Fitch Ratings has affirmed Morocco's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Morocco's 'BBB-' rating is supported by a track-record of macroeconomic stability, comfortable external buffers and a low share of foreign-currency debt in public debt. This is balanced against weak development and governance indicators, high government debt and budget and current account deficits (CAD) that are wider than rating peers.
The government will miss its target of narrowing the central government (CG) budget deficit to 3.0% in 2018 from 3.6% of GDP in 2017. Fitch projects it will widen to 3.8% of GDP, against a revised government estimate of 3.5%. The upsurge in hydrocarbon prices will lead to a 0.4% of GDP overshoot in spending on subsidies as Morocco continues to support the prices of butane gas as well as those of wheat and sugar. Moreover, disbursements of Gulf Cooperation Council (GCC) grants will fall short of projections and the receipts of the corporate income tax will undershoot budget forecasts. Fitch forecasts the general government (GG) deficit, which also includes social security, local governments and extra-budgetary units, to widen to 2.5% of GDP in 2018 from a government estimate of 2.2% in 2017.
The government has prioritised social policies in the 2019 budget. It envisages an overhaul of social programmes as well as measures to support consumer purchasing power, spur employment and reduce regional disparities. Despite strong investments in infrastructure and manufacturing capacities in recent years, Morocco's non-agricultural activity has failed to accelerate and job intensity of growth remains low, resulting in only small improvements in employment and social indicators. This has contributed to social discontent, which is illustrated by recurrent protests in peripheral regions since 2016 and a boycott movement targeting some consumer products earlier in 2018.
Fitch projects a broadly stable CG deficit of 3.7% of GDP in 2019 (GG: 2.5%) reflecting a halt in consolidation efforts. The government is seeking to accommodate social priorities while containing pressures on the budget deficit by closing tax loopholes and raising some direct and indirect tax rates. It expects to limit the CG deficit to 3.3% of GDP by raising MAD5 billion from planned privatisations but Fitch treats privatisation receipts as a below-the-line financing item rather than budget revenues. The CG deficit will narrow slightly to 3.5% of GDP in 2020 (GG: 2.4%) under Fitch's forecasts, mostly on lower on-budget capital spending/GDP. A further rise in oil prices would exert pressures on the budget.
The government's stated goal of reducing CG debt to 60% of GDP in 2021 is unlikely to be achieved. Fitch projects CG debt will rise to 67.6% of GDP in 2020 from 65.1% in 2017. CG debt has been on an upward trajectory since it reached its low point of 45.4% of GDP in 2008, reflecting moderate growth and slow and intermittent progress on fiscal consolidation. GG debt will rise from 51.1% of GDP in 2017 to 53.3% in 2020. Refinancing risks are low as debt is mostly dirham-denominated, while 76.7% of external public debt is owed to official creditors.
The debt of state-owned enterprises' (SOEs) is high, at 26% of GDP at end-2017, of which 16.9% of GDP is owed to external creditors. Government guarantees on SOE debt amounted to 14.3% of GDP at end-2017. The government is currently working on a draft law to streamline the governance and oversight of SOEs and strengthen their balance sheets.
GDP growth will average 3.2% in 2018-2020, in line with the current 'BBB' category median of 3.3%. Following a bumper harvest in 2017, crop production has further increased during the current season due to supportive weather conditions and improved productivity, but unfavourable base effects mean that GDP growth will slow from 4.1% in 2017 to 3.3% in 2018 and 2.9% in 2019 as agricultural value-added contracts assuming a normalisation of harvests.
Activity in the non-agricultural sector is underpinned by continued foreign-financed investments in the automotive and aeronautic industries, steady growth in mining production and strong tourism. However, the medium-term outlook for non-agricultural activity remains constrained by structural impediments, including weak education outcomes, skill mismatches and low participation rates. The government is intensifying efforts to reduce the long payment delays in the economy, which are a key constraint for private sector activity.
The CAD will average 4.2% of GDP in 2018-2020, up from 3.6% in 2017 and well above the current 'BBB' median of 1.6%. These forecasts reflect a larger trade deficit and lower disbursement of GCC grants. Rising imports are driven by the upsurge in oil prices given the high dependence on energy imports, strong domestic demand and assembling industries inputs. They will be only partly offset by strong export performance lifted by sales of phosphates and transport equipment.
Foreign direct investments will average 1.7% of GDP in 2018-2020.wider CADs against the background of a pegged exchange rate will result in a fall in FX reserves to 4.9 months of current account payments in 2020 from 5.9 months in 2017, assuming a Eurobond issuance by the sovereign in 2019. Net external debt will also rise to 15.6% of GDP in 2020 from 14.6% in 2017, above the current 'BBB' median of 5.8%, based on Fitch's projections. Morocco's two-year precautionary liquidity line (PLL) with the IMF expired in July and the government has applied for a successor arrangement with the Fund. A new precautionary arrangement would offer a safety net against risks of external stress.
Bank profitability is steady, supported by wide interest margins, and the deposit-based funding structure is stable. However, the sector's capitalisation is below the 'BBB' median and provides only thin buffers given asset risks. Loan concentration is high, despite tighter regulatory rules and non-performing loans were 7.5% of total loans in 2017 versus a 'BBB' category median of 4.2%. The transition to the IFRS9 accounting standards that started in January is putting pressure on capitalisation ratios but the central bank has allowed a five-year transition period for compliance.
Structural features are a major constraint on the ratings, as governance and development indicators are well below 'BBB' and 'BB' medians. Continued tensions between some of the members of the ruling six-party coalition persist, but will not impact policy-making in the short to medium term, in Fitch's view. Negotiations over the long-simmering conflict in the Western Sahara region have reached a standstill since 2012 but renewed UN efforts could lead to the resumption of talks in the coming months. Although Fitch does not expect a prompt resolution to the conflict, a reactivation of the peace process would contribute to reducing regional geopolitical tensions.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Morocco a score equivalent to a rating of 'BBB-' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factors that may, individually or collectively, lead to positive rating action are as follows:
-Fiscal consolidation leading to a trend reduction in government debt/GDP;
- Sustained improvement in the current account balance consistent with declining net external debt-to-GDP;
-Over the medium term, stronger growth potential and an improvement in development indicators.
The main factors that may, individually or collectively, lead to negative rating action are as follows:
- An increase in government debt/GDP driven by the fiscal stance or a materialisation of contingent liabilities;
-Security developments or social instability affecting macroeconomic performance or external balances or leading to significant fiscal slippages;
-Weakening of medium-term growth prospects leading to a widening of the gap between Morocco's development indicators and the 'BBB' category medians.
KEY ASSUMPTIONS
We expect global economic trends and commodity prices to develop as outlined in Fitch's latest Global Economic Outlook. We assume that oil prices will decline from USD70/barrel in 2018 to USD65 in 2019 and further to USD57.5 in 2020.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F3'
Short-Term Local-Currency IDR affirmed at 'F3'
Country Ceiling affirmed at 'BBB'
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'BBB-'
Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BBB-'
