Morocco, Government of — Moody’s changes Morocco’s outlook to negative, affirms Ba1 rating

Moody’s changes Morocco’s outlook to negative, affirms Ba1 rating Global Credit Research – 04 Feb 2021New York, February 04, 2021 — Moody’s Investors Service (“Moody’s”) has today changed the outlook on the Government of Morocco’s issuer ratings to negative from stable. Moody’s has affirmed Morocco’s Ba1 issuer and senior unsecured bond ratings. Moody’s decision to change the outlook to negative from stable reflects the medium term impact of the pandemic on Morocco’s fiscal strength, particularly in light of the subpar economic recovery expected given the economy’s concentrated exposure to sectors and trading partners that have been hard hit by the pandemic. While the impact on public debt has thus far been in line with other emerging markets, the upward step in the debt burden continues a consistent trend since 2008. Set alongside the government’s exposure to contingent liabilities from state-owned enterprises’ (SOE) debts and an increase in credit guarantees as part of the pandemic response it raises concerns regarding the government’s ability to arrest, and ultimately to reverse, the erosion in fiscal strength.The Ba1 rating affirmation takes into account the continued affordability of the debt stock, supported by access to domestic and external funding sources at favorable terms in order to meet higher gross borrowing requirements, while persistently low energy prices and a solid foreign exchange reserve buffer contain external vulnerability risks.Morocco’s country ceilings remain unchanged. The local currency ceiling remains at Baa1, reflecting a large public sector footprint in addition to predictable institutions and reduced external vulnerability risk, balanced by lingering political risk as reflected in sporadic social protests and the potential flare up of tensions related to the Western Sahara territory. The foreign currency ceiling at Baa2 reflects the existence of capital controls, consistent with the pegged exchange rate system, and takes into account the gradual foreign-exchange rate liberalization policy initiated in January 2018, although that process will proceed at a slower pace than initially envisioned.Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL440079 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.RATINGS RATIONALERATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLEFURTHER EROSION OF FISCAL STRENGTH OVER THE OUTLOOK PERIOD WOULD UNDERMINE CREDIT SUPPORT AT Ba1 RATING LEVELIn light of a pandemic-induced real GDP contraction of 7% in 2020 and a fiscal deficit at 7.5% of GDP, Moody’s expects a further deterioration in the central government debt/GDP ratio to almost 76% of GDP in 2020 from 65% in 2019, before eventually stabilizing below 80% over the next three years. On a general government basis (taking into account the consolidated debt of central and local governments and the social security funds controlled by these entities), the debt stock will approach 70% of GDP in that period. This compares with a Ba1-median (excluding Morocco) of about 60% of GDP in a post-pandemic environment. Looking forward, Moody’s expects a gradual reduction in the fiscal deficit to 6.5% of GDP in 2021 and 4.5% in 2022, supported by a modest recovery in revenue.While the projected impact on public debt is broadly in line with emerging market peers, the upward step in the debt burden as percent of GDP or of revenue continues a trend over the past decade to levels that have the potential to erode the sovereign’s fiscal strength over the medium term. If sustained, this dynamic would erode compatibility of Morocco’s credit profile at the Ba1 rating level.Fiscal pressures are exacerbated by increasing contingent liability risks stemming from the SOE sector with external debts at 15.2% of GDP in 2019, of which about 11% of GDP were guaranteed by the government. As part of its pandemic response, the government has increased transfers to non-commercial SOEs and extended additional credit guarantees in the range of 5-6% of GDP on behalf of commercial SOEs and as financial support measures to private sector firms in order to sustain the small and medium enterprise sector (SMEs), bringing the amount of outstanding guarantees to almost 20% of GDP.The materialization of these contingent liability risks or the persistence of larger than expected transfers to SOEs would inhibit the government’s fiscal consolidation and debt stabilization objectives, risking the debt trajectory further diverging from the Ba1 median.EXPOSURE TO PANDEMIC-HIT SECTORS AND TRADING PARTNERS DAMPENS RECOVERY PROSPECTS AMID REDUCED SHOCK ABSORPTION CAPACITYThe sovereign’s reduced fiscal room for maneuver limits shock absorption capacity, already constrained by low wealth levels (with GDP per capita at $8,148 in 2019). Morocco faces the prospect of a subpar economic recovery given the economy’s exposure to sectors and trading partners that are suffering durable effects from the pandemic. The tourism industry which accounts for about 12% of GDP as well as the industrial sector that benefits from the integration in the global value chain in the automotive and the aeronautic industries and which account for a similar share of GDP, are part of Morocco’s key growth and export drivers that Moody’s expects will only gradually return to pre-crisis levels over the next three years. Similarly, about 60% of exports are directed to the euro area, with Spain and France alone accounting for over 45% of total exports, followed by Italy with another 5% of the total. These are among the European economies most severely hit by the pandemic and for which Moody’s expects a slow, uneven and fragile recovery, adding to downside risks for external demand.The concentrated exposure to the European trade cycle (and as a source of remittances) adds downside risks to the pace of economic recovery that Moody’s projects to include a 4.5% rebound in 2021, followed by 3.2% growth in 2022 and an average of 