Overview

• We project Morocco's real GDP growth will be about 2.8% this year, constrained by the decline in external demand and agricultural output, rebounding to about 4.0% by 2021.
• The country's budgetary position should gradually improve, supported by the government's comprehensive budgetary strategy and privatization proceeds over the forecast period, to reach 3% of GDP in 2022.
• We believe the precautionary and liquidity line approved by the International Monetary Fund (IMF) in December 2018 underpins Morocco's macrofinancial stability and its economic and budgetary policy objectives.
• As a result, we are revising the outlook on the country to stable from negative.
• At the same time, we are affirming our 'BBB-/A-3' ratings on Morocco.

Rating Action

On Oct. 4, 2019, S&P Global Ratings revised its outlook on Morocco to stable from negative. At the same time, we affirmed our 'BBB-/A-3' long-term and short-term foreign and local currency sovereign credit ratings on Morocco.

Outlook

The outlook is stable, balancing our expectation of further fiscal consolidation and gradual improvement in the current account position over the next two years against risks to economic growth from domestic structural shortcomings or external shocks, for example, due to a slowdown in world trade.

We could raise the rating if budgetary consolidation prospects materially improve or the ongoing transition toward a more flexible exchange rate that targets inflation significantly bolsters Morocco's external competitiveness and ability to withstand macroeconomic external shocks. We could also raise the ratings if Morocco's ongoing economic diversification strategy results in less volatile and higher rates of economic growth.

Conversely, we could lower the rating if the government deviates from its fiscal consolidation plan, resulting in substantially higher government debt compared with our forecast; real GDP growth rates significantly undershoot our expectations; or external imbalances widen, resulting in a significant increase in the economy's gross financing needs.

Rationale

The outlook revision reflects our expectation that Morocco's budgetary position should gradually improve, supported by the government's comprehensive budgetary strategy and privatization proceeds over the forecast period, to reach 3% of GDP in 2022. This year, the government expects to address the shortfall in tax revenues mainly by making savings in current spending. We don't expect the public sector wage hike announced in the spring to affect the budgetary outcome, because it had already been included in the 2019 budget. Additional savings will come from lower-than-budgeted spending on subsidies for liquefied petroleum gas (LPG). For example, the government put in place a hedging strategy, which shields its spending on subsidies for LPG against potential increases in LPG prices during 2019.

Moreover, the government's strategy of promoting private sector activity includes the establishment of schemes similar to public-private partnerships, including concessions to private sector investors, which should allow the government to reduce public investment outlays and build on its assets (such as sea ports and real estate). Given the government's commitment to privatize some assets from 2019-2024, we expect the change in net general government debt--our preferred indicator of fiscal flows--to decline as of 2019.

We believe that the ongoing shift in Morocco's underlying economic structure, driven by substantial foreign direct investment and a more resilient agricultural sector, both underpinned by the government's strategy to promote private sector activity and limit or--in some sectors--reduce the government's role in the economy, benefits economic growth prospects and stability. As a result, overhauling the economic structure, along with higher economic growth, should in our view lead toward gradually reduced economic vulnerability from persistent current account and budget deficits. We believe that the IMF-approved precautionary and liquidity line from December 2018 underpins the country's macrofinancial stability, and economic and budgetary policy objectives.

The ratings on Morocco are supported by moderate government debt and manageable current account deficits, despite a deterioration in 2018, amid relatively stable policymaking. The ratings remain constrained by GDP per capita lower than that of similarly rated sovereigns, significant economic reliance on agriculture, high social needs, and a relatively slow approach to budgetary consolidation.

Institutional and economic profile: Economic growth to decelerate this year, while economic diversification is set to continue

• Morocco's GDP per capita remains one of the lowest of the sovereigns rated in our 'BBB' category.
• We forecast real GDP growth will be about 2.8% in 2019, absent any significant shocks in the external and domestic business environments, before gradually firming during 2020-2022.
• Economic growth remains vulnerable to volatility in agricultural output and the ongoing economic slowdown in Europe, and growth excluded parts of the Moroccan population before.

