow for
Algeria to strengthen their ability to absorb external shocks.
4. Reserve Management In Algeria, and The Implications
of The 2008Finacial Crisis.
This section exposes first some available information related
to Algeria policy frameworks for reserve management. Secondly, it studies the
Impact of the global financial crisis of 2008 on Algeria foreign reserves, and
third it offer an evaluation to Algeria reserve management practices.
10
4.1. The Framework for Reserves Management in
Algeria
Given the absence of publications and official reports
undertaken by the bank of Algeria to inform the public yearly about the
management of foreign exchange reserves ,and its dealing with this issue
confidentially with the lack of transparency and disclosure.However,the main
aspects of the policy and operational matters relating to the management of the
reserves in Algeria, were presented in speech delivered by The Governor of the
Central Bank,Mr. Mohammed Laksaci in2011including the following areas[5] :
A/ Algeria has managed its official foreign exchange reserves
soundly and prudently, by adopting the following primary objectives:
- The preservation of the reserves capital value: in terms of
reducing the risk of loss in assets market value, and maintain a diversified
assets portfolio with high quality (i.e. the credit rating), and application of
appropriate practices to mitigate risks; - Maintaining a high level of
liquidity: through investments of these reserves in assets close to maturity or
that can re-sell quickly without loss of value; - Return optimization, with a
respect to safety and liquidity, which constitute the twin objectives of
reserve management in Algeria.
B/ the bank of Algeria permits the following investment
categories:
deposits with other central banks and the Bank for
International Settlements (BIS),and deposits with high rating quality foreign
commercial banks .
C/ The demands placed : in this regard, 98 percent of
investment operations of foreign reserves in the US and Europe were proceeded
in the form of sovereign bonds portfolio, which Algeria has bought between 2004
and 2007 when the international interest rates were high.
D/The interest rate of the aforementioned bonds hit 3 percent
in 2010, a bit lower than the rate recorded in 2008 and 2009.
E/ Algeria has invested only 1.75 percent of its foreign
exchange reserve in deposits with foreign commercial banks, contrary to
previous years when it used to invest up to 20 percent . This investment
framwork reflect the diversification strategy undertaken by Algerian
authorities since2004 in order to secure the reserves from external shocks.
While safety and liquidity constitute the twin objectives of reserve management
in Algeria, return optimization becomes an embedded strategy within this
framework.
F/ the reserves investment policy include the selling of
Foreign Currency Assets that are maintained as a multi-currency portfolio
comprising major currencies, such as, US dollar, Euro. In 2010 for example: the
dollar represent 47.96%,and 41.38% for the euro. This diversification of
currencies, countries and institutions is part of the policy of securing these
assets
G/ The Bank of Algeria has established an institutional
framework for managing foreign reserves, in order to face world interest rates
historical decline, especially after the global financial crisis of 2008.in
this context Algeria has adopted a prudent approach in the
11
management of its reserves since the global financial crisis
2008 and, this policy has proven its effectiveness because of the investments
non-affected during the period of crisis.
H/ according to the bank of Algeria 2010 report, Algeria has
collected $4.60 billion in 2010 from investing exchange reserves abroad,
comparing to $4.74 billion in 2009 and $5.13billion in 2008, $3.8billion in
2007 and $2.42billion in 2006 [6] .
4.2. Algeria's Foreign Reserves and the Implications
of The 2008 Global Financial Crisis
Many observers to Algeria economic situation said that
Algeria, may not be affected by the2008 financial crisis, because of several
external and internal factors.According to the International Monetary Fund,
Algeria's prudent fiscal and monetary policies contributed to maintaining
inflation low, and, combined with a period of increasing oil prices, allowed
Algeria to build a solid financial position, with large external reserves,
sizable budgetary savings in an oil stabilization fund, and low public and
external debts. The support to economic growth, which helped to weather the
impact of the global crisis in2009, should not be withdrawn too quickly. The
prudent macroeconomic management of the past decade has given Algeria an
important margin to face external shocks and absorb sharp falls in hydrocarbon
prices. However, the global crisis also showed Algeria's financial
vulnerability to prolonged periods of low oil prices. At the same time, the
authorities should remain vigilant about risks of potential inflationary
pressures [7].
Other Algerian economists like the former Ministers of Economy
Mr.Hocine Benissad and Mr.abdellatif Benachenhou , found that Algeria is
currently far from the international turmoil because of the following reasons[8
,9] :
(i) Algeria good external solvency
The record-high oil prices since 2001 have translated into huge
current account surpluses, soaring foreign reserves. So, the authorities were
able to guard against external shocks, by proceeding to the prepayment of its
external debt. This situation leads to a significant drop in foreign debt, and
strengthened Algeria external solvency, through which Algeria is currently far
from the blow of the crisis.
Furthermore, taking advantage of the steady rise of the
Revenue Regulation Fund (established in 2000 by the government), estimated in
2008 at 4,200 billion dinars and foreign currency reserves have reached $ 135
billion in late October2008, Algeria was able to acquire its external solvency
until 2015.
(ii) Algerian financial system disconnected from the
international financial center The Algerian financial system is
dominated by the banking sector which accounts for 93 percent of total
financial system assets. Public banks continue to overwhelm the system,
representing 90 percent of total banking assets. The insurance sector is
insignificant account for less than 3 percent of total financial system assets.
However, lending by state-owned banks, mostly to public entities, still
dominates financial intermediation. financial markets
12
remain in their infancy because of highly opaque financial
information, banks' inability to provide investors with information, and small
institutional investors[10].
