Algeria curbs dismay foreign investors

By William Maclean

ALGIERS (Reuters) - Investment curbs announced and proposed in the last two months look set to dampen foreign interest in OPEC-member Algeria, delay diversification and slow job creation vital to social stability.

Adopting a strongly nationalist tone ahead of a presidential election in 2009, the north African energy exporter says foreign investors are having it too easy and the war-weary 34 million population should get a bigger share of national wealth.

Analysts say populist measures unveiled and proposed in the non-energy sector will tighten an investment regime already hobbled by a complex and ponderous bureaucracy and overshadowed by political uncertainty and sporadic al Qaeda bombings.

The measures, announced apparently without consultation with business and including a 49 percent limit on foreign ownership, may make investors think twice about entering a country still searching for stability after years of political violence.

That would be bleak news for Africa's third biggest economy, which badly needs new skills and technology, relies excessively on oil and gas and where most adults under 30 are unemployed, analysts say. It is in the non-energy sector that Algeria hopes to create most new jobs.

"If they implement this it's going to be a disaster for the economy, in terms of affecting investors wanting to commit to the economy," said Philippe Dauba-Pantanacce, senior economist, Middle East and North Africa at Standard Chartered Bank.

"Foreign investors have continued to talk about Algeria as a place of great potential, but these new regulations will deter potential foreign investment," said EFG-Hermes senior economist Simon Kitchen, who sees Algeria's new attitude as a "U-turn".

The steps include the imposition of the 49 percent foreign investor stake cap on foreign investors from no previous limit and an end to the right of industrial investors to own land on which they build a project. Also, the 2009 draft budget proposes giving the state the right of first refusal should a foreign investor decide to sell.

"AGGRESSIVE TERMS"

Kitchen said of the right of first refusal plan: "Even if you expect to come in for a long time, it does raise questions over how you get out if you need to."

A proposed ban on financing construction through prior sale of property to end-users may affect some big projects planned by Arab Gulf property developers, Algerians say.

Geoff Porter, an analyst at Eurasia Group consultants, said the terms looked tough. "If they only applied to hydrocarbons then they would be in line with global trends, but even compared to China these terms are aggressive."

"Compared to elsewhere in Africa these terms are very tough" apart from South Africa which has similar land ownership curbs.

The 49 percent limit is a staple of many investment regimes. However, unlike some emerging economies, Algeria lacks free zones that offer foreign companies a workable alternative to minority participation.

The measures echo nationalist changes in the hydrocarbon sector in 2006 that entrenched a dominant role for state firm Sonatrach and slapped foreign energy firms with a windfall tax.

Like the 2006 moves, the new changes are popular with a population steeped in nationalism since independence from France in 1962 and have powerful backing.

In a July 26 speech, President Abdelaziz Bouteflika startled foreign investors by lashing out at those he said had profited at Algeria's expense.

Officials insist they need foreign investment and Prime Minister Ahmed Ouyahia says he wants to build a market economy.

"There is no failure of economic policy and there is no change of course. There is a refinement of method," he said.

Diplomats suspect some steps will eventually be dropped or that the 49 percent limit will be applied case by case.

UNCERTAINTY

"Before drawing drastic conclusions we should see if this is pre-election rhetoric," said Dauba-Pantanacce.

But for some investors, a case by case scenario is worse, since it injects more uncertainty into the planning process.

One senior diplomat worries that the damage may already have been done: he said the nationalist tone of official statements could encourage middle-ranking administrators to impose the maximum demands in processing foreign companies' paperwork in the belief that it is their patriotic duty.

Algerian economist Lyes Kahouadji favors many of the measures as a necessary defense of Algerian interests but he dislikes the way the measures appeared suddenly.

"We don't understand why the government has taken these decisions," he said. "There is no debate, no explanation."

His comments echo those of many foreign investors who still await details of the some of the measures and their implementation.

Some Algerians say that instead of hitting foreigners the state should do more to help the small domestic private sector.

Most analysts suspect the government's motives are political rather than economic ahead of a presidential election in April 2009 in which Bouteflika is expected to seek re-election.

But for foreign investors, the election itself poses a another uncertainty: Bouteflika can stand only if the constitution is changed to permit him a third term. Bouteflika has not yet even confirmed that he will seek another term.

(Editing by Ron Askew)