Algeria dispute threatens Orascom's credit rating

The creditworthiness of Orascom Telecom is under threat from a government dispute in Algeria, the home of one of the company's most profitable mobile networks. The ratings agency Standard & Poor's (S&P) yesterday placed Egypt's largest public company on ratings watch, warning that if the dispute was not resolved quickly, Orascom's "B" credit rating could be cut. Orascom operates the Djezzy mobile network in Algeria. The network has a market share of almost 65 per cent and generated US$580 million (Dh2.13 billion) in profit last year, almost all of which Orascom is trying to repatriate to its Egyptian headquarters.

But the process has been blocked by the Algerian government, which has said Orascom must pay about $40m in back taxes before the transfer can take place. The government recently reassessed Orascom's 2004 taxes, concluding that the company owed an additional $50m. Orascom believes it was exempt from taxes in 2004, due to a clause in its Algerian licence agreement. It paid 20 per cent of the total and has tried to negotiate over the rest.

"Management are now saying that the issue should be resolved in two to three weeks," said Marise Ananian, an analyst at EFG-Hermes in Cairo. "Algeria is certainly becoming a more difficult environment for Orascom and the government keeps on imposing new taxes and policies." The dispute is not Orascom's first challenge in the country. Last year it abandoned efforts to launch a fixed-line telephone service in competition with Algerie Telecom, the government-owned monopoly. The company said that despite acquiring a fixed-line licence, it was treated unfairly by authorities and the regulator.

"From a political and regulatory perspective, Algeria has always been seen as risky, Mrs Ananian said. "But now that kind of risk is increasing." Orascom has operating networks in markets where many fear to tread. It quickly deployed one of Iraq's first national mobile services in the years after the US-led invasion of the country, and operates networks in international pariah states such as Zimbabwe and North Korea.

The Algerian dispute has exposed the risks involved in such a strategy. But it has also left vulnerabilities in the company's balance sheet, which is increasingly dependent on revenues from overseas operations, said Michael O'Brien, a credit analyst at S&P. "We believe that any substantial delays in repatriation of expected dividends of over $500m from Algeria could have potential knock-on consequences on liquidity management at Orascom Telecom," Mr O'Brien said.