We expect real GDP growth in Morocco at about 2.8% in 2019, reflecting a slowdown in Europe, as well as decelerating growth in the country's agricultural output. The government has been reducing the economy's vulnerability to weather shocks by investing in more-efficient technologies in the agricultural sector via the Green Morocco Plan, as well as diversifying the economy. In this context, we believe that nonagricultural output, which had been accelerating this year (3.4% growth in the first quarter of 2019), will continue to expand in line with past trends and reflect continuous growth in foreign direct investment (FDI), despite an expected dip this year.

The main sources of growth are the expanding automotive, aeronautic, and electronics sectors, where substantial output growth is expected to continue at least through 2022. For example, the recently inaugurated car manufacturing plant by PSA is expected to increase its output in 2021, boosting the economy's exports. Indeed, Morocco has built comprehensive industrial clusters around its emerging auto industry. It has attracted a number of foreign car manufacturers, first from France and most recently from China.

As a result, the number of vehicles produced in Morocco has increased by more than 2.5x since 2014, overtaking in value exports related to phosphates and their derivatives a few years ago. Nevertheless, phosphates and their derivatives will still represent an important share of the country's exports. We also consider that tourism has substantial further growth potential, despite solid growth in tourist receipts this year, of almost 6% year-on-year during the first seven months of the year. The construction sector has recovered this year and we expect it to contribute positively to overall economic growth.

Given Morocco's significant dependence on energy imports, FDI in the energy sector is increasingly important. The country aims to produce 52% of its power from renewable energy by 2030, which appears realistic, given that an estimated 35% of its current electricity production comes from renewables (hydro, wind, and solar). Projects such as this, which ease the economy's dependence on external sources of energy, are positive because they support a further reduction in current account imbalances and also further insulate Morocco from energy price increases, which were particularly adverse in 2018.

The government has also promoted several gas field exploration projects. Although they are unlikely to come on-stream over the next two years, they could further reduce Morocco's energy imports and benefit its trade balance. This vulnerability was most recently demonstrated in September 2019 when oil prices increased due to geopolitical factors. As a result of the significant negative economic and budgetary effects, the government is considering a price regulating mechanism that would prevent the full impact of oil price increases being felt by end-user customers. Instead, it would require the supply chain to absorb part of the pressure. If approved by the Moroccan competition authority, this mechanism could cushion the negative impact on the economy, in part by supporting households' disposable income, and allow for improved predictability in terms of budgetary outcomes.

We forecast that real GDP growth will average about 4% in 2020-2022, backed by increasing growth in nonagricultural sectors and resilience in the agricultural sector. We also expect that the business environment and external demand will remain broadly supportive of the steady pick-up in nonagricultural output. To this end, the government has prepared an investment charter, small-business act, and tax system overhaul to introduce more stability and policy predictability for business. Moreover, to improve liquidity in the economy, the government has shortened its payment times to suppliers, and those of state-owned enterprises (SOEs), and has settled its payment arrears with the private sector. We believe that these measures will support the private sector's development, especially given this year's economic slowdown.

Tackling other structural weaknesses, such as payment indiscipline among private sector companies and administrative hurdles in the business environment, could support the country's economic diversification and the resilience of its economic growth. We believe that the government's strategy to further improve the business environment, including access to finance, is likely to enhance the country's standing in the World Bank Doing Business ranking. It is currently 60th among 190 countries.

Unless Morocco suffers external economic shocks--for example, due to the heightened risk of global protectionism or a faster slowdown in European economies, which represent about 70% of its export markets--we believe that the expansion of its export capacity and its rise up the value-added ladder will contribute positively to economic growth over 2019-2022. We view the two-year IMF-approved liquidity line put into place in December 2018 (worth about $2.97 billion) as an important tool in the context of these risks, as well as a relevant policy anchor. It resulted in a number of policy measures being rolled out to improve the economy's performance and strengthen its resilience.