Unlike the various emerging economies opened to international
financial markets, Algeria restrictions and controls are maintained on many
capital account payments and transfers. So , the Algerian financial system
remain disconnected from the international financial center and as result
insulated from the global financial crisis contagion effects, which spread
rapidly to various international banks through the mechanism of
"securitization".
(iii) The safety of Foreign exchange reserves invested
abroad
The question of the impact of the global financial crisis on
foreign exchange reserves back to their forms of investment. Generally, these
deposits are available in principle paid or subscription of securities. Unless
the custodian from slipping into bankruptcy, deposits are not at risk of not
returning. As for the underwriting of government bonds (like U.S. Treasury
bills or French), their repayment may be not a concern. The only major concern
to have, thanks to this crisis, could make the volatility of exchange rates.
Exchange rates volatility may bring about losses. But this concern is not new,
it is part of the operation of the foreign exchange market, and foreign
exchange dealers of the Bank of Algeria are prepared for this type of
turbulence.
Despite that international reserves stood at a very
comfortable level, prudent management of these reserves remain highly necessary
,because they are the result of an exogenous factor, which is the price of oil
which has been unstable due to soaring speculation stakeholder unregulated,
uncontrolled markets... Algeria s foreign exchange reserves are so fragile.
(iv) The use of oil Stabilization Fund to balance the
budget Against a background of volatile oil revenues, the attainment
of a growth path with a balanced industry structure would require the
implementation of a prudent fiscal policy strategy that smoothes government
expenditure over time, with the aim to minimize fluctuations in domestic
absorption.
In this regard the Revenue Regulation Fund (oil stabilization
funds) that the government had the wisdom to create in 2000 play an important
role in dealing with the economic consequences of natural resource booms, to
ensure that government savings are accumulated at the fund in periods of strong
oil revenues, would be essential, to balance the state budget in period of oil
price decline.
Algeria s2008 budget stand with oil at $ 37 ,and the balance
of the budget of 2009 was provided with a barrel to 60 dollars, but if the
price drops to $ 37( the reference price of the2009 Budget Law), the 2009
budget envisages the use of Revenue Regulation Fund , estimated in 2008 at
4,200 billion dinars to balance the state budget and cover investment projects
underway. The Revenue Regulation Fund will hold for three years, so there is no
fiscal risk until 2012.
13
(v). The non Setting Up of sovereign wealth funds
Many oil-producing countries has accumulated enormous reserves thanks
to the record-high oil prices.but these countries don't have the ability to
absorb this soaring foreign reserves at the level of their economies, because
to the lack of diversified production system on a competitive basis and the
absence of any industrial policy. However, the best way to prepare the post-oil
stage is the Setting Up of sovereign wealth funds .
Sovereign wealth funds for these purposes are separate pools
of international assets owned and managed (directly or indirectly) by
government to achieve various economic objectives, such as stabilization of the
macro economy or contributing to a process of saving and intergenerational
wealth transfer. Sovereign Wealth Funds are special purpose investment vehicles
to generate higher returns[11].
Although security is never absolute, under the global
financial crisis of 2008, the sovereign wealth funds suffered heavy losses
when, for example, companies - which they held shares - experienced a severe
market value devaluation. Some of them continue to count their losses while
others have scaled back their investment plans. In the case of Algeria, it was
far from these consequences because it doesn't create such sovereign funds.
4.3. The main shortcomings of Algeria's foreign reserves
management policy
The main potential issues and shortcomings raised by Algeria's
management of its
international assets can consider the following
points:
-The Lack of transparency and disclosure in the reserves management
policy ,due to the absence of data and annual reports an operational matters
relating to the management of the reserves ,especially: currencies,
instruments, issuers and counterparties , earnings ,losses.Its appear that
Algeria deals with reserve management file as state secrets, despite, the Money
and credit Act gives the Bank of Algeria Governor the responsibility for the
conduct of exchange reserves.
- The absence of legal framework for the management of the
country's Gold reserves notably:gold holdings, the purchase and sales
operations, the deposits custody, the rate of
earnings on gold...
- The diversification strategy in the
deployment of foreign exchange reserves include only the portfolio currency
composition, but the investment policy focus on The safest reserve asset i.e.
treasury bills, which pays the lowest rates of return.
- Despite that Sovereign Wealth Funds have become important
forms of external assets and its role in generate higher returns and developing
the national industrial policy through the acquisition of the high technology.
The Algerian authorities still reject the idea of Setting Up of sovereign
wealth.
-The management of foreign reserves by the Algerian government
focuses on the short-term vision, animated by a desire to provide liquidity to
cover the years of importation,which
14
means the lack of strategic vision (the new trends: from
liquidity to return) in the management of these reserves.
- The framework for the risk management practices followed by
the Bank of Algeria and the strategy for managing and controlling the exposure
to financial and operational risks associated with deployment of reserves are
absent.
- It seems that Algeria's Foreign reserves suffer from the
phenomenon of depletion because of the imports bill, which increased
dramatically to $ 40 billion over two years (2009/2010) . given that the most
indicators of the Algerian economy such as economic growth, demographic growth,
inflation, consumption, unemployment, productivity and the limited absorptive
capacity of the Algerian economy( $ 15 billion annually) did not change
significantly during the period (2004/2009) and therefore, cannot explain this
excessive increase in imports, which grew during the same period by 300%.
| 
