By Ajay Makan and Javier Blas in London

Morocco has become the first oil-importing country to turn to Wall Street to protect itself against high oil prices, highlighting the challenges faced by governments grappling with social discontent because of rising fuel costs.
The government in Rabat has entered into derivatives contracts to hedge any unexpected rise in the cost of imported fuel, according to two people familiar with the deals.
The rare hedge transactions, made last month, come as Morocco starts to wind down a costly subsidies programme under pressure from the International Monetary Fund. As it removes the populist scheme, Rabat is keen to avoid any spike in local fuel prices.
Morocco is the only oil importing nation known to be hedging its consumption through derivatives arranged by the government. Ghana, an oil exporter, has previously taken out hedges on oil imports and exports at the same time.
The Moroccan government initially hedged its imports with local bank Banque Marocaine du Commerce Exterieur (BMCE), and BMCE then paid premiums to Barclays, Citi and Morgan Stanley to take on the risk.
The transactions covered a large chunk of Morocco’s expected fuel consumption for the rest of the year, and cost the government roughly $50m to $60m, according to one of the people familiar with the deals.
The government bought so-called call options for European diesel, which give Morocco the right to buy fuel at a predetermined price for the rest of the year, according to two people familiar with the deal. If prices drop, Rabat has the option to purchase fuel at lower prices. Morocco has yet to enter into hedges for 2014, but both people said that the country could return to the market in the new year.
Morocco’s move comes as countries across the world balance the cost of fuel subsidy regimes with the threat of social unrest if they unwind them. The pressure to reform the costly schemes has increased as oil prices rose recently above $115 a barrel on the back of supply disruptions from Libya to the North Sea.
Morocco raised the prices of gasoline, diesel and fuel oil in mid-September, triggering street protests and calls from opposition parties for the government to resign. The derivative contracts were taken out at the same time to cap the impact of possible increases in global diesel prices on the domestic market.
“After the Arab Spring the government can’t just remove subsidies altogether, or it would be toppled,” said one person familiar with the transactions.
In Middle East and north African states, in particular, low fuel prices are seen as a basic government service. But cheap fuel is encouraging wasteful consumption, and with populations rising fast, subsidy schemes are stretching government budgets.
The Moroccan government has been forced to begin unwinding its programme of subsidies under pressure from the International Monetary Fund, which offered Morocco a credit line of $6.2bn last year as its budget deficit topped 7.5 per cent.
Barclays, Citi, Morgan Stanley all declined to comment. BMCE and the Moroccan finance ministry could not be reached.
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