Research Update:

Outlook On Morocco Revised To

Stable On Improving Fiscal And
External Balances; Ratings Affirmed At
'BBB-/A-3'
Primary Credit Analyst:
Ana Jelenkovic, London (44) 20-7176-7116; ana.jelenkovic@standardandpoors.com
Secondary Contacts:
Patrick W Raleigh, London +44 (0)2071767194; patrick.raleigh@standardandpoors.com
Christian Esters, CFA, Frankfurt (49) 69-33-999-242; christian.esters@standardandpoors.com
Analytical Group Contact:
SovereignEurope; SovereignEurope@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Outlook On Morocco Revised To Stable On
Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
Overview
In our view, Morocco's external and fiscal deficits will continue to
consolidate, supported by the government's consolidation plan and
reforms, as well as a more-favorable external environment.
We are therefore revising our outlook on Morocco to stable from negative.
We are affirming our 'BBB-/A-3' long- and short-term sovereign credit
ratings on Morocco.
The stable outlook reflects our view that growth-oriented reforms will
continue and that Morocco's high external financing needs will be met by
foreign direct investment (FDI) and the ready access to capital markets
of the public sector and large private companies.
Rating Action
On May 16, 2014, Standard & Poor's Ratings Services revised its outlook on the
Kingdom of Morocco to stable from negative. At the same time, we affirmed our
'BBB-/A-3' long- and short-term foreign and local currency sovereign credit
ratings.
Rationale
The outlook revision reflects our view that Morocco's fiscal and external
deficits will continue to narrow, supported by public finance reforms and
improvements in the external account. Its twin fiscal and external balances
suffered significantly with the onset of the Arab Spring in 2011, with public
finances strained by increased spending on social welfare, wages, and oil and
food subsidies. We expect these balances to improve over the next two or three
years, as long as our base-case assumptions for Moroccan and eurozone growth
hold.
The ratings on Morocco are supported by economic growth prospects, a moderate
government debt burden, and political and social stability. The ratings remain
constrained by low income levels and social needs, a relatively high external
liability position, and the deterioration in external and fiscal debt stocks
that has occurred in recent years.
The new government has pursued measures aimed at improving growth,
competitiveness, and productivity while lowering subsidy payments. We expect
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the coalition government--comprising the moderate Islamist party Justice and
Development Party (PJD) and the National Rally of Independence (NRI)--to
remain in power for its full term, expiring in 2016. Political opposition from
the Istiqlal party (which withdrew from government in mid-2013 over government
austerity plans) and popular opposition against reforms will remain challenges
for the government, however.
After taking weeks to form a new ruling coalition in 2013, the government has
pursued its subsidy reform agenda. In 2013, the subsidy bill decreased by 2%
of GDP from a high of 6.5% following the indexation of a number of energy
products to world prices, and also due to lower oil prices. As a result, the
central government deficit narrowed to 5.4% of GDP from 7.3% a year earlier.
In January 2014, the government removed subsidies on gasoline and industrial
fuel not used for generation, reduced the per-unit subsidy on diesel, and
announced further incremental reductions for the year. We expect the central
government deficit to narrow moderately to 5.2% of GDP in 2014, and to 4.0% by
2017. A bigger improvement would require efforts beyond subsidy reform--say in
the area of public wages, which total 13% of GDP. We estimate a consolidated
general government balance, including social funds and local government
surpluses, of 3.5% of GDP in 2014.
Fiscal reforms are targeting a key weakness that emerged at the onset of the
Arab Spring: the ballooning cost of blanket subsidies on energy and food
products. We also expect some reforms aimed at widening the tax base and
improving tax collection, as well as measures to be announced this year to
address the emerging structural deficits in the nation's pension system. The
main public pension fund, Caisse Marocaine de Retraites, is expected to run a
deficit in 2015 for the first time according to the Moroccan authorities.
According to the IMF, the pension fund will exhaust its reserves by 2021
without reforms.
On the other hand, we see limited prospects for public-sector wages reform.
The government's ongoing dialogue with key stakeholders, including unions, is
also likely to lead to some reform agenda compromises. In April, for example,
the government agreed to increase the minimum wage in the private sector and
to increase public-sector wages. That said, our rating affirmation partly
reflects our expectation that compromise, as well as a parallel improvement in
the targeting of social spending, will enable the government to push forward
with further subsidy cuts.
