Moody's Investors Service ("Moody's") has changed the outlook on the Government of Morocco's long-term issuer ratings to stable from positive and has affirmed the Ba1 issuer ratings.
Moody's decision to change the outlook from positive to stable reflects the agency's view that the pace of fiscal consolidation will be slower than previously assumed, implying that the central government debt/GDP ratio will peak later and at a level that exceeds the median debt ratio of peers at similar rating levels. Lower than expected fiscal space will constrain the government's capacity to absorb domestic or external shocks in a tightening global financial environment. The slower than expected pace of fiscal consolidation reflects a slight weakening of institutional strength, and specifically policy effectiveness, relative to Moody's expectations when the positive outlook was assigned.
The affirmation of the Ba1 rating balances the credit challenges posed by comparatively low wealth levels against the demonstrated resiliency of Morocco's credit profile, supported by the government's access to relatively deep domestic capital markets that help to shield the government from international capital market volatility. It also reflects the continued expansion of the economy into higher value-added export segments in the automotive and aeronautics sectors, and the renewed build-up in foreign exchange reserves as a backstop to the gradual foreign-exchange liberalization introduced in January 2018.
The foreign and local-currency bond and deposit ceilings remain unchanged. Specifically, the foreign-currency bond ceiling remains at Baa2, the foreign-currency deposit ceiling at Ba2, and the local-currency bond and deposit ceilings at Baa1.
RATINGS RATIONALE
RATIONALE FOR THE STABLE OUTLOOK
FISCAL SETBACK IN 2018 AND SLOWER THAN ANTICIPATED PACE OF FISCAL CONSOLIDATION OVER THE NEXT THREE YEARS DIMINISHES FISCAL SPACE AND CAPACITY TO ABSORB SHOCKS
Budget execution data for 2018 point to an end-year deficit of 3.8% of GDP against a targeted 3%, resulting from weaker-than-budgeted corporate tax receipts and slower grant disbursements from the Gulf Cooperation Council (GCC) in addition to higher-than-targeted subsidy and investment bills. Moreover, the 2019 budget envisages a broadly unchanged fiscal deficit at 3.7% (excluding privatization receipts) and a slower than previously anticipated pace of fiscal consolidation over the next three years, implying a later and higher peak in the central government debt/GDP ratio at about 67% in 2020 and gradually declining thereafter. This contrasts with Moody's expectation when the positive outlook was assigned that the debt ratio would peak below 65% at the end of 2016 and decline thereafter.
The budget focuses on social policies and targeted social support programs following public dissent especially in response to higher fuel prices in the wake of the price liberalization in 2015. Taking into account the debt trajectory's high sensitivity to fiscal overruns, the erosion of fiscal space--as reflected in the higher debt ratio and in the interest/revenue ratio at over 10%--constrains Morocco's future shock absorption capacity, especially in comparison to sovereigns rated Baa3 and above.
The slower than previously planned consolidation effort in the face of social demands suggests a marginal weakening in institutional strength, and specifically in policy effectiveness, relative to Moody's expectations when the positive outlook was assigned. The willingness and capacity to articulate and implement credit positive economic and fiscal policies is an aspect of institutional strength that is a characteristic of sovereigns rated Baa3 and above; Moody's decision to change the outlook to stable reflects in part the rating agency's somewhat lower assessment of institutional strength than anticipated at the time the positive outlook was assigned in 2017. The current institutional strength assessment nevertheless recognizes the government's coherent macroeconomic policies and fiscal reforms that have been implemented over the past few years, including the elimination of fuel subsidies, the enactment of parametric public pension reform and the implementation of the organic budget law.
RATIONALE FOR THE Ba1 RATING
DEMONSTRATED RESILIENCY OF MOROCCO'S CREDIT PROFILE, ALBEIT CONSTRAINED BY COMPARATIVELY LOW WEALTH, HIGH DEBT BURDEN AND LOW PRODUCTIVITY
Morocco's main credit constraints are its comparatively low wealth levels with GDP per capita at $8,568 (on a Purchasing Power Parity basis) in comparison to Moody's rated universe, the elevated debt burden which has risen quite materially over the past decade, and the relatively subdued trend growth compared to peers at similar income and development levels. Potential growth is constrained by rigid labor markets, skill mismatches and poor education standards by international comparisons, in addition to the very low labor force participation rate among women. These constraints result in a low productivity performance, making the growth trajectory dependent on continued capital deepening.
Set against those constraints, Morocco's credit profile has proven quite resilient to changes in the domestic and external environment in recent years. Growth has remained positive in recent years, averaging about 3.5%. Inflation has remained low. The resilience of Morocco's credit profile also reflects the government's access to relatively deep domestic capital markets in local currency which shields the credit somewhat from any financial market volatility resulting from tightening international liquidity conditions. Moody's estimates that the government's gross borrowing requirements are in the 10-15% of GDP range, most of which is funded domestically. Both the foreign currency and external debt share in total central government debt are around 20%, reducing the debt trajectory's sensitivity to exchange rate volatility and to adverse investor sentiment shifts.
The main driver of event risk is the banking system, with assets at over 120% of GDP which—while providing an ample funding base for the government in domestic currency—also represents a source of contingent liabilities. The largest banks' expansion into Sub-Saharan Africa represents a potential source of risk although subject to the strict supervision of Bank Al-Maghrib.
CONTINUED EXPANSION IN HIGHER VALUE-ADDED AUTOMOTIVE AND AERONAUTICS EXPORTS SUPPORTS FX REVENUE GENERATION CAPACITY
The share of higher value-added exports in the automotive and aeronautics sectors continues to expand, enhancing access to foreign exchange with more limited exposure to commodity price volatility.
Based on Moody's oil price assumption of $74 per barrel in 2018 and $75 in 2019, the current account deficit is likely to increase to 4.4% of GDP in 2018 and to 4.5% in 2019 from 3.5% in 2017, as expanding exports only partially offset the negative affect of higher oil prices. However, over the longer term, Moody's expects the continued expansion in the share of renewable energy in electricity production, especially via wind and solar installations, to contribute to reducing Morocco's high external sensitivity to oil prices.
The foreign exchange reserve buffer at 5 months of goods and service imports as of October 2018 provides an adequate backstop for the gradual foreign exchange rate liberalization introduced in January 2018. The new policy widens the daily trading band around the reference rate, which is pegged to a basket of 60% euro and 40% US dollars, to 2.5% in each direction, from 0.3% previously. Moody's expects the higher degree of currency flexibility to support Morocco's price competitiveness and external shock absorption capacity over the longer term.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade would likely be predicated on action taken to address at least some of the key constraints noted above. That would most likely involve further policy action that ensures that the public debt ratio—including external debt guarantees from state-owned enterprises (SOEs)—is firmly positioned on a downward trajectory, supported by the continued implementation of fiscal and business environment reforms that improve the economy's non-agricultural growth prospects. Together, such a policy mix would also support an increasingly positive view of Morocco's institutional strength.
The credit profile's resilience to fiscal and external shocks in recent years suggests there is limited likelihood of a downgrade in the next few years. That said, continued fiscal deterioration 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.
GDP per capita (PPP basis, US$): 8,568 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.1% (2017 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.9% (2017 Actual)
Gen. Gov. Financial Balance/GDP: -3.6% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.5% (2017 Actual) (also known as External Balance)
External debt/GDP: 46.1% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 15 November 2018, a rating committee was called to discuss the rating of the Government of Morocco. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework has marginally deteriorated. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risk has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.
