Reuters
Fitch Ratings has affirmed Morocco’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB-‘ and ‘BBB’ respectively. The issue ratings on Morocco’s senior unsecured foreign and local currency bonds were also affirmed at ‘BBB-‘ and ‘BBB’ respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling was affirmed at ‘BBB’, and the Short-term foreign currency IDR at ‘F3’.
KEY RATING DRIVERS
Morocco’s ‘BBB-‘ IDRs reflect the following key rating drivers:
Political and Economic Stability
The affirmation of Morocco’s ratings reflects its resilience during the years of transition following the Arab Spring in early 2011. GDP growth has remained high despite a challenging external and domestic environment. Accommodative public policies have led to rising government and external debt ratios but Fitch expects this to unwind, supported by both the political drive to implement reforms and a gradual recovery in the euro zone.
Firm Reduction in Twin Deficits
The deficits of the central government and the current account narrowed by 2 ppts in 2013 to 5.4% and 7.5% of GDP respectively, driven by reforms on energy subsidies, strong performance of new export industries (+23% for cars, +20% for aeronautics, +12% for electronics) and lower oil prices. Fitch expects the twin deficits to gradually narrow as reforms continue and the external environment improves.
Public Debt Stabilises
On a general government consolidated basis, Fitch estimates public debt to have peaked at 46.6% of GDP in 2013 (versus 40% for the BBB median) and that it should stabilise at this level in 2014 before declining thereafter. The main risks to the debt dynamics are slower-than-expected fiscal consolidation and GDP growth.
Steady GDP Growth
Growth was 4.8% in 2013, up from 2.7% in 2012 as it benefited from a weather-related marked rebound in agricultural output (+20%) and despite a slowdown in non-agricultural output (to 3.1% in 2013 from 4.5% in 2012). Fitch expects GDP growth to remain above 4% in the medium term as the non-agricultural sector accelerates on expected stronger European demand (Europe accounts for 60% of current account receipts (CXR), 80% of foreign tourists and remittances and 50% of exports) and domestic demand.
Government Commitment to Reform
Fitch expects the new coalition, in power since October 2013, to continue with reforms and budget tightening in line with the recent announcement of further reduction in energy subsidies. General elections are due in 2016. The IMF programme started in August 2012 has provided not only a precautionary credit line (USD6.2bn) but also a strong anchor for reform. Potential continuing IMF involvement after the current programme ends in August 2014 should support the reform agenda.
Rising Net External Debt
The fall in foreign exchange (FX) reserves over 2011 and 2012 combined with increased external sovereign borrowing have led to a sharp increase in Morocco’s net external debt, to 11.6% of GDP in 2013 (vs. 9.2% for the BBB median) from
-5% in 2010. FX reserves increased to USD19.2bn during 2013 (4.6 months of imports) and are expected to stabilise at 4.5 months of imports by 2015. Fitch expects net external debt to steadily increase and reach 16% of GDP by 2015.
Low Development Indicators
Morocco’s UN Development index scores and GDP per capita are lower than BBB peers. Unemployment (9.2% in 2013) is also higher than peers. Youth unemployment (13%) is one of the most critical social issues and a policy priority.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently well balanced. The main factors that individually or collectively might lead to rating action are as follows:
Positive:
-A substantive narrowing in Morocco’s twin deficits that materially reduces the vulnerability of the economy to shocks
-Improvements in social indicators (e.g. youth unemployment, poverty) amid entrenched political stability
Negative:
-Insufficient fiscal consolidation to narrow the budget deficit
-A weakening economic performance and sharply rising net external debt in the face of external shocks, such as weaker-than-expected euro zone performance or higher-than-expected oil prices
-Social instability that would constrain the political scope for reform
KEY ASSUMPTIONS
The Stable Outlook anticipates a gradual narrowing of the budget and the current account deficits from the peak of 2012 that will allow public debt to stabilise and a gradual rebuilding of FX reserves.
Fitch assumes continuing reform in a context of social stability. Fitch assumes a gradual economic recovery in the euro zone, to 1.1% in 2014 and 1.4% in 2015 from -0.4% in 2013. Growth in France and Spain, the two key economic partners, is forecast at respectively 0.9% in 2014 and 1.2% in 2015, up from 0.3% in 2013 and 0.8% in 2014 and 1.5% in 2015, up from -1.2% in 2013. Fitch assumes oil prices will decline to USD100/barrel by 2015 from USD109/barrel in 2013.
