Morocco’s Macroeconomic Prospects unfavourable but positive momentum

Casablanca, Morocco, Capital Markets in Africa: Prospects for the Morocco economy in 2016 are mixed with very weak economic growth on the one hand and, on the other, an on-going contraction in the twin deficits, which will help restore the long-term health of the country’s public finances and balance of payments.

As far as the growth outlook is concerned, expectations of weak GDP growth in 2016 should once again highlight the economy’s sensitivity to the agricultural sector and the vagaries of the weather, despite the considerable progress made in recent years under the Green Morocco Plan. In addition to the volatile character of the country’s GDP, the fact that non-agricultural GDP has registered only moderate growth has undoubtedly been the stand-out factor in since 2013. This is likely to remain so in 2016. Non-agricultural GDP is expected to grow by about 3%, well below the growth rate registered between 2004 and 2012.

This slowdown can partially be explained by the prevailing global economic situation which remains hesitant, particularly among the country’s main trading partners as well as a less expansionary fiscal policy. Such a slowdown is particularly symptomatic of Morocco’s economy entering a transition phase, resulting in the gradual emergence of new high value-added industries as drivers of the country’s economic development, at the expense of a number of ‘traditional’ sectors. The rapid development of the latter over the past decade has provided a strong boost to non-agricultural activity but the slowdown seen in recent years has been particularly marked.

The future flagship sectors of the Moroccan economy have been broadly identified as automobiles, aeronautics, food-processing and renewable energy while more ‘traditional’ sectors include tourism and phosphates. These sectors have performed remarkably well in recent years. However, their contribution to GDP growth and the knock-on effects on the country’s productive capacity are still inadequate to raise the general level of non-agricultural GDP. Given the likelihood that this situation will continue for a few more years, the scenario of persistently moderate growth of the non-agricultural component is the most likely one for the domestic economy over the coming years.

In the short to medium term, Morocco’s non-agricultural growth is likely to be between 3% and 4% with the top end of the range only achievable if the global economy were to show signs of a much more robust pick-up and if domestic fiscal policy were to become more expansionary. However, this scenario would seem to be highly unlikely over the short to medium term given the government’s current priorities.

Despite the fact that the 2016 and medium-term economic growth forecasts hardly warrant anything more than cautious optimism, it is worth highlighting the significant contraction in the country’s twin deficits, after reaching worrying levels in 2012. This positive trend towards restoring equilibrium on the budgetary and external trade fronts paves the way for a number of major reforms. Therefore, it enables the government to focus on bringing about further reform in sensitive areas such as pensions reform, particularly with regard to civil servant and state corporation employee pensions with concerns growing over their viability. In addition, it provides the Central Bank with the conditions needed to make a gradual and successful transition towards a floating exchange rate system.

Given the relatively sluggish state of the domestic economy, it is essential that Morocco tackles the shortcomings of its existing growth model and undertakes the structural reforms required to move towards a development model based on productivity growth rather than one governed by accumulating factors of production.

Opportunity for both aggressive and conservative … 
Despite an unfavourable macroeconomic outlook along with the expectation that earnings should not grow substantially in 2016, the CFG25 is up by 0.8% year-to-date. Indeed, as of February 19th, the market was up 3.2% to 19,718 pts after breaking its previous resistance at 19,400 pts. This was followed by a fall of the index by 2.3% which eroded the gains realized during the first weeks of the year. It is very noticeable that the market is hesitating after an early rally this year as a result of the uncertainty engendered by the heterogeneity of the

factors impacting its prospects.

The antagonism inherent to the plurality of factors expected to impact the market in year 2016 create a lot of uncertainty regarding the trajectory that the market could follow. What we can quite confidently assert is that the performance of the market will be moderate should the market increase or decrease. Indeed, we believe that the market should increase by 5% at most (best case scenario) or also ebb by at most 5% (worst case scenario).

Amid the uncertainty that characterizes the market, we recommend two investment strategies that investors should elect based on their risk aversion, their expected returns and their investment horizon:

For an aggressive investment strategy with an investment horizon that hovers around 2-3 years, we recommend buying the stocks that are the most undervalued. As we believe for most of these stocks that the upside should start to materialize starting 2016, as a result of their current low valuation levels, and their high dividend yields which provides a downside  protection.

On the contrary, for a conservative investment strategy, we recommend focusing on defensive stocks that offer high and sustainable dividend yields (i.e. dividend yields above the median dividend yield of the market). This strategy should yield the same return as a money market bond, i.e. a mild increase that would provide some protection in case the market remains in a bearish territory this year.

On a final note, we do believe that the performance of the market should be moderate regardless of whether the market ends the year in the green or the red. This conviction arises from the fact that the factors impacting this year are antithetic. In fact, on one hand, the market could suffer from an unpromising macroeconomic environment along with a mild growth of the aggregate earnings. On the other hand, the market should benefit from the decrease in bond yields, the attractiveness of the Moroccan market for foreign investors who perceive it as relatively defensive, as well as the recovery of certain sectors that have been extremely oversold in our opinion such as the real estate sector.