CPI FINANCIAL
by Jessica Combes
Moody’s Investors Service has changed the outlook on the Government of Morocco’s rating to positive from stable and affirmed the issuer and senior unsecured ratings at Ba1.
The key drivers of the rating action are:
(1) Improving external position reflected in the build-up of foreign exchange reserves in the wake of dynamic new export industries and lower nominal oil imports;
(2) Declining fiscal imbalances, reflecting gradual but steady fiscal consolidation, supported by fuel subsidy and public pension reforms, which in turn increase the prospect of a gradual reduction in public-sector indebtedness.
Moody’s decision to affirm Morocco’s Ba1 rating balances an institutional environment, which is supportive of structural reforms, as illustrated by the country’s industrialisation and renewable energy strategy, against low wealth levels, a volatile and subdued growth pattern, and a comparatively high public debt stock relative to similarly rated peers. The Ba1 rating also captures Moody’s political risk assessment, which is based on the delays in the formation of a new government following the elections in October last year, in addition to potential regional tensions related to the disputed Western Sahara territory.
Morocco’s foreign- and local-currency ceilings remain unchanged, namely the long-term foreign-currency bond ceiling at Baa2, the long-term foreign-currency deposit ceiling at Ba2, and the long-term local-currency bond and deposit ceilings at Baa1. The short-term foreign-currency bank deposit ceiling remains unchanged at NP, and the short-term foreign-currency bond ceiling at P-2.
Ratings rationale
First driver: dynamic new export industries and lower nominal oil imports gradually improving the country’s external position
The first driver for Moody’s decision to change Morocco’s rating outlook to positive is the country’s improving external position in the wake of lower nominal oil imports and resilient export sectors, resulting in the build-up of a foreign-exchange buffer amounting to around 7 months of import cover at the end of 2016, up from 4.1 months at year-end 2012. As one of the most energy-import-dependent countries among Moody’s-rated MENA sovereigns, Morocco is one of the main beneficiaries of the lower-for-longer oil price environment, which supports the preservation of the buffer over the forecast horizon. The forex buffer also represents a necessary precondition for the central bank’s announced strategy to gradually move towards a flexible exchange rate system starting in the second half of 2017.
Morocco’s export performance is supported by the diversification into higher value-added automotive, aeronautics and electronics sectors, which have together overtaken the more traditional exports in the phosphate, agriculture or textile sectors, and which continued to expand at double-digit rates in 2016. Moody’s expects the country’s export performance in these new sectors to remain dynamic in response to their increased integration in the global production chain.
The country’s current account deficit has improved to an estimated 3.8 per cent of GDP at the end of 2016 from a deficit of 9.5 per cent in 2012. Moody’s expects the current account deficit to remain around the 4 per cent of GDP level over the forecast horizon, with oil prices projected to remain in the $40-$60 range. Morocco’s relative political stability has also bolstered foreign direct investment (FDI) inflows, which are mainly geared towards the real estate and the industrial sectors, and which balance nascent FDI outflows toward Sub Saharan Africa in support of Morocco’s regional trade diversification strategy. If sustained at current levels, Moody’s expects that net FDI inflows will remain an important source of funding for the country’s current account deficit, therefore limiting the build-up of external debt.
Second driver: institutional reforms likely to support gradual but steady fiscal consolidation
The second driver behind Moody’s decision to change Morocco’s rating outlook to positive is the country’s improving fiscal performance, reflecting a gradual but steady pace of fiscal consolidation, which is in turn supported by institutional improvements that are likely to reduce implementation risks in the future. The fiscal deficit has declined steadily to four per cent of GDP at the end of 2016 from 7.3 per cent in 2012, driven mainly by the reduction in the energy subsidy bill to about 1.2 per cent of GDP from 6.5 per cent in 2012. While the slump in oil prices played an important role, the complete elimination of fuel subsidies and the introduction of an automatic pricing formula in late 2015 shields the deficit from expanding again with increasing oil prices. Looking ahead, Moody’s believes that Morocco’s fiscal deficit is likely to continue to contract. Provided there are no major setbacks, the continued shrinking of the fiscal deficit raises the prospect for the central government’s debt-to-GDP ratio to begin trending downward as of this year and gradually move towards the 2020 60 per cent target envisaged by the government.