We believe that Morocco has largely demonstrated political and social stability, especially following the Arab Spring. It achieved this through constitutional reforms, a rise in government spending aimed at economic development, and reduction of economic inequality in less developed regions, with broad support from King Mohammed VI. The king chairs the Council of Ministers, which deliberates on strategic laws and state policy orientations. His role in policymaking has held greater importance since 2017, when he intervened in curbing social tensions in the Rif and Jerada regions.

Although ethnic, tribal, religious, and regional divisions are less pronounced in Morocco than in much of the Middle East and North Africa, there are rising demands from some parts of the Moroccan population for more-inclusive economic growth. In our view, this partially stems from high unemployment among youth and the income disparities between more- and less-developed areas. At the national level, the unemployment rate appears low and falling, but the differences among population segments are significant (higher in urban areas, and for youth and women). Moreover, we believe that higher participation by women in the labor market (estimated at 22.2% in 2018) could significantly increase the country's economic growth potential.

The government has expressed its willingness to accelerate the implementation of regional development programs and decentralization of the state with devolution of tasks to regions to reduce income disparities, including by tackling high unemployment. We believe that these demands will persist and constrain Morocco's budgetary position, delaying a faster reduction in the budget deficit over our forecast horizon. Nevertheless, to the extent they are directed toward improving education and labor market outcomes, such policies could boost the country's growth potential in the medium-to-long term.

Flexibility and performance profile: Budget deficit to slowly decline, supported by privatization proceeds

• For 2019, we expect the government to post a budget deficit of about 3.3% of GDP, including the planned privatization proceeds.
• Following a significant wider current account deficit in 2018, we expect the deficit to gradually decline, on the back of new exporting capacities, subject to the trends in external demand.
• We anticipate that authorities will inch toward a more flexible exchange rate regime over the medium term.

The budget deficit widened to 3.7% of GDP in 2018 against the government's target of 3%, mainly because of a sharp rise in oil prices (leading to increased cost of energy subsidies for liquefied petroleum gas), combined with lower-than-planned grants from the Gulf Cooperation Council (GCC). We don't anticipate a repeated slippage in 2019 because the remaining amount of budgeted GCC grants is modest and our forecasts don't suggest a similar rise in oil prices this year. In fact, the latter risk has been eliminated, as the government put in place a hedging strategy which shields its spending on subsidies for LPG against potential price increases during 2019. We therefore expect the headline budget deficit to be broadly stable in GDP terms in 2019.

This year, the government expects to address the shortfall in tax revenues mainly by savings in current spending. We don't expect the public sector wage hike to affect its budgetary outcome, given that it had already been budgeted for and we expect additional savings from lower-than-budgeted government subsidies for LPG, due to the implementation of the above-mentioned hedging strategy. Moreover, the government's strategy of promoting private sector activity includes the establishment of public-private-partnership-like schemes, including concessions to private sector investors. These should allow the government to reduce public investment outlays and build on its assets. Given the government's commitment to privatize assets worth approximately 4% of GDP during 2019-2024, we expect the change in net general government debt to decline in 2019 compared with 2018.

The government has been addressing the rising social demands for better living standards, including education and health care, and tackling high unemployment rates in poorer parts of the country by strengthening social protection programs. This includes the National Human Development Initiative aimed at supporting vulnerable parts of the population, funded from public and private sector sources. Morocco provides socially sensitive subsidies on basic goods (flour, sugar, and LPG) and is implementing a single subsidy registry to provide better targeted and efficient support. On the revenue side, in the context of the decisions following the tax system conference held in May 2019, we view favorably the government's plans to broaden the tax base to improve tax collection. This includes reducing numerous tax exemptions to benefit the investment activity and attempting to address sizable tax avoidance and evasion, while targeting the vulnerable social groups.

We forecast that the gross government debt-to-GDP ratio will stabilize at about 53% of GDP over the medium term. We expect net general government debt to average about 51% of GDP during 2019-2022. The average maturity of the central government debt outstanding stands at about 6.75 years, with the average interest rate estimated at below 3.9%.

Our budgetary forecast includes expected privatization proceeds for 2019-2022. We incorporated into our forecast privatization proceeds of about 0.4% of GDP in 2020 and 2021, and 0.2% of GDP in 2022. If the realized proceeds are higher than forecast, the decline in the general government debt-to-GDP ratio will be faster than our forecast suggests.

