Morocco 'BBB-/A-3' Ratings Affirmed; Outlook Negative

  • We project Morocco's real GDP growth will be 3.1% this year, constrained by the decline in external demand, rising to about 4.0% by 2021.
  • Following a slippage in 2018, the budgetary position should gradually improve, supported by privatization proceeds over the forecast period to year-end 2021.
  • We consider that the liquidity line approved by the International Monetary Fund (IMF) in December 2018 supports Morocco's macrofinancial stability and its economic policy objectives.
  • As a result, we are affirming our 'BBB-/A-3' ratings on Morocco. The outlook remains negative.
On April 5, 2019, S&P Global Ratings affirmed its long- and short-term foreign 
and local currency sovereign credit ratings on Morocco at 'BBB-/A-3'. The 
outlook is negative.

The negative outlook signifies that we could lower our ratings on Morocco 
within the next 18 months if the government fails to improve its budgetary 
position, pushing up net government debt beyond our forecasts; if real GDP 
growth rates materially undershoot our expectations; or if external imbalances 
widen further, causing a substantial increase in the economy's gross financing 

We could revise the outlook to stable if the budgetary consolidation prospects 
materially improve. For example, if the deterioration observed in 2018 is 
reversed, or the ongoing transition toward a more flexible exchange rate 
regime that targets inflation significantly bolsters Morocco's external 
competitiveness and ability to withstand macroeconomic external shocks. An 
outlook revision to stable could also arise if Morocco's ongoing economic 
diversification strategy results in less volatile and higher rates of economic 

The ratings on Morocco are supported by a moderate level of government debt 
and manageable current account deficits, despite a deterioration in 2018, amid 
relatively stable policymaking. The ratings remain constrained by GDP per 
capita lower than that of similarly rated sovereigns, significant economic 
reliance on agriculture, high social needs, and a relatively slow approach to 
budgetary consolidation.

Institutional and Economic Profile: Economic growth to broadly stabilize this 
year, while economic diversification is set to continue
  • Morocco's GDP per capita remains one of the lowest of sovereigns rated in our 'BBB' category.
  • We forecast real GDP growth will be about 3.1% in 2019, absent any significant shocks in the external and domestic business environments, before gradually firming during 2020-2022.
  • Economic growth remains vulnerable to the volatility of agricultural output and the ongoing economic slowdown in Europe, while it has also excluded parts of the Moroccan population in the past.
We expect real GDP growth in Morocco at around 3.1% in 2019, reflecting a 
slowdown in Europe, as well as likely slower growth in Morocco's agricultural 
output. The government has been reducing the economy's vulnerability to 
weather shocks by investing in more efficient technologies in the agricultural 
sector via the Green Morocco Plan, as well as diversifying the economy. In 
this context, we believe that non-agricultural output will continue to expand 
in line with past trends and reflecting continuous growth in foreign direct 
investment (FDI). The main sources of growth are the expanding automotive, 
aeronautic, and electronics sectors, where substantial output growth is 
expected to continue at least through 2022. Morocco has built comprehensive 
industrial clusters around its emerging automotive industry. It has 
successfully attracted a number of foreign car manufacturers, first from 
France and most recently from China. As a result, the number of vehicles 
produced in Morocco has increased by more than 2.5x since 2014, overtaking in 
value exports related to phosphates and their derivatives a few years ago. The 
latter will nevertheless still represent an important share of the country's 
exports, while we consider that tourism has substantial further growth 
potential, despite strong growth in foreign tourist arrivals over 2017-2018, 
at around 10% annually. 

Given Morocco's significant dependence on energy imports, FDI in the energy 
sector is increasingly important. The country aims to produce 52% of its power 
from renewable energy by 2030. Projects such as this, which ease the economy's 
dependence on external sources of energy, are positive since they support a 
further reduction in current account imbalances and also further insulate 
Morocco from energy price volatility. The government has also promoted several 
gas field exploration projects. Although they are unlikely to come on stream 
over the next two years, if successful they could further reduce Morocco's 
energy imports and benefit its trade balance. In the context of the recent oil 
price increase and its significant negative economic and budgetary 
implications, the government is considering putting in place a price 
regulating mechanism, which would prevent the full impact of oil price 
increases being felt by final customers and instead it would require the 
supply chain to absorb part of the pressure. If approved by the Moroccan 
competition authority, such a mechanism could cushion the negative impact on 
the economy and allow for improved predictability in terms of budgetary 

We forecast that real GDP growth will average close to 4% in 2020-2021, backed 
by increasing resilience in the agricultural sector, and that the business 
environment and external demand will remain broadly supportive of the steady 
pick-up in nonagricultural output. To this end, the government is preparing a 
new investment charter, a small-business act, and an overhaul of the tax 
system to introduce more stability and policy predictability in the business 
environment. Moreover, in order to improve liquidity in the economy, the 
government has decided to shorten its payment times to suppliers, and those of 
state-owned enterprises (SOEs), and to settle its payment arrears with the 
private sector. We believe that these measures will help the development of 
the private sector. Tackling other structural weaknesses, such payment 
indiscipline among private sector companies and administrative hurdles in the 
business environment, could support the country's economic diversification and 
the resilience of its economic growth.

