Morocco: MLT political risk downgraded from category 3/7 to 4/7
Historic robust growth numbers will fall in negative territory this year
For the last few years, the Moroccan economy has recorded robust growth: real GDP growth has averaged 3.6% since 2011. As shown in graph 1, Morocco outperformed in the past years compared to the Middle East and North Africa region. However, the covid-19 crisis is projected to give a serious blow to the country. According to the World Bank, a real GDP contraction of 4% is in the cards this year. The main reason is the impact of the covid-19 pandemic. The sudden halt in global tourism in the past months and the likely lower tourist arrivals until a vaccine is found, is expected to seriously hurt the tourism sector, an economic growth motor for the country and large provider of jobs. Furthermore, Morocco has increasingly specialised in the production of manufacturing products (e.g. automotive) for the European market. The sector is expected to be hit hard by the covid-19 crisis due to supply chain disruptions and a fall in demand. Besides the covid-19 pandemic, the agriculture sector (the linchpin of the economy) is suffering from drought, which is especially affecting cereal harvests. Assuming that the covid-19 pandemic wanes, a recovery of 3.4% is forecasted in 2021: a higher rebound than most other countries in the region. Nevertheless, projections remain surrounded by large uncertainty as it is unclear how and when the covid-19 virus will disappear, swings in agriculture export can occur and potentially new unrest might flare up in the region.
Covid-19 pandemic expected to push twin deficit to historic high levels again
Morocco suffered from historical large twin deficits in 2012. Since then, the current account and fiscal deficits have eased but the covid-19 crisis is likely to bring this positive evolution into jeopardy. Indeed, graph 2 shows the evolution of the public finances in the past decade. Morocco’s public deficit clearly peaked in 2012 to a historic high level of 7.2% of GDP on the back of an increasingly high public wage bill, increased subsidy payments and higher interest payments. Since then, the public deficit has reduced, albeit at a slow pace, and it has been difficult to bring it under 4% of GDP. As a result, the public debt continued to rise slowly in the past years. The covid-19 crisis is likely to lead to lower tax receipts while higher public expenditure is in the cards as the government is trying to mitigate the social and economic impact of the current crisis. Hence, the public deficit is projected to reach a wide 7.1% of GDP this year and push up the public debt (estimated at 66% of GDP in the end of 2019).
In line with the evolution of the public finances, Morocco’s current account deficit peaked in 2012 to almost 9.5% of GDP (see graph 3). Since then it has reduced again, but has remained around 4% of GDP in recent years. This year, the current account deficit is expected to widen again close to historical high levels as a deficit of 8.5% of GDP is in the offing. The main reasons are a fall in manufactures exports (accounting for 40% of the current account receipts), the impact of the drought (agriculture products account for 12% of the current account receipts), lower tourism revenues and private transfers (each accounting for about 15% of the current account receipts) and despite the lower oil prices (Morocco is an oil importer). Depending on the possibility of new lockdowns and a slower speed of economic recovery (especially with its main trading partner: the EU), the projections might be further revised downwards.
External debt expected to swell further
In the past, current account deficits have been financed by FDI and external debt issuances, leading to rising external debt. Also this year, external debt issuance will be necessary to fund the current account deficit. Although, after unprecedented capital outflows in the beginning of the year – the recent easing of global financial conditions led to a return of risk appetite towards emerging markets – FDI and portfolio inflows are unlikely to fully finance the gap in Morocco. Furthermore, a reversal of the global investor sentiment is possible depending on the longevity or reoccurrence of the covid-19 pandemic, geopolitical tensions, too optimistic expectations about the extent of central banks’ support or a broadening of global social unrest. Hence, external debt is likely to swell also this year. The government fully drew on the USD 2.93 billion available under the Precautionary and Liquidity Line from the IMF. It is the first time that the precautionary and liquidity line is used since the start of the programme in 2012. On the upside, gross foreign exchange reserves (another potential source to finance the current account deficit) have been strengthening in the past months and stood at roughly 6 months of import cover in April 2020. This is a relatively comfortable level. Nevertheless, the cushion may eventually be threatened as the dirham is pegged to a weighted currency basket with a relatively small exchange rate flexibility of up to 5% from the peg rate.
Reoccurring protests led to government reshuffles but are unlikely to threaten political stability
Protests have been regularly resurfacing in Morocco, especially in the less-developed areas. The large anti-government protests that took place in 2018-2019 led to a large government reshuffle and downsizing in October 2019, making the current government the smallest since 1979. The change was initiated by King Mohammed VI, the ultimate arbiter of power in Morocco, who also enacted a smaller reshuffle in April of this year. Protests have died down since the outbreak of covid-19 but as lockdowns have been eased, (localized) unrest is likely to pop up again. Before the covid-19 outbreak, protesters have been demanding more voice and accountability in the government as they are frustrated by the high corruption perception, high unemployment rate, police violence, deterioration of social conditions and delays in the investment projects in the poorer regions. As the grounds for these protests have not been tackled and while the expected recession is likely to rise unemployment, popular discontent could intensify. That being said, unrest is unlikely to threaten political stability or the king’s legitimacy. Instead, the government will most likely be blamed for socio-economic troubles, increasing the likelihood of government reshuffles in the wake of the 2021 legislative elections.
Downgrade from 3/7 to 4/7 for medium- to long-term political risk
The rising external debt and the wide current account and fiscal deficits are deteriorating Morocco´s economic fundamentals. Moreover, the Moroccan economy is unlikely to recover quickly from the current shock. Taking the measures needed to put public (and thus external) debt levels back on a downward trajectory will take a very long time. Furthermore, the past track record of the government, the large uncertainties in the current global environment and the lingering risk of protests do not bode well for successful and rapid reforms. In this context, Credendo downgraded the MLT political risk from category 3/7 to category 4/7.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com