On Oct. 9, 2015, Standard & Poor's Ratings Services affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Morocco. The outlook is stable.
RATIONALE
The ratings on Morocco are supported by political and social stability, economic growth prospects, and a moderate government debt burden. The ratings remain constrained by low income levels and high social needs, a relatively high external liability position, and the deterioration in external and fiscal debt stocks that has occurred in recent years.
In our view, Morocco has demonstrated its resilience at a time of widespread social and political upheaval in the regional context of the Arab Spring. Unlike elsewhere in the Middle East and North Africa region, political turmoil has been contained. This has been largely due to the 2011 constitutional revision adopted in a popular referendum, a rise in current spending by the government, and the continued popularity of King Mohammed VI. In 2011, the Party for Justice and Democracy (PJD), an Islamist political party, won a plurality of seats in the elections for the Chamber of Representatives. That
election was the country’s first under the new constitution whereby the king appoints the head of government from the largest party in parliament.
The multiparty government coalition, led by the PJD, has broadly demonstrated a willingness and ability to reform substantial and fiscally burdensome programs, particularly the subsidy system, the state pension regime, and public salaries. In our view, the PJD's victory in the September 2015 local elections has strengthened its capacity to push through sensitive reforms, notably further reduction in subsidies and reform of the struggling pension system, which are still pending.
Morocco fares reasonably well in international comparisons of governance and institutional quality. For example, the World Bank ranks Morocco in the 53rd percentile globally for government effectiveness, 49th for rule of law, 50th for regulatory quality, and 32nd for political stability and absence of violence. Transparency International, meanwhile, places the country in the middle of its Corruption Perceptions Index. (The World Bank ranking and the Corruption Perceptions Index are not direct inputs into our rating.)
Morocco's economy grew by about 3.6% in 2011-2014. GDP growth has been held back by the country's dependence on volatile agricultural output, weaker phosphate prices, and lower external demand from Europe. We project growth to accelerate in 2015 to 4.6% from 2.6% in 2014, supported by a rebound in agricultural output. We forecast economic activity to average about 4.5% in the medium term as we expect agricultural production to return to more normal levels.
In recent years, Morocco has successfully attracted French car manufacturers--such as Renault in 2007 and PSA Peugeot in June 2015--to develop its emerging automotive industry. In our view, the country will continue to attract foreign direct investments, and its business environment should stay broadly supportive. Morocco stands at 71 in the ranking of 189 countries in the World Bank's Ease of Doing Business. New economic sectors such as the automotive industry, aeronautics, and electronics are set to continue growing rapidly in line with the country's industrial policy, which enjoys broad political support. However, the country’s judiciary system needs reform to improve Morocco's attractiveness to foreign investors. Recent and ongoing judicial reforms, such as changes to the penal code, could improve matters over the medium term.
We project that the fiscal deficit will reach 4.3% of GDP in 2015 from 4.9% of
GDP in 2014 as a result of subsidy and wage reforms. We expect consolidation to continue apace, and the government to meet its fiscal target of a deficit of 3% of GDP by 2017. Subsidies on fuel and food ballooned to over 6% of GDP following the start of the Arab Spring in 2011. This led to wider fiscal deficits, and annual average changes in general government debt of more than 6% of GDP in 2011-2013. However, the government has since managed to cut its subsidies bill substantially. It has also taken measures to slow growth in other areas of current spending, such as public salaries.
Nevertheless, given that there has been some slippage from budgeted spending in previous years, particularly on subsidies and wages, we foresee implementation risks to the proposed cuts. However, we expect a new budgetary framework to help boost discipline. Notably, it should make wage appropriations binding, and increase the transparency and oversight of line ministries' spending. Capital spending has broadly stagnated in the past three years, squeezed by demands for sustained high operating spending, but it is due to rise in 2015 by 9% year on year. This should help support economic growth and private-sector job creation to some extent.
The projected fiscal consolidation will help the debt ratios decline gradually over the medium term, according to our forecast. We expect net general government debt (which excludes from gross debt the government's liquid assets and the holdings of central government debt by other branches of state, such as public pension funds) to average 51% of GDP in 2015-2018. The general government debt stock has risen quickly in recent years to fund wide deficits. External financing has increased, and the government successfully tapped the international dollar and euro markets in 2013 and 2014, respectively, with issues of $750 million and €1 billion.
Morocco's current account deficit shot up to nearly 10% of GDP in 2012, amid high prices for imported food and fuel products and weak demand for Moroccan exports from major markets in Europe, as well as weaker phosphate prices. We expect the deficit to continue narrowing to 2.1% of GDP in 2018, from 5.8% in 2014, reflecting rising exports from newly developed industries (such as automotives) and lower imports owing to lower oil prices. Lower hydrocarbon prices should significantly ease pressure on imports, of which fuel products accounted for nearly one quarter in 2014. We have revised down our forecasts for oil and gas prices over the projected period (see "Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions," published Sept. 24, 2015, on RatingsDirect).
We also forecast rising tourism receipts and higher export volumes of cars from the Renault factory in Tangier. Cars have recently become the country's leading export product by value, overtaking phosphates. We also anticipate that increased phosphate production will support exports and, in turn, current account consolidation. The expected slow economic recovery in key European markets for trade, investment, tourism, and remittances, particularly France and Spain, will also help Morocco's external position in the next three years.
We expect foreign direct investment to finance a growing proportion of these deficits, from just over one-third in 2013, with external borrowing covering the remainder. We forecast narrow net external debt to drop slowly as a proportion of current account receipts (CARs) to 26% in 2018 from an estimated 37% in 2015. We forecast the country's gross external financing requirements to be covered by its CARs over this period. Meanwhile, our revised forecast for lower current account deficits in 2015-2018 now leads us to expect the country's reserve coverage to be slightly higher than five months of current account payments.
In our view, the $5 billion 24-month Precautionary and Liquidity Line (PLL) approved by the International Monetary Fund in July 2014 helps bolster confidence in Morocco’s external position in a stress situation. As with the two-year PLL granted in August 2012, we do not expect the authorities will need to draw on it. Also supportive of Morocco's external position are the pledged grants for project financing from Gulf Cooperation Council states, totaling about $1 billion per year in 2013-2017.
We expect that the Moroccan Central Bank, Bank Al Maghrib (BAM), will remain committed to the current pegged exchange rate regime for at least the next two years, and until a more supportive macroeconomic environment is in place, at which point the BAM has indicated its intention to liberalize the regime. The current foreign exchange regime will continue to limit monetary policy flexibility. Successive and substantial cuts by BAM of its reserve requirement ratio, from 15% in January 2008 to 2% in March 2014 have helped ease liquidity conditions on the domestic market and ensured adequate financing of the economy. We expect credit to the economy to continue to grow at a moderate pace over the next few years, but at a lower rate than our projected nominal GDP growth. Inflation should remain low--we forecast it will average 2% in
2015-2018, compared with 0.4% in 2014.
OUTLOOK
The stable outlook reflects our expectation that the consolidation of Morocco's fiscal and external deficits will continue over the next few years, while economic growth accelerates under the influence of continued implementation of reforms.
We could lower the ratings if growth does not accelerate as markedly as expected, if the government deviates substantially from its fiscal consolidation path, or if the current account does not narrow as we anticipate. We could raise the ratings if economic growth substantially exceeds our forecasts, and if monetary policy and exchange regime flexibility increase markedly.