Morocco's current account deficit narrowed in 2013 to 7.5% of GDP from 10% in
2012. The balance benefitted from lower oil prices, stronger external demand
and stable remittances from Europe, as well as grants from the Gulf
Cooperation Council (GCC) states. We expect the current account deficit to
narrow to 6.2% of GDP in 2014 due to the trade deficit stabilizing. This
reflects the services and transfers balances strengthening further and
forecast strong export growth (automobiles by 50%, electronics by 20%, and
aeronautics by 10% in 2014), as well as lower oil imports being offset by
rising wheat imports. Automobile exports have already surpassed textile
exports in value. Of the $5 billion (around 5% of GDP) pledged by the GCC over
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Research Update: Outlook On Morocco Revised To Stable On Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
2012-2017, $600 million has been deposited with the central bank and the
government expects up to another $1 billion will be deposited this year. These
deposits contribute to the central bank's foreign currency reserves. Reserves
have stabilized at about 16% of GDP (down from a high of 27% of GPD in 2007)
on the improvement in external balances, strong net FDI inflows, GCC and other
donor support, and public- and private-sector external borrowing.
Morocco's net external liability position remains high at about 140% of
current account receipts (60% of GDP). External liabilities are 40% debt and
60% direct inward and equity investments. We estimate Morocco's gross external
financing requirement, including the current account, short-term debt, and
amortization of long-term debt, at over $15 billion in 2014. We expect this to
be covered by FDI ($4 billion), a 100% rollover of $5.5 billion of short-term
external debt, and sovereign and private-sector external issuance, including
state-owned enterprises, as well as by multilateral and bilateral debt.
In the event of an external shock, Morocco can draw down the $6.2 billion
precautionary credit line with the IMF. The agreement expires in August 2014,
and we believe it is likely to be renewed.
GDP growth in 2013 accelerated to an estimated 4.5% from 2.7% in 2012. This
was driven by 20% growth in the agricultural sector after a good harvest.
Meanwhile, nonagricultural sector growth declined to 3.1% from 4.5% the
previous year. Recovery in the non-agricultural sector, particularly in the
newly developing manufacturing sectors (automobiles, aeronautics, and
electronics) is expected to strengthen in 2014, supported by stronger demand
from the EU.
Given the likelihood of a more normal harvest this year, however, we forecast
overall economic growth to slow to 4%. Agriculture accounts for about 15% of
GDP and fluctuates widely, although its impact on the broader economy is
diminishing with greater irrigation and the increasing share of
higher-value-added sectors in the non-agriculture sector. Stronger medium-term
growth will depend on the implementation of structural reforms, including to
reduce the fiscal deficit, and implementing labor market reforms, as well as
structural reforms to the business environment and to strengthen
competitiveness. In the context of the exchange rate peg, increasing
competitiveness and flexibility of the economy will be a challenge.
We expect that the central bank, Bank Al-Maghrib (BAM), will support the
current pegged exchange rate regime until there is more certainty about global
economic conditions. Given sensitivities surrounding the possible inflationary
impact of a more-flexible exchange rate, we believe there will be limited
steps, if any, toward a more flexible exchange rate regime. This will continue
to limit monetary policy flexibility. With a stable exchange rate and low
inflation in the eurozone, we expect Morocco's inflation rate to remain
subdued. In 2013, inflation averaged 2%. We expect it will pick up vis--vis
the eurozone's rate with the further removal of subsidies, weaker agriculture
sector growth in 2014, and the increase in minimum wages.
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Research Update: Outlook On Morocco Revised To Stable On Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
Liquidity in the Moroccan banking system has deteriorated in recent years, and
we expect the banks to remain restrained by limited long-term funding
resources. Funding diversification is low and the loan-to-deposit ratio of
104% (December 2013) has been steadily increasing because the pool of
available deposits no longer is sufficient to fund new lending. Total credit
growth in 2013 was 3.5%, but credit growth in the private sector was less than
1% in 2013. In 2013, financing of the fiscal deficit accounted for most of the
credit growth due to a slowdown in credit demand in line with the slowdown in
non-agricultural growth. We expect stronger growth in 2014 from the
non-agricultural sector. The BAM has given extensive liquidity support to the
banking system by cutting the reserve requirement from 6% to 2% since 2012,
providing repo facilities, and relaxing eligible collateral requirements. We
expect banks to raise loanable funds by increasingly tapping capital and money
markets for subordinated debt, commercial paper, or interbank repos. Our
Banking Industry Country Risk Assessment for Morocco is '7' (with '1' being
the lowest risk, and '10' the highest).