Unless Morocco suffers external economic shocks--for example, due to the 
heightened risk of global protectionism or a faster slowdown in European 
economies, which currently represent about 70% of its export markets--we 
believe that the expansion of its export capacity and its rise up the 
value-added ladder will contribute positively to economic growth over 
2019-2022. Importantly, we view the two-year Precautionary and Liquidity Line 
approved by the IMF in December 2018 (worth about $2.97 billion) as an 
important tool in the context of the abovementioned risks as well as a 
relevant policy anchor.

We believe that Morocco has largely demonstrated political and social 
stability, especially in the context of the Arab Spring. It has achieved this 
through constitutional reforms, a rise in government spending aimed at 
economic development, and reduction of economic inequality in less developed 
regions, with broad support from King Mohammed VI. The king chairs the Council 
of Ministers, which deliberates on strategic laws and state policy 
orientations. The king's role in policymaking has held greater importance 
since 2017, when he intervened in curbing social tensions in the regions of 
Rif and Jerada. In addition, in 2018 the king mandated the prime minister to 
appoint new ministers of finance, education, planning, housing, health, and 
African relations to revamp the country's development plans. 

Although ethnic, tribal, religious, and regional divisions are less pronounced 
in Morocco than in much of the Middle East and North Africa, there are rising 
demands from some parts of the Moroccan population for more inclusive economic 
growth. In our view, this partly stems from high unemployment among youths and 
the income disparities between more- and less-developed areas of the country. 
While at the national level, the unemployment rate appears low, the 
differences among population segments are significant (higher in urban areas, 
and for youth and women). Moreover, we believe that a higher participation of 
women in the labor market (currently estimated at about 20%) could 
significantly increase the country's economic growth potential.

The government has expressed its willingness to accelerate the implementation 
of regional development programs and decentralization of the state with 
devolution of competencies to regions in order to reduce income disparities, 
including by tackling high unemployment. We believe that these demands will 
persist and constrain Morocco's budgetary position, delaying a faster 
reduction in the budget deficit over our forecast horizon. Nevertheless, to 
the extent they are directed toward improving education and labor market 
outcomes, such policies could provide a boost to the country's growth 
potential in medium to long term.

Flexibility and Performance Profile: Budget deficit to slowly decline, 
supported by privatization proceeds
  • In 2019, we expect the government to post a budget deficit of about 3.3% of GDP, including the planned privatization proceeds.
  • Following a significant widening of the current account deficit in 2018, we expect the deficit to gradually decline, on the back of new exporting capacities, subject to the trends in external demand.
  • We anticipate that the authorities will inch toward a more flexible exchange rate regime over the medium term.
The budget deficit widened to 3.7% of GDP in 2018 against the government's 
target of 3%, reflecting mainly a sharp rise in oil prices (leading to 
increased cost of energy subsidies for liquefied petroleum gas), as well as 
lower-than-planned grants from the Gulf Cooperation Council (GCC). We don't 
expect a repeat in 2019 as the remaining amount of budgeted GCC grants is 
modest and our forecasts don't suggest a similar rise in oil prices this year. 
We therefore expect the headline budget deficit to be broadly stable in GDP 
terms in 2019. However, given the government's commitment to privatize some of 
its assets (worth approximately 4% of GDP during 2019-2024), the change in net 
general government debt--our preferred indicator of fiscal flows--is likely to 
be lower than in 2018 (i.e. 2.7% of GDP in 2019, driven by privatization 
proceeds of almost 1% of GDP). 

The government has been addressing the rising social demands for better living 
standards, including education and health care, and tackling high unemployment 
rates in poorer parts of the country by strengthening social protection 
programs. This includes the National Human Development Initiative aimed at 
supporting the vulnerable parts of the population, funded from public and 
private sector sources. Morocco provides socially sensitive subsidies on basic 
goods (flour, sugar, and liquefied petroleum gas) and is implementing a 
subsidy registry to provide better targeted and efficient support. On the 
revenue side, in the context of the upcoming tax system conference to be held 
in May 2019, we view favorably the government's plans to broaden the tax base 
in order to improve tax collection, including by reducing numerous tax 
exemptions, and as an attempt to address sizable tax avoidance and evasion. 

On the basis of our projected fiscal trajectory, we forecast that the gross 
government debt-to-GDP ratio will stabilize at about 52.5% of GDP over the 
medium term. We expect net general government debt to average about 51% of GDP 
during 2018-2021. 

