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 are also affirmed at 'BBB-' and 'BBB' respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'BBB' and the Short-term foreign-currency IDR at 'F3'.
KEY RATING DRIVERS
Morocco's rating balances weak structural indicators (including development and governance) with macro stability and our projection that gradual consolidation of twin deficits will support public and external debt dynamics.
The IDRs reflect the following key rating drivers:-
-We expect real GDP to grow 4.6% in 2015 (2014: 2.4%) due to buoyant agricultural production. Even if non-agricultural growth is likely to remain moderate in 2015 as a result of weak phosphate and tourism activity, manufacturing output prospects are favourable given the country's focus on the development of new industries. Inflation and growth performance are in line with 'BBB'-rated peers and the country performs favourably on stability of growth, inflation and exchange rate compared with peers.
-Most public finances indicators are performing in line with 'BBB' medians. Although general government debt is higher than peers, at 49.1% of GDP at end-2014, we expect it to have peaked in 2014 and to gradually decline in line with a tightening budget deficit. Government's target of a 4.3% of GDP central government deficit in 2015 is credible in light of budget execution figures as of end-July 2015, and achieving the medium term target of 3% of GDP by 2017 (2012: 7.3%) will be facilitated by a more efficient budget process under the new organic budget law. General government debt composition is favourable, with a moderate share of foreign-currency debt (31.4% at end-2014, in line with peers), reasonable maturity and low cost.
-Morocco's net external debt has risen sharply since 2008, which we forecast at 13% of GDP at end-2015 (2007: -18.5%), higher than the 'BBB' median of 8%. However, external risks have receded since 2012, with the current account deficit expected to reach 3.1% of GDP by end-2015 (down from 9.5% of GDP in 2012), due to lower oil imports, but also the development of manufacturing exports (car exports increased 15% in 8M15) and gradual recovery in the EU, Morocco's main trading partner. Foreign direct investments (FDIs), at around 2.5% of GDP each year, provide a stable source of funding, which will help stabilise net external debt. We expect the sovereign will remain a net external creditor.
-International reserves will cover more than five months of current account payments by end-2015, providing comfortable support to the exchange rate peg. The recently renewed precautionary and liquidity line with the IMF, worth USD5bn (equivalent of 5% of 2014 GDP), also provides additional buffer against balance of payment crises.
-Morocco's main rating weakness stems from weak development and governance indicators, which are more in line with 'BB' medians. GNI and GDP per capita as well as human development indicators are roughly half of the 'BBB' median, while ease of doing business is slightly lower than the median. Political stability is better than regional peers, leading us to expect smooth legislative elections in 2016. Risks of financial shocks in the country are moderate as the banking sector is developed and well supervised.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.
The main factors that may, individually or collectively, lead to positive rating action are as follows:
-Continued fiscal consolidation and reduction in the general government debt-to-GDP ratio
-Over the medium term, increase in per capita income level and an improvement in social indicators
-Continued moderate current account deficits consistent with declining net external debt-to- GDP ratio
The main factors that may, individually or collectively, lead to negative rating action are as follows:
-Rise in current account deficit and net external debt/GDP
-A widening of the budget deficit and an increase in general government debt
-Decline in medium-term growth prospects
-Political and social instability constraining scope for reform
KEY ASSUMPTIONS
Fitch assumes that Brent crude will average USD60 and USD70 per barrel in 2016 and 2017 respectively, therefore alleviating pressure on the current account deficit.
Fitch assumes that global GDP will grow 2.7% in 2016 and 2017, supporting Morocco's exports of goods and services.
Fitch assumes that the 2016 legislative elections will proceed smoothly.