Outlook
The stable outlook reflects our view that growth-oriented reforms will
continue and that Morocco's high external financing needs will be met by FDI
and the ready access to capital markets of the public sector and large private
companies.
We could consider lowering the ratings on Morocco if the government's
structural reform program stalls (particularly beyond subsidies), or if
Morocco's fiscal and external deficits do not continue to narrow as we
forecast.
Conversely, a step-rise in medium-term growth prospects that translated into a
materially improved government and external debt position as a share of the
economy could lead us to consider an upgrade.
Key Statistics
Table 1
Kingdom of Morocco - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal
GDP (US$
bil)
75 89 91 91 99 96 105 116 123 131 140
GDP per
capita
(US$)
2,453 2,871 2,907 2,869 3,095 2,949 3,185 3,465 3,649 3,827 4,046
Real GDP
growth
(%)
2.7 5.6 4.8 3.6 5.0 2.7 4.5 4.0 4.2 4.5 5.0
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Research Update: Outlook On Morocco Revised To Stable On Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
Table 1
Kingdom of Morocco - Selected Indicators (cont.)
Real GDP
per capita
growth
(%)
1.8 4.6 3.7 2.4 3.6 1.2 3.2 2.7 2.9 3.2 3.7
Change in
general
government
debt/GDP
(%)
(1.0) (1.6) 1.8 4.0 4.6 8.7 4.0 3.1 3.0 2.3 2.3
General
government
balance/GDP
(%)
3.9 3.7 1.2 (2.1) (4.7) (5.3) (3.7) (3.5) (3.3) (2.6) (2.6)
General
government
debt/GDP
(%)
38.7 33.1 32.9 35.5 38.4 46.0 47.1 47.5 47.7 47.1 46.3
Net
general
government
debt/GDP
(%)
35.7 30.9 30.8 33.1 36.5 44.0 44.6 45.1 45.5 45.0 44.3
General
government
interest
expenditure/revenues
(%)
7.0 6.1 6.5 6.8 6.3 6.4 7.3 7.5 7.6 7.7 7.5
Oth dc
claims on
resident
non-govt.
sector/GDP
(%)
74.0 82.7 86.7 92.2 97.0 98.8 95.5 93.5 92.4 92.8 92.7
CPI
growth
(%)
2.0 3.7 1.0 1.0 0.9 1.3 1.9 2.5 2.3 2.3 2.3
Gross
external
financing
needs/CARs
+use. res
(%)
67.3 75.6 74.8 76.0 85.6 94.1 97.2 96.7 96.6 96.0 95.8
Current
account
balance/GDP
(%)
(0.3) (6.4) (5.9) (4.6) (8.4) (10.3) (7.5) (6.2) (5.3) (4.3) (3.4)
Current
account
balance/CARs
(%)
(0.7) (14.3) (16.6) (12.0) (20.5) (24.4) (17.6) (14.0) (11.6) (9.1) (7.2)
Narrow
net
external
debt/CARs
(%)
(31.1) (17.4) (11.8) (2.2) 9.5 25.5 31.5 35.9 36.0 34.9 32.3
Net
external
liabilities/CARs
(%)
86.3 80.5 118.9 123.4 115.7 134.5 136.8 135.3 135.0 132.5 128.3
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Research Update: Outlook On Morocco Revised To Stable On Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
Table 1
Kingdom of Morocco - Selected Indicators (cont.)
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year
plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as
the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid
assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net
external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
General Criteria: Understanding National Rating Scales, April 14, 2005
Related Research
Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,
2014
Banking Industry Country Risk Assessment: Morocco, Oct. 10, 2013
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
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Research Update: Outlook On Morocco Revised To Stable On Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
Morocco (Kingdom of)
Sovereign Credit Rating BBB-/Stable/A-3 BBB-/Negative/A-3
Senior Unsecured BBB-
Transfer & Convertibility Assessment BBB+
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Research Update: Outlook On Morocco Revised To Stable On Improving Fiscal And External Balances; Ratings
Affirmed At 'BBB-/A-3'
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