Fitch Gives Morocco ‘BBB’ Rating

Global rating agency Fitch has affirmed Morocco’s Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-‘, Long-term local currency IDR at ‘BBB’, and Short-term foreign currency IDR at ‘F3’. The agency has also given the North African Kingdom a “stable outlook” and affirmed the country ceiling at ‘BBB’.
Morocco’s ‘BBB-‘ rating is supported by a strong macroeconomic performance, as evidenced by low inflation, sustained GDP growth and general government debt (39% of GDP) in line with rating peers, says Fitch. Recent success in managing the political transition has underlined Morocco’s political stability. Economic dependence on Europe (60% of current account receipts, 80% of foreign tourists and remittances and 50% of exports in 2011) and on oil imports contributed to higher fiscal and current account deficits in 2011 and represent significant downside risks. However, Fitch expects these ‘twin deficits’ to begin narrowing this year, supported by recent and prospective measures to reduce fuel subsidies, and supporting the Stable Outlook.
Real GDP growth remained strong at 5% in 2011, supported by accommodative economic policies and structural reforms, and despite economic difficulties affecting Morocco’s main economic partners in the eurozone. Growth has slowed in 2012 due to a decline in agricultural output, but non-agricultural growth remained at 4.2% in Q212. Assuming a rebound in agriculture, and some recovery in the eurozone, Fitch expects GDP growth to recover to 5% by 2014, in line with performance in the previous decade, supported by new investment projects. The main risk to the forecast is worse than expected performance in the eurozone, especially given Morocco’s much more limited room to support domestic demand now compared with 2009.
High oil prices in 2011 and 2012 have pushed the current account to a large deficit (7.2% of GDP expected in 2012 after 8% of GDP in 2011) and international reserves have declined markedly to an expected 4.1 months of current account payments (CXP) by end-2012 from 7.1 months in 2009. However, Fitch forecasts a gradual improvement in the current account deficit, primarily due to lower oil prices (forecast at USD100/barrel in 2013 and 2014 from USD110/barrel in 2012) as well as a pickup in exports. Under this scenario, international reserves would stabilize by 2013 at four months of CXP and net external debt, which has been increasing, should also stabilize. Morocco has obtained an IMF Precautionary and Liquidity Line (PLL) worth USD6.2bn (1.4 months of CXP) over two years. The authorities do not intend to use the credit line and see it as insurance against a potential extreme scenario.
The central government deficit increased markedly to 6.2% of GDP in 2011 after 4.7% in 2010, primarily reflecting the increased subsidy bill (6.1% of GDP) as a result of higher oil prices. The authorities have started to reform the universal subsidy system (caisse de compensation) and administered oil prices were increased by 16% in June 2012. Fitch projects the budget deficit to decline gradually (4.8% of GDP in 2013 from 5.5% in 2012) in line with the recently announced budget and in the medium term as the subsidy reform progresses. General government debt would stay in line with rating peers at the 2014 horizon. Rising spending pressures following the institutional changes in the wake of the Arab Spring increase implementation risks to the projected tightening.
Morocco has been the most successful country in the region in responding to popular demand for change following the Arab Spring. Under the terms of the new constitution, the King appointed the leader of the dominant party in the newly elected Parliament (the Parti de la Justice et du Developpement) as head of the government in January 2012. The government has taken a gradual reformist approach and its first policy steps suggest continuity in terms of economic policy.
The Stable Outlook anticipates improvement in the fiscal and current account deficits, consistent with Fitch’s central scenario, supported by successful implementation of the subsidy reform and continued high growth.
In contrast, inability to correct the large central government and current account deficits, further erosion in the international reserves position and a material weakening of economic performance in the face of external shocks, such as weaker than expected eurozone performance or higher than expected oil prices, would be rating negative. In the longer term, Morocco’s ratings would benefit from improvements in key social indicators (poverty, GDP per capita, youth unemployment) that are relatively weak compared to rating peers.