In terms of contingent liabilities, represented predominantly by the existing stock of state guarantees to SOEs, we believe that the government's announced overhaul of the role of SOEs is credit-positive in several ways, beyond the use of privatization proceeds in the budgetary consolidation process. If fully implemented, it would contain and reduce the contingent liability risk for the sovereign balance sheet, while likely improving productivity and efficiency of business outcomes. It would also stimulate private sector activity, which has become a key economic policy strategy for the government.

Our gross general government debt data consolidate the holdings of central government debt by other branches of state, such as public pension funds, while net general government debt excludes from gross debt the government's liquid assets. Therefore, change in net government debt--our preferred variable for fiscal flow performance--reflects all the components affecting the government debt position, not just the central government balance.

The general government debt stock has risen significantly over the past eight years (from 32% of GDP at year-end 2010, before the Arab Spring) due to consistently large budget deficits. We believe this points to structural weaknesses in the Moroccan economy, relative to other sovereigns at this rating level. The government's debt profile appears favorable: At year-end 2018, the average life of debt outstanding stood at six years and five months, and the average cost of debt was 3.9%.

The Moroccan dirham is currently pegged to a currency basket comprising 60% euros and 40% U.S. dollars. The foreign exchange (FX) peg regime limits monetary policy flexibility, in our view. In January 2018, Moroccan authorities and the central bank, Bank Al Maghrib (BAM), decided to increase flexibility in the exchange rate regime by widening the band of fluctuation between the dirham and the basket of currencies to 2.5% in either direction from the previous plus or minus 0.3%. In our view, the measure was implemented smoothly, especially considering earlier attempts in mid-2017, when BAM's FX reserves shrank by more than 15% in the two months before the reform. We attribute the decline in FX in part to pressure from domestic market participants following increasing demand for hedging instruments. As a result, a sizable portion of these reserves was transferred onto domestic banks' balance sheets, leading to a substantial increase in foreign-currency assets, and the banking system as a whole did not lose its FX reserves. At the end of 2018, the reserve coverage was approximately five months of current account payments.

If widening the exchange-rate fluctuation bands continues to go well, we would view further widening as positive for our overall monetary assessment on Morocco. It would likely bolster the country's external competitiveness and ability to withstand macroeconomic external shocks. However, we anticipate that authorities will first allow external financial developments to test the current fluctuation bands, and wait for other parameters like budget and current account balance to improve before moving toward further widening the bands.

Finally, although they are moving toward a more flexible exchange rate regime, we expect Moroccan authorities will maintain restrictions on capital accounts in the near term. These restrictions will be eased gradually, to avoid any potential large-scale capital outflows.

Although the banking sector appears to be moderately capitalized, it is unlikely to pose a significant risk to the wider economy, given its adequate regulatory Tier 1 capital ratio of almost 10.8%. Although nonperforming loans constitute a relatively high proportion of the total, at 7.7% at the end of August 2019, they appear adequately provisioned. Nevertheless, the banking sector remains vulnerable to credit concentration risks. The banks' expansion into Sub-Saharan Africa has so far been highly profitable, but it opens new channels of risk transmission to the country's banking system.

We expect Morocco's current account deficit to narrow to about 4.9% of GDP in 2019, down from about 5.5% of GDP last year, when energy-related imports increased by almost 20%. In the absence of a significant decline in external demand--which could come from a rise in global protectionism or the ongoing economic slowdown in Europe--we expect the current account deficit to narrow during the forecast horizon, as rising export capacity materializes in higher value-added industries, like auto.

Cars have become the country's leading export product, accounting for about 24% of total goods exports and more than 5% of GDP in 2017. Auto exports rose almost 11% during 2018, with an even larger increase in aeronautics (13.9%). Furthermore, the export of phosphate and its derivatives bottomed out and will grow in line with external demand (17% growth last year). At the same time, tourism receipts grew by almost 6% in the first seven months of this year. Meanwhile, the development of domestic energy sources should curb growth in Morocco's energy bill, although we