3.5% afterwards, in line with the non-agricultural growth rate registered before the pandemic. A weaker than expected economic recovery would add to labor market constraints and to social risks, with repercussions on the pace of fiscal consolidation.RATIONALE FOR THE AFFIRMATION OF THE Ba1 RATINGThe Ba1 rating balances diminished economic and fiscal strength, with moderate event risk exposure driven by banking sector risk, and a track record of coherent macro policies and fiscal reform implementation over recent years as highlighted by the elimination of fuel subsidies and the implementation of parametric public pension reform. Morocco’s institutional capacity to support SOE, health and social safety net reform implementation as part of the government’s structural reform agenda supports creditworthiness.The credit profile also benefits from the sovereign’s large domestic funding base in local currency, and its continued access to domestic and external funding sources at favorable terms in order to meet higher gross borrowing requirements at about 17% of GDP in 2021 (and declining gradually thereafter). Access to local currency funding sources underpins the favorable government debt structure with a foreign currency share of about 20%, while low borrowing costs contribute to the continued affordability of the debt stock as measured by interest/revenue below 12% over the next three years and close to the median of Ba1-rated peers.Meanwhile external vulnerability risks are contained given structurally lower energy prices and a solid foreign exchange reserve buffer covering over eight months of imports at the end of 2020. Moody’s projects the current account deficit to have narrowed to 3.7% of GDP in 2020 from 4.1% in 2019, and to remain in the 3.5-4% of GDP range over the next three years.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSMorocco’s ESG Credit Impact Score is moderately negative (CIS-3), reflecting its exposure to environmental and social risks but supported by a track record of policy effectiveness. Resilience to environmental and social risks is increasingly constrained by low wealth and high debt levels.Morocco’s credit profile is highly exposed to environmental risks, reflected in its E-4 issuer profile score. Physical climate risk exposure is high and mainly reflects the sovereign’s water scarcity that is leading to dwindling groundwater reserves and a strong dependence on rain-fed agriculture. The primary sector accounts for 10-15% of GDP and about 35% of total employment and contributes to a volatile growth pattern, increasing the issuer’s sensitivity to environmental risks.Exposure to social risks is high (S-4 issuer profile score) and primarily reflects rigid labor markets that constrain employment opportunities, including for educated youth. Morocco also underperforms in terms of education performance in the international comparison, resulting in wide disparities between achievements in public and costly private schools. A high degree of gender inequality is reflected in the very low female labor participation rate at less than 25% of the female population aged 15+ which represents a structural constraint on Morocco’s growth potential.Governance is broadly in line with other sovereigns and does not pose particular risk (G-2 issuer profile). Policy effectiveness reflects the government’s coherent macroeconomic policies and fiscal reforms that have been implemented over the past few years, including the elimination of most fuel subsidies, the enactment of parametric public pension reform and the shift to renewable energy production. However, governance is constrained by weak voice and accountability and by the high debt ratio that reduces the government’s financial capacity to address environmental and social risks.GDP per capita (PPP basis, US$): 8,148 (2019 Actual) (also known as Per Capita Income)Real GDP growth (% change): 2.5% (2019 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): 1% (2019 Actual)Central Gov. Financial Balance/GDP: -4.1% (2019 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: -4.1% (2019 Actual) (also known as External Balance)External debt/GDP: 45.9% (2019 Actual) Economic resiliency: baa3Default history: No default events (on bonds or loans) have been recorded since 1983.On 1 February 2021, a rating committee was called to discuss the rating of the Morocco, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer’s susceptibility to event risks has not materially changed.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade of Morocco’s ratings is unlikely in the near to medium term given the negative outlook. A change in the outlook to stable from negative would likely relate to further policy action that ensures that the government debt ratio stabilizes and SOE contingent liabilities are contained. The continued implementation of business environment reforms that improve the economy’s non-agricultural growth prospects would also be credit supportive.Continued fiscal deterioration beyond Moody’s current expectations, evident in the government debt/ratio rising further or the materialization of significant contingent liabilities emanating from SOEs or from the banking sector could lead to a downgrade. Similarly, an unforeseen and sustained deterioration in the external accounts would likely be more in line with a lower rating level.The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.REGULATORY DISCLOSURESThe List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL440079 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody’s disclosures on the following items:** Rating Solicitation** Issuer Participation** Participation: Access to Management** Participation: Access to Internal Documents ** Disclosure to Rated Entity ** Endorsement ** Lead Analyst ** Releasing Office For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Elisa Parisi-Capone Vice President – Senior Analyst Sovereign Risk Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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