Fitch Ratings has affirmed Morocco's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.
Key Rating Drivers
Morocco's 'BBB-' rating is underpinned by a record of macroeconomic stability reflected in relatively low inflation and GDP volatility; a low share of foreign-currency (FC) debt in total general government (GG) debt, and relatively comfortable external liquidity buffers. These strengths are balanced against weak development and governance indicators, high GG debt, and budget and current account deficits (CAD) that are wider than in rating peers.
Fiscal deficits widened in 2018-2019 on a combination of adverse exogenous developments and moderate spending pressures from social issues. The 2019 budget raised social spending in the wake of repeated protests fuelled by economic discontent. Staged wage increases, under a three-year agreement concluded with labour unions in April, will raise payroll spending by 0.5% of GDP in 2019 and around 1% of GDP cumulatively in 2020. Fitch projects the central government (CG) deficit to widen for the second consecutive year in 2019, to 4% of GDP from 3.7% in 2018, slightly overshooting the initial budget target (excluding privatisation receipts) of 3.7%.
Under our baseline, we forecast the CG deficit to stabilise at 4% of GDP in 2020 and narrow slightly to 3.7% in 2021. Savings on operational primary spending and efficiency gains on payroll management will offset higher personnel costs. Tax revenues will slowly pick up with the implementation of fiscal reforms recommended by the May 2019 national tax conference to broaden the tax base, reduce distortions and streamline collections. Fitch expects the government will adjust capital spending to actual revenue performance to keep the deficit contained. The GG deficit, which also includes social security, local governments and extra-budgetary units, will average 2.3% in 2019-2021, above the current 'BBB'-median of 1.7%.
Debt dynamics remain relatively benign. GG debt will peak at 53% of GDP in 2020 (CG: 66.6%), on Fitch's forecasts, up from 52% in 2018 (CG: 65.3%), and decline to 52.3% in 2021 (CG:66%). The debt burden compares unfavourably to the current 'BBB' median of around 43.5% of GDP. Privatisation of non-strategic state assets and the opening of the capital of some major state-owned enterprises (SOEs) to the private sector will reduce borrowing needs modestly. Around 74% of GG debt is dirham-denominated and held by a captive domestic investor base while the share of commercial debt in external debt remains low despite a EUR1 billion Eurobond issuance in November, the first such operation in five years. This favourable debt composition limits rollover and exchange-rate risks, and moderates interest service costs.
SOE debt is high, at 25% of GDP at end-2018, of which around 14% of GDP is explicitly guaranteed by the state. The track record suggests a low likelihood that these liabilities will migrate to the sovereign's balance sheet. State guarantees are likely to rise under the government's plan to boost investment spending through public-private partnerships.
External deficits compare unfavourably to rating peers and are forecast to improve only slowly over the medium term. Fitch projects the CAD to narrow from 5.5% of GDP in 2018 to 5% in 2019 and 4.5% in 2020, versus a forecast 'BBB' median of 1.4% in 2020. The improvement in the CAD will be driven by the expansion of supply in the automotive industry and strong performance in light manufacturing, mining and tourism in combination with the projected decline in oil prices under Fitch's baseline. However, buoyant domestic demand will boost imports, while the difficulties faced by the global automotive sector and the loss of growth momentum in the eurozone - Morocco's main external partner - will constrain exports.
Relatively large CADs will be mostly debt-financed, as net FDI inflows will average only 2% of GDP in 2019-2021. This will lead net external debt to edge up to 21% of GDP in 2021, under Fitch's forecasts, from 16% in 2018 and compared to a current 'BBB' median of 7.5%. Foreign-currency reserves are relatively comfortable and external resilience is reinforced by capital restrictions on investments abroad by Moroccan residents and an ongoing precautionary arrangement with the IMF. However, increasing external financing needs against the backdrop of limited exchange-rate flexibility will exert pressures on FC reserves in the medium term.
The government's commitment to prudent economic policies is a key support for the rating. Consistent, albeit slow, progress on reforms has streamlined the macroeconomic policy framework and enhanced resilience to shocks. In particular, fiscal reforms have addressed short-term spending pressures from fuel subsidies and the pension system, and have considerably improved public finance management. Over the past year, the authorities have implemented measures to tackle overdue VAT credits and long payment delays in the public sector, a key impediment for private sector activity. A 75-rank rise in Morocco's position on the World Bank's Ease of Doing Business Indicators over the past decade underscores strong progress on improving the business climate.
Economic growth is in line with peers and expected to be broadly stable through 2021. Unfavourable base effects in the agricultural sector and drought will lead GDP growth to slow to 2.7% in 2019 from 3% in 2018 before picking up to its long-term average of 3.5% in 2020, driven by domestic demand. Morocco's growth model is heavily reliant on physical capital accumulation with investment around one-third of GDP versus a current 'BBB'-median of 23%. Productivity gains remain subdued reflecting deep-rooted impediments to private sector activity, including poor education outcomes and barriers to competition.
Morocco ranks below peer medians on governance and development indicators. In particular, GDP per capita is less than one-third of the current 'BBB' median and only half of the current 'BB' median. Persistently high unemployment, particularly affecting urban youth, is a potential source of social tension against the backdrop of recurring bouts of unrest in the Middle East and North Africa region. A cabinet reshuffle in October has further weakened the position of the government head's PJD party within the cabinet. It also saw a junior coalition member leave the governing alliance, which nonetheless still enjoys a comfortable majority in Parliament. Fitch expects the government to hold until the 2021 general elections despite continued differences within the five-party governing coalition.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Morocco a score equivalent to a rating of 'BB+' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- Macroeconomic performance, policies and prospects: +1 notch. The addition of +1 notch on this pillar of the QO reflects Morocco's record of prudent economic policies, which underpins macroeconomic stability and translates into a low and stable inflation rate, muted GDP growth volatility and contained GG debt dynamics. The authorities have achieved significant progress on upgrading the macroeconomic policy framework in recent years.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factors that may, individually or collectively, lead to positive rating action are as follows:
- Fiscal consolidation, for example from implementation of tax reforms, leading to a trend reduction in government debt/GDP;
- Sustained improvement in the current account balance consistent with declining net external debt/GDP;
- Over the medium term, stronger growth potential leading to an improvement in GDP per capita and/or an improvement in governance indicators.
The main factors that may, individually or collectively, lead to negative rating action are as follows:
- An increase in government debt/GDP driven by the fiscal stance or a materialisation of contingent liabilities;
- Continued high trade and current account deficits placing net external debt on an upward path over the medium term;
- Security developments or social instability affecting macroeconomic performance or leading to significant fiscal slippages.
Key Assumptions
We expect global economic trends and commodity prices to develop as outlined in Fitch's December 2019 Global Economic Outlook. Fitch forecasts real GDP growth in the eurozone, Morocco's main trading partner, to average of 1.2% in 2019-2021. The agency forecasts a drop in average oil prices from USD65/bbl in 2019 to USD60/bbl in 2021.
ESG Considerations
Morocco has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's Sovereign Rating Model; Morocco ranks below 'BBB' peers on Governance Indicators and unemployment and development gaps are a source of social tensions; this is highly relevant to the rating and a key rating driver with a high weight.
Morocco has an ESG Relevance Score of '5' for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's Sovereign Rating Model; this is highly relevant to the rating and a key rating driver with a high weight.
Morocco has an ESG Relevance Score of '4' on Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.
Morocco has an ESG Relevance Score of '4'for Creditor Rights as willingness to service and repay debt is relevant to the rating and a rating driver for Morocco, as for all sovereigns.
