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Kingdom of Morocco Ratings Affirmed; Outlook Revised To Negative On Weaker Fiscal And External Positions
Publication date: 11-Oct-2012
FRANKFURT (Standard & Poor's) Oct. 11, 2012--Standard & Poor's Ratings Services today affirmed its long- and short-term foreign currency sovereign credit ratings on the Kingdom of Morocco at 'BBB-/A-3' and its long- and short-term local currency ratings at 'BBB/A-2'. The transfer and convertibility assessment for Morocco remains 'BBB+'. At the same time, we revised our outlook on Morocco to negative from stable.
The ratings on Morocco are supported by its macroeconomic management approach, which has traditionally focused on achieving stability. This has contributed to strong economic growth relative to peers, low consumer price inflation, relatively low external leverage, and moderate government debt levels. The ratings are constrained by comparatively low prosperity (relative to similarly rated peers) and by social pressures, which we believe have increased since the Arab Spring, but remain much lower than in neighboring countries.
The general government balance had been broadly balanced during the past decade. However, deficits rose to over 4% of GDP in 2011 and this year as spending, especially on fuel subsidies, has increased and driven the primary balance deeper into deficit. We expect that cuts in subsidies will see a primary surplus return in 2013 and the net general government debt peak at an estimated 41% of GDP in 2012.
The total subsidy bill was equivalent to a substantial 6% of GDP in 2011. The government began to reduce untargeted fuel subsidies in mid-2012, but will need to take more steps to restore Morocco's traditional fiscal stability. While the government has expressed its intent to press ahead with further subsidy reform, we believe this will be politically contentious and could undermine social cohesion, leading to further delays. We also note that, to date, no concrete timetable for reforms has been laid out. Higher global oil prices--while currently not expected by Standard & Poor's--could also impair progress, as could weak economic performance in European export markets and sources of trade, investment, remittances, and tourists.
Morocco's external financing needs used to be contained due to low external debt and a current account close to balance or in surplus. Since the onset of the global financial crisis, however, the current account deficit has risen fast, reaching by our estimate an average of over 7.5% of GDP during 2011-2013, partly fuelled by rising oil prices and a poor harvest in 2012.
Morocco's narrow net external debt ratio has therefore quickly deteriorated. As recently as the middle of last decade the Moroccan economy was a net creditor, by that measure, of more than 20% of current account receipts (CARs). By contrast, we forecast a net debtor position of 28% in 2012.
Although official foreign exchange reserves have fallen sharply from their peak, we estimate immediate gross external financing needs at a still-moderate 93% of CARs plus usable reserves (in 2012) and expect them to stabilize at around 100% by the middle of the decade (from less than 70% before 2007). Immediate refinancing risks are further mitigated by an IMF precautionary liquidity line equivalent to $6.2 billion.
We also recognize that past FDI (averaging about 2% of GDP during the last decade) will likely improve export performance. Nevertheless, we believe that economic rebalancing over the medium term will remain difficult and may lead to lower GDP growth, which could heighten risks to political and social stability.
The Moroccan authorities responded quickly to the challenges of the Arab Spring. The government effectively defused large-scale protests by implementing referendum-approved constitutional reforms, and holding elections in November 2011. We believe the current government better represents the views of Moroccan voters, which supports the legitimacy of the political system--including the powerful position of the King, who we believe remains broadly popular. We therefore consider a fundamental regime change (as seen in Tunisia, Libya, and Egypt) and all its uncertainties as unlikely. Nonetheless, in our opinion, Morocco's social cohesion could weaken if living standards were to decline, say as a consequence of comprehensive subsidy reform or a marked economic slowdown, for example in the wake of a deepening economic crisis in the eurozone.
The negative outlook reflects our view that we could lower the ratings if the fiscal and current account deficits do not narrow significantly and sustainably, social pressures escalate to a degree that they jeopardize political stability or impede coherent reforms, or economic performance is materially harmed by a weakening external economic environment.
We expect the progress of political and economic reforms, and the authorities' ongoing efforts to contain consumer price inflation, to limit popular unrest to sporadic outbursts. However, if unemployment remains stubbornly high, living costs spike, or political reforms disappoint popular expectations, there is a risk of sustained and large-scale unrest that could also lead to a downgrade.
The ratings could stabilize at the current levels if the government were to implement reforms that would lastingly reduce Morocco's twin deficits and see the government's and the country's external debt ratios decline once again, while maintaining social peace and political stability.
Standard & Poor's
Publication date: 11-Oct-2012
- We are affirming our investment-grade long- and short-term foreign and local currency sovereign credit ratings on Morocco at 'BBB-/A-3' and 'BBB/A-2', respectively.
- We expect economic reforms, and particularly petroleum subsidy cuts, to diminish Morocco's external and fiscal deficits.
