State guarantees raise public sector risk

Algeria’s Finance Commission hearing on the 2026 draft Finance Bill clarifies a fiscal stance that leans on hydrocarbons while seeking measured consolidation. The draft targets a 2026 cash deficit of 12.4% of GDP, quantified at about USD 40 billion on an implied nominal GDP base near USD 323 billion (calendar year). That compares with an estimated USD 288 billion nominal GDP in 2025 and underscores an expansionary nominal envelope despite the consolidation signal.

Total 2026 expenditures exceed USD 135 billion, with the public wage bill projected near USD 45 billion, roughly one-third of outlays. The framework assumes real GDP growth of 4.1% in 2026 and an oil reference price of USD 60 per barrel, establishing the terms-of-trade anchor for revenues while assigning non-hydrocarbon activity a larger share of the consolidation burden without deep cuts to transfers.

Mechanically, the strategy reduces the reported deficit less through expenditure compression than through growth-linked revenue, hydrocarbon receipts at the reference price, and increased Treasury “engagements” that mobilise public enterprises and state guarantees. This mix compresses immediate cash financing but raises contingent liabilities across the broader public sector balance sheet. Subsidies remain material: DZD 657.65 billion (≈USD 4.8 billion) is allocated to key items including cereals, energy, and desalinated water. The composition preserves real incomes and stabilises near-term demand but limits fiscal space for productivity-enhancing capital formation if growth or oil prices underperform the baseline.

Macro transmission runs through the twin-deficit channel and the oil cycle. Hydrocarbons continue to dominate exports and a large share of budget revenue, leaving the current account exposed to price and volume swings. After reverting to deficit in 2024, the external balance is projected negative in 2025, around −3.7% of GDP on prevailing import demand and moderated energy prices. International reserves stood at USD 67.8 billion in June 2025, roughly 14 months of import cover, providing a meaningful buffer while not insulating the economy against a sustained price undershoot. Headline inflation eased towards 3.5% in 2025 from around 4.0% in 2024, aided by administered prices and softer import costs; the durability of that path hinges on supply conditions and exchange-rate pass-through.

For markets, signals are mixed. The oil anchor and reserve stock dampen near-term volatility in sovereign risk pricing. Conversely, heavier reliance on public enterprises and guarantees to finance the state augments quasi-fiscal risk that the cash deficit does not capture. General government gross debt is estimated at 57.8% of GDP in 2025 and could edge higher if the 2026 deficit track slips or if contingent liabilities crystallise. Investors typically price such opacity with wider hard-currency spreads versus the EM composite represented by EMB, especially when funding windows narrow. The sensitivity to Brent (BZ=F) remains immediate: a sustained average below USD 60 materially widens financing needs and increases rollover risk.

Peer comparisons frame the trade-offs. Several oil producers used recent windfalls to accelerate balance-sheet repair; Morocco advanced subsidy rationalisation and targeted social support to free capex headroom. Algeria’s persistence with generalised subsidies and a wage-heavy mix cushions households but dampens multipliers from public investment and constrains private-sector crowd-in if domestic funding tightens. The monetary channel offers partial support via lower inflation, yet credit allocation and exchange-rate flexibility provide only limited reinforcement to private capital formation while hydrocarbons still set the external constraint.

The forward test is measurable and time-bound. Over the next four to six quarters, credibility strengthens if three thresholds are met simultaneously: the cash deficit narrows to ≤11.0% of GDP by Q4-2026; non-hydrocarbon real growth runs ≥4.0% year on year for three consecutive quarters; and general government debt stabilises at ≤52% of GDP with limited new state guarantees. Market confirmation would present as tighter hard-currency spreads relative to EMB, a steadier USD/DZD (DZD=X), and a Brent corridor at or above USD 60.

Failure modes are equally explicit: Brent averages < USD 60, non-hydrocarbon growth prints < 3.5%, and debt breaches 52% with rising guarantees. In that scenario, spreads widen, issuance windows compress, and policy pivots from broad subsidy defence to targeted consolidation and productivity-anchored investment by mid-2026.