Fitch Affirms Morocco at ‘BBB-‘; Outlook Stable

RABAT (Capital Markets in Africa) – Fitch Ratings-Hong Kong-07 April 2017: Fitch Ratings has affirmed Morocco’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BBB-‘ with a Stable Outlook. The issue ratings on Morocco’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-‘. The Country Ceiling has been affirmed at ‘BBB’ and the Short-Term Foreign- and Local-Currency IDRs at ‘F3’. 

KEY RATING DRIVERS 
Morocco’s ratings are driven by its economic performance, public finance and external finance metrics in line with ‘BBB’ medians and structural features (as reflected in development and governance indicators) that are weaker than peer medians.

The Economic policy focuses on maintaining macroeconomic stability and is unlikely to change much as a result of the parliamentary election in October 2016. The Justice and Development Party (PJD), the main governing party in the previous parliamentary term, remained the biggest party but differences between parties meant it took until March 2017 for a new government to be formed. The main parties in the new government are the same and there is little indication that the addition of one smaller party will change the direction of policy. However, the prolonged negotiation has meant little progress was made on reform projects under the caretaking government and it is likely that the reform momentum will take some time to return.

GDP growth fell to 1.6% in 2016, from 4.5% in 2015, mainly because of the worst drought in 30 years following a bumper harvest in 2015. As a result, cereal production fell by more than 70% and agricultural value added decreased by 9.6%. Confidence effects from the weak agricultural performance and low growth in the euro area as the key export market depressed the non-agricultural economy, which grew 3.1%, after 3.5% in 2015, illustrating the limited effect of the industrial strategy on growth so far. Rainfall for the 2017 agricultural season has been favourable, suggesting that there will be a significant rebound in the agricultural sector and this should help lift growth to 4.3% in 2017. In 2018, base effects will no longer boost GDP growth, leading to a deceleration to 3.2%.

Despite the weakening economy, the central government deficit decreased to 4.1% in 2016, from 4.3% in 2015, although it stayed well above the budget target of 3.5%. Apart from the impact of weaker growth, the underperformance relative to the budget reflected a higher execution of investment projects, an acceleration of VAT refund payments and another fall in disbursements of grants from GCC countries.

The budget for 2017, submitted to parliament in October, foresaw a deficit of 3% of GDP, but due to the lower starting point we expect the deficit will come in at 3.8% of GDP. The improvements will partly reflect the economic recovery, although the tax take from the agricultural sector is quite small. In addition, improved budget administration as a result of the Organic Budget Law (OBL) will also help to contain expenditure. Fitch estimates that the fiscal deficit of the general government, which also includes social security, local governments and special treasury accounts, was 1.7% of GDP in 2016, down from 1.8% in 2015, with a further decline to 1.3% in 2017. In addition to the improved central government, the improvement reflects the impact of pension reforms approved last year.

The delay in forming a new government and in approving the budget for 2017 has had only limited impact on fiscal execution. The OBL has streamlined fiscal management for periods where no approved budget is in place, and under a government decree the draft budget 2017 is being implemented with the exception of civil service recruitment and the implementation of new projects.

Fitch estimates general government debt peaked at 49.6% of GDP in 2016 and is likely to decline gradually in subsequent years. The government faces significant additional contingent liabilities from guarantees mainly for infrastructure projects managed by state-owned enterprises, estimated at 19% of GDP in 2016. The guarantee exposure is expected to continue rising moderately, but the track record suggests a low likelihood that the liabilities will move to the government balance sheet.

The current account deficit deteriorated substantially in 2016 to 3.9% of GDP, from 2.1% in 2015 despite the beneficial effect of lower oil prices. The deterioration primarily reflected a sharp rise in capital goods imports, which rose by 27% in MAD terms. The deficit was also affected by soft prices for phosphates and phosphates-based fertilisers, one of Morocco’s main export commodities (accounting for 18% of exports). We expect the government’s policy of attracting foreign investment to lead to a continued high demand for capital goods, but the deficit should gradually decline as growth in exports will remain solid. This could help net external debt, which at 11.5% of GDP remains higher than the BBB median of 0.6% of GDP end-2016, to decline gradually.

However, significant capital inflows meant that the Bank al-Mahgrib was able to raise international reserves USD2.3 billion to USD24.4 billion or 6.5 months of current external payments at end-2016. The currency is considered to be broadly aligned with fundamentals and the authorities are still planning to gradually move to a more flexible exchange rate arrangement. Fitch believes this will initially only mean wider fluctuation against the currency basket against which the dirham is pegged. Capital account liberalisation, reducing restrictions on Moroccan investments abroad, will be phased in only gradually.

Development and governance indicators are weaker than ‘BBB’ medians. In particular, GDP per capita and the World Bank’s human development indicator are lower than both the ‘BBB’ and the ‘BB’ category medians. Exposure to financial shocks is moderate, due to a developed and broadly sound banking sector.