Similarly, the parametric public-sector pension reform, which the Moroccan government enacted before the October 2016 elections, has improved the financial sustainability of the public-sector pension fund, thereby reducing pressures on the budget over the medium term. Other reform initiatives, which have been undertaken with the technical cooperation of the IMF under three consecutive Precautionary and Liquidity Line (PLL) programmes since 2012, include the almost complete implementation of the organic budget law, the continued fiscal decentralisation under the Advanced Regionalization programme, in addition to tax reform with the objective of broadening the tax base, reducing exemptions and improving the business environment.
Rationale for affirming Morocco’s rating at Ba1
Moody’s affirmation of Morocco’s Ba1 government bond rating takes into account the continued progress in the country’s industrialisation strategy, which aims to increase the manufacturing share to 23 per cent of GDP by 2020 from 16 per cent currently, deepen its focus on renewable energy to reduce its energy import dependence, and expand the country’s geographical trade diversification into Sub Saharan Africa.
At the same time, Morocco’s rating reflects persistent structural constraints, combining low wealth levels with relatively subdued and volatile growth dynamics in comparison to peers because the county’s agriculture sector continues to contribute a significant 13 per cent of GDP as well as 40 per cent of the labour force. The Ba1 rating also takes into account the comparatively high central government debt ratio of an estimated 64.8 per cent of GDP in 2016, although the low foreign-currency share of the overall debt stock, and access to a large domestic funding base represent mitigating factors. As the main driver of event risk, the Moroccan banking sector’s foray into Sub Saharan Africa represents both an opportunity to diversify and to expand its market share, as well as a challenge in terms of cross-border supervision and risk management.
The Ba1 rating affirmation also captures Moody’s political risk assessment of Morocco, which takes account of delays in the formation of the new government following the elections in October last year, in addition to the potential for regional tensions related to the disputed Western Sahara territory.
What could change the rating up/down?
Upward rating pressure would arise from increased evidence that the country’s budgetary performance will be sufficiently robust in the coming years to firmly position the central government debt ratio on a downward trajectory, combined with a stabilisation of debt guarantees from state-owned enterprises. A resolution of the political stalemate that would secure the maintenance of fiscal discipline and the reform momentum – including the stated objective of easing the current currency peg in the second half of 2017 with the aim to moving to an inflation-targeting regime and easing capital controls over the medium term — would also be credit supportive.
If the Moroccan government proved unable to control the deficit, the debt burden and debt guarantees this would increasingly limit Morocco’s fiscal space and weigh on the country’s credit profile over the medium term.
A continued political stalemate or increased tensions with the Western Sahara territory would also be credit negative, as would an unforeseen deterioration in the external accounts due to a sharp and sustained spike in oil prices or as a result of the gradual transition to a flexible exchange rate system.
GDP per capita (PPP basis, $): 8,180 (2015 Actual) (also known as Per Capita Income)
Real GDP growth ( per cent change): 4.5 per cent (2015 Actual) (also known as GDP Growth)
Inflation Rate (CPI, per cent change Dec/Dec): 0.6 per cent (2015 Actual)
Gen. Gov. Financial Balance/GDP: -4.4 per cent (2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.1 per cent (2015 Actual) (also known as External Balance)
External debt/GDP: 42.7 per cent (2015 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1986.
On 21 February 2017, a rating committee was called to discuss the rating of the Government of Morocco. Other views raised included: the issuer’s economic fundamentals, including its economic strength, have not materially changed; the issuer’s institutional strength/framework, have increased; the issuer’s fiscal or financial strength, including its debt profile, has not materially changed; the issuer’s overall susceptibility to event risk has not materially changed.