- We are revising the outlook to negative from stable. This reflects our view that the Moroccan authorities are finding it more challenging to reduce the vulnerabilities created by the twin deficits in the context of a difficult external environment, while maintaining Morocco's traditional political and social stability.
- The negative outlook reflects our view that we could lower the ratings if the fiscal and current account deficits do not narrow significantly, if social pressures escalate and impair reform progress, or if economic performance is materially harmed by a weakening external economic environment.
FRANKFURT (Standard & Poor's) Oct. 11, 2012--Standard & Poor's Ratings Services today affirmed its long- and short-term foreign currency sovereign credit ratings on the Kingdom of Morocco at 'BBB-/A-3' and its long- and short-term local currency ratings at 'BBB/A-2'. The transfer and convertibility assessment for Morocco remains 'BBB+'. At the same time, we revised our outlook on Morocco to negative from stable.
The ratings on Morocco are supported by its macroeconomic management approach, which has traditionally focused on achieving stability. This has contributed to strong economic growth relative to peers, low consumer price inflation, relatively low external leverage, and moderate government debt levels. The ratings are constrained by comparatively low prosperity (relative to similarly rated peers) and by social pressures, which we believe have increased since the Arab Spring, but remain much lower than in neighboring countries.
The general government balance had been broadly balanced during the past decade. However, deficits rose to over 4% of GDP in 2011 and this year as spending, especially on fuel subsidies, has increased and driven the primary balance deeper into deficit. We expect that cuts in subsidies will see a primary surplus return in 2013 and the net general government debt peak at an estimated 41% of GDP in 2012.
The total subsidy bill was equivalent to a substantial 6% of GDP in 2011. The government began to reduce untargeted fuel subsidies in mid-2012, but will need to take more steps to restore Morocco's traditional fiscal stability. While the government has expressed its intent to press ahead with further subsidy reform, we believe this will be politically contentious and could undermine social cohesion, leading to further delays. We also note that, to date, no concrete timetable for reforms has been laid out. Higher global oil prices--while currently not expected by Standard & Poor's--could also impair progress, as could weak economic performance in European export markets and sources of trade, investment, remittances, and tourists.
Morocco's external financing needs used to be contained due to low external debt and a current account close to balance or in surplus. Since the onset of the global financial crisis, however, the current account deficit has risen fast, reaching by our estimate an average of over 7.5% of GDP during 2011-2013, partly fuelled by rising oil prices and a poor harvest in 2012.
Morocco's narrow net external debt ratio has therefore quickly deteriorated. As recently as the middle of last decade the Moroccan economy was a net creditor, by that measure, of more than 20% of current account receipts (CARs). By contrast, we forecast a net debtor position of 28% in 2012.
Although official foreign exchange reserves have fallen sharply from their peak, we estimate immediate gross external financing needs at a still-moderate 93% of CARs plus usable reserves (in 2012) and expect them to stabilize at around 100% by the middle of the decade (from less than 70% before 2007). Immediate refinancing risks are further mitigated by an IMF precautionary liquidity line equivalent to $6.2 billion.
We also recognize that past FDI (averaging about 2% of GDP during the last decade) will likely improve export performance. Nevertheless, we believe that economic rebalancing over the medium term will remain difficult and may lead to lower GDP growth, which could heighten risks to political and social stability.
The Moroccan authorities responded quickly to the challenges of the Arab Spring. The government effectively defused large-scale protests by implementing referendum-approved constitutional reforms, and holding elections in November 2011. We believe the current government better represents the views of Moroccan voters, which supports the legitimacy of the political system--including the powerful position of the King, who we believe remains broadly popular. We therefore consider a fundamental regime change (as seen in Tunisia, Libya, and Egypt) and all its uncertainties as unlikely. Nonetheless, in our opinion, Morocco's social cohesion could weaken if living standards were to decline, say as a consequence of comprehensive subsidy reform or a marked economic slowdown, for example in the wake of a deepening economic crisis in the eurozone.
The negative outlook reflects our view that we could lower the ratings if the fiscal and current account deficits do not narrow significantly and sustainably, social pressures escalate to a degree that they jeopardize political stability or impede coherent reforms, or economic performance is materially harmed by a weakening external economic environment.
We expect the progress of political and economic reforms, and the authorities' ongoing efforts to contain consumer price inflation, to limit popular unrest to sporadic outbursts. However, if unemployment remains stubbornly high, living costs spike, or political reforms disappoint popular expectations, there is a risk of sustained and large-scale unrest that could also lead to a downgrade.
The ratings could stabilize at the current levels if the government were to implement reforms that would lastingly reduce Morocco's twin deficits and see the government's and the country's external debt ratios decline once again, while maintaining social peace and political stability.
Standard & Poor's
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