Our budgetary forecast includes expected privatization proceeds for 2019, but 
in the absence of additional information we don't include the planned proceeds 
during 2020-2022. If they materialize, the decline in the general government 
debt-to-GDP ratio will be faster. In terms of contingent liabilities, 
represented predominantly by the existing stock of state guarantees to SOEs, 
we believe that the overhaul of the role of SOEs announced by the government 
is positive in several ways, beyond the use of privatization proceeds in the 
budgetary consolidation process. If implemented, it would contain and reduce 
the contingent liability risk for the sovereign balance sheet, while likely 
improving productivity and efficiency of business outcomes, as well as 
stimulating private sector activity.

Our gross general government debt data consolidate the holdings of central 
government debt by other branches of state, such as public pension funds, 
while net general government debt excludes from gross debt the government's 
liquid assets. As such, according to our sovereign rating methodology, our 
preferred variable of fiscal flow performance, namely change in net government 
debt, reflects all the components affecting the government debt position and 
not only the central government balance. The general government debt stock has 
risen significantly over the past eight years (from 32% of GDP at year-end 
2010, before the Arab Spring) due to consistently large budget deficits, which 
we believe point to structural weaknesses of the Moroccan economy, relative to 
other sovereigns at this rating level. The government's debt profile appears 
favorable: At year-end 2018, the average life of outstanding debt stood at six 
years and five months, and the average cost of debt was 3.9%.

The Moroccan dirham is currently pegged to a currency basket comprising 60% 
euros and 40% U.S. dollars. The foreign exchange (FX) peg regime limits 
monetary policy flexibility, in our view. In January 2018, the Moroccan 
authorities and the central bank, Bank Al Maghrib (BAM), decided to increase 
flexibility in the exchange rate regime by widening the band of fluctuation 
between the dirham and the basket of currencies to 2.5% in each direction from 
the previous +/- 0.3%. In our view, the measure was implemented smoothly, 
especially considering earlier attempts in mid-2017, when BAM's FX reserves 
shrank by more than 15% in the two months before the reform was rolled out. We 
attribute the decline in FX, in part, to pressure from domestic market 
participants due to increasing demand for hedging instruments. As a result, a 
sizable portion of these reserves was transferred onto domestic banks' balance 
sheets, leading to a substantial increase in foreign-currency assets, and the 
banking system as a whole did not lose its FX reserves. At the end of 2018, 
the reserve coverage was approximately five months of current account 

If widening the exchange-rate fluctuation bands continues to go well, we would 
view further widening as positive for our overall monetary assessment on 
Morocco. It would likely bolster Morocco's external competitiveness and 
ability to withstand macroeconomic external shocks. However, we anticipate 
that the authorities will first allow the current fluctuation bands to be 
tested by external financial developments, and wait for other parameters like 
budget and current account balance to improve before moving toward further 
widening of the bands. Finally, although they are moving toward a more 
flexible exchange rate regime, we expect the Moroccan authorities will 
maintain restrictions on capital accounts in the near term. Such restrictions 
will be eased gradually, to avoid any potential large-scale capital outflows.

Although the banking sector appears to be moderately capitalized, it is 
unlikely to pose a significant risk to the wider economy, given its current 
adequate regulatory Tier 1 capital ratio of almost 10.5%. Although 
nonperforming loans comprise a relatively high proportion of the total, at 
7.7% at the end of 2018, they appear adequately provisioned. Nonetheless, the 
banking sector remains vulnerable to credit concentration risks. The banks' 
expansion into Sub-Saharan Africa has been so far highly profitable, but it 
opens new channels of risk transmission to Morocco's banking system.

We expect Morocco's current account deficit to narrow this year to about 3.6% 
of GDP in 2019, down from about 5.3% of GDP last year, which was a result of 
the increase in global oil prices. Energy-related imports increased by almost 
20% during 2018. In the absence of a significant decline in external 
demand--which could come from a rise in global protectionism or the ongoing 
economic slowdown in Europe--we expect the current account deficit to narrow 
during the forecast horizon, as rising export capacity materializes in higher 
value-added industries, like automotives. Importantly, cars have become the 
country's leading export product, accounting for about 24% of total goods 
exports and more than 5% of GDP in 2017. Automotive exports expanded by almost 
11% during 2018, with an even larger increase recorded in aeronautics (13.9%). 
Furthermore, the export of phosphate and its derivatives bottomed out and will 
grow in line with external demand (17% growth last year). At the same time, 
despite an over 10% increase in tourist arrivals, tourism receipts grew only 
1.4% in 2018. This was likely distorted by the significant increase the 
previous year in transfers by Moroccan citizens working abroad, ahead of the 
start of the exchange rate liberalization. Meanwhile, the development of 
domestic energy sources should curb growth in Morocco's energy bill, although 
we do not incorporate this development into our forecast yet, since it is 
likely to emerge only at the end of our projection horizon. Morocco also 
benefits from strong remittances. 

The external liabilities position will remain large over the next three years, 
and we forecast narrow net external debt as a proportion of current account 
receipts (CARs) to be 20%-30% in 2019-2022. We also forecast that external 
financing requirements will remain covered by CARs and usable reserves over 
this period.

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