CPI Financial
by Matthew Amlôt
On April 17, 2015, Standard & Poor’s Ratings Services affirmed its ‘BBB-/A-3’ long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Morocco. The outlook is stable.
“Since our last review, in November 2014, we have revised down our forecasts for average global oil prices in 2015-2018 significantly, to $68 per barrel (/bbl) of Brent blend from $90/bbl. As Morocco is a significant net importer of oil products, this has led us to revise down our forecasts for the country’s current account deficits over this period.
“However, somewhat offsetting this gain, we now expect the euro to be weaker against the U.S. dollar over the next four years than we forecast in November. Given the still-heavy weighting of the euro (despite being reduced from 80 per cent to 60 per cent in mid-April 2015) in the basket of currencies to which Morocco’s dirham is pegged, we now expect the dirham to also weaken against the U.S. dollar. This expected depreciation is somewhat mitigated by the recent decision of the central bank, Bank Al Maghrib (BAM), to increase the dollar’s weighting to 40 per cent.
“Morocco has faced strong headwinds since the financial and economic crisis and the Arab Spring, but in our view it has demonstrated resilience. Unlike elsewhere in North Africa, political turmoil has been contained. This has been largely due to constitutional reforms, a rise in current spending by the government, and the continued popularity of King Mohammed VI. Moreover, ethnic, tribal, religious, and regional divisions are less pronounced in Morocco than in much of the Middle East and North Africa.
“The country fares reasonably well in international comparisons of governance and institutional quality. For example, the World Bank ranks Morocco in the 53rd percentile globally for government effectiveness, 49th for rule of law, 50th for regulatory quality, and 32nd for political stability and absence of violence. Transparency International, meanwhile, places the country in the middle of its Corruption Perceptions Index.
“The coalition government, led by the moderate Islamist Justice and Development Party, has broadly demonstrated a willingness and ability to push through substantial and often-tough reforms, particularly to subsidies, but also to pensions and public salaries.
“We now estimate income per capita at just over $3,000 in 2015, which is low for a sovereign rated ‘BBB-‘, and lower than at our last review, given our weaker forecasts for the exchange rate of the dirham against the dollar. Wider measures of development are also weaker in Morocco than in most investment-grade peers. The country’s Human Development Index score of 0.617 (with one being the highest possible) is mid-range, although it has been on a steadily rising trend for many years, from 0.399 in 1980, which has led to decreased poverty. Weaknesses include fairly low adult literacy rates (67 per cent according to the U.N. Development Program), still high (albeit declining) gender inequalities, and rising wealth inequality.
“Real GDP growth was sedate in 2012-2014, averaging 3.4 per cent, or 1.9 per cent on a per capita basis. Growth has been held back in part by the country’s still-pronounced, albeit declining, dependence on highly volatile agricultural output, weaker phosphate prices, and lower external demand from Europe.
“Nonetheless, new sectors such as automotives, aeronautics, and electronics areset to continue growing rapidly in line with the country’s industrial policy, which enjoys broad political support. In view of this trend, continued growth in tourism, and a likely rise in phosphate output, we expect real GDP growth to accelerate to five per cent in 2018. We estimate the weighted average of trend growth in GDP per capita at just shy of three per cent per year in 2009-2018, which is fairly rapid and in line with many similarly rated peers. The country will continue to welcome foreign direct investment (FDI), and its business environment should stay broadly supportive (it is ranked 71st out of 189 countries in the World Bank’s Doing Business 2015 Index). However, in our view, weaknesses in the country’s judiciary will remain a deterrent to investors. That said, recent and ongoing judicial reforms, such as changes to the penal code, could improve matters over the medium term.
“The current account deficit shot up to nearly 10 per cent of GDP in 2012, from 4.5 per cent in2010, amid high prices for imported food and fuel products and weak demand for Moroccan exports from major markets in Europe, as well as weaker phosphate prices. However, we expect the deficit to continue narrowing to 2.3 per cent of GDP in2018, from 7.6 per cent in 2013. Lower global hydrocarbons prices should significantly ease pressure on imports, of which fuel products accounted for nearly one quarter in 2014.
