CPI FINANCIAL
Moody’s Investors Service has today changed to stable from negative the outlook on Morocco’s Ba1 government bond rating. Concurrently, Moody’s has affirmed the Ba1 rating.
The key drivers of the decision to change the outlook to stable are as follows:
1) The implementation of the government’s energy subsidy reform, which improves the structure of fiscal and external accounts;
2) The government’s industrial policy agenda, which promotes higher value-added export industries, particularly in the offshoring, automotive and aerospace industries, and is funded by significant foreign direct investment (FDI).
The affirmation of Morocco’s Ba1 rating balances the expected peak in the country’s debt/GDP in 2015 and significant ongoing borrowing requirements with its easy access to funding.
Moody’s has also kept all rating ceilings unchanged, namely the foreign-currency bond ceiling at Baa2/P-2, the foreign-currency deposit ceiling at Ba2/NP, and the local-currency bond and deposit ceiling at Baa1.
The first driver of Moody’s decision to change the outlook on Morocco’s government bond rating to stable from negative is the implementation of the government’s energy subsidy reform. This reform is facilitating structural adjustments to the fiscal and external accounts and helping to reduce the large twin deficits that the government accumulated in the aftermath of the Arab Spring. The formation of these deficits was the key driver for the negative outlook assignment in February 2013.
Cumulative budget execution data from January to June 2014 confirm Morocco’s progress in reducing subsidy expenditures, in line with Moody’s expectations. Subsidy and transfer expenditures over the first half of 2014 were almost 47 per cent lower than over the same period in 2013. The government is on track (1) to reach the MAD35 billion end-year subsidy expenditure target; and (2) to reduce the subsidy bill to 3.8 per cent of GDP in 2014 and below three per cent in 2015, from 4.8 per cent in 2013 and 6.6 per cent in 2012. The latter assumes that oil prices remain broadly constant. Moreover, the retrenchment in subsidy expenditures has allowed the government to expand public investment expenditures significantly in H1 2014 compared to the same period last year.
Moody’s also notes the impending pension reform and the expected adoption of the Organic Budget Law as being supportive of creditworthiness.
The second driver of today’s outlook change is the government’s industrial growth strategy, which has started to show significant results in the areas of offshore outsourcing and the creation of export-oriented industrial zones with a focus on higher value-added automotive, aerospace and electronics industries. Automobile construction and electronics-related exports have increased at high double-digit rates over H1 2014 compared to the same period last year, with the potential for further expansion. The development of these industries was funded by significant FDI inflows, which have also strengthened Morocco’s international reserve base.
Morocco’s “Vision 2020” strategy for the development of the tourism industry as the country’s main source of foreign currency income is also supportive of creditworthiness.
Moody’s has affirmed Morocco’s government bond rating at Ba1 to reflect the following key considerations:
1) Morocco’s general government debt-to-GDP is projected to peak at about 66 per cent of GDP in 2015, and to decline only gradually thereafter, thus leaving the fiscal strength indicators in line with Morocco’s rating peers.
2) The country’s gross borrowing requirements remain significant at about 15 per cent of GDP per year, in line with peers, although its low share of foreign-currency funding and ample access to domestic and external funding at favourable conditions are mitigating factors.
3) The availability of IMF support under the Precautionary and Liquidity Line (PCL), which provides additional insurance against deteriorating funding conditions in case of tighter external liquidity conditions or a significant change in market sentiment.
Upward rating pressure would result from higher economic growth through improved competitiveness. In addition, further institutional improvements such as negotiated under the Deep and Comprehensive Free Trade Area (DCFTA) with the EU would be supportive of creditworthiness.
Risks to Morocco’s current rating stem from a potential reversal in the country’s fiscal consolidation strategy due to the materialization of domestic or geopolitical risk, as well as a significant worsening of the current account following a protracted slowdown in the euro area, which is Morocco’s main trading partner.
by Matthew Amlôt