“We also forecast rising tourism receipts and higher export volumes of cars from the Renault factory in Tangiers. Cars have recently become the country’s leading export product by value, overtaking phosphates. We also anticipate increased phosphate production will support exports and, in turn, current account consolidation. The expected–although slow–economic recovery in key European markets for trade, investment, and tourism, particularly France and Spain, will also help Morocco’s external position in the next three years.
“We expect FDI to finance a growing proportion of these deficits, from just over one-third in 2013, with external borrowing covering the remainder. We forecast narrow net external debt to drop slowly as a proportion of current account receipts (CARs) to 29 per cent in 2018 from an estimated 37 per cent in 2015. We forecast the country’s gross external financing requirements to be covered by its CARs over this period. Meanwhile, our revised forecast for lower current account deficits in 2015-2018 now leads us to expect the country’s reserve coverage to be slightly higher than at our last review, at just under five months of current account payments. However, this is still much lower than the nearly seven months’ coverage seen in 2009.
“The renewed Precautionary and Liquidity Line (PLL) worth around $5 billion, which the IMF granted in July 2014, would provide a significant buffer in a stress scenario. As with the two-year PLL granted in August 2012, we do not expect the authorities will need to draw on it. Also supportive of Morocco’s external position are the pledged grants for project financing from Gulf Cooperation Council states, totaling around $1 billion a year in 2013-2017.
“Fiscal metrics have shown strain in recent years, but we expect consolidation to continue apace, and for the government to hit its target of a central government deficit of just over three per cent of GDP by 2017, from over seven per cent in 2012. We expect the general government balance, which includes surpluses of local governments and social security funds, to be lower still, at 2.6 per cent of GDP in 2018.
“Subsidies on fuel and food ballooned to over six per cent of GDP following the onset of the Arab Spring in 2011. This led to wider fiscal deficits, and annual average changes in general government debt of more than six per cent in 2011-2013. However, the government has managed to cut its subsidies bill substantially. It has also taken measures to slow growth in other areas of current spending, such as public salaries.
“Given that there has been some slippage from budgeted spending in previous years, particularly on subsidies and wages, we foresee implementation risks to the proposed cuts. However, we expect a new budgetary framework to boost discipline. Notably, it should make wage appropriations binding, and increase the transparency and oversight of line ministries’ spending. Capital spending has broadly stagnated in the past three years, being squeezed by demands for sustained high current spending, but it is due to rise in 2015 by nine per cent year-on-year. This should help support economic growth and private-sector job creation to some extent.
“We expect net general government debt (which excludes from gross debt the government’s liquid assets and the holdings of central government debt by other branches of state, such as public pension funds) to average 47 per cent of GDP in 2015-2018. The stock has risen quickly in recent years to fund wide deficits. External financing has increased, and the government successfully tapped the international dollar and euro markets in 2013 and 2014 respectively, with issues of $750 million and EUR 1 billion at favorable rates.
“However, at end-2013 just over three-quarters of the stock was in local currency. Initial maturities of the stock are long, with roughly half at more than 10 years, which limits refinancing risk. With over 90 per cent of the debt stock at fixed interest rates, debt-servicing risks are also mitigated.
“Regarding monetary flexibility, we expect that the BAM will remain committed to the current pegged exchange rate regime for at least the next two years, and until a more supportive macroeconomic environment is in place, at which point the BAM has indicated its intention to liberalize the regime.
“However, given the strong sensitivities surrounding the possible inflationary impact of a more flexible exchange rate, we currently foresee limited progress, if any, toward a more flexible exchange rate regime by end-2018. This will continue to limit monetary policy flexibility, but should contribute to continued low rates of inflation, which we forecast to average just over two per cent a year in 2015-2018.
“The stable outlook reflects our expectation that the consolidation of the still-large twin deficits will continue over the next few years, while economic growth accelerates from recently low rates.
“We could lower the ratings if growth does not accelerate as markedly as expected, if the government deviates substantially from its deficit consolidation path, or if the current account does not narrow as anticipated, for example owing to lower-than-expected exports.
“We see an upgrade as a more-remote possibility. It might require economic growth to substantially exceed our forecasts, for exchange rate flexibility to increase markedly, and for our assessment of Morocco’s institutional and governance quality to rise above that of similarly rated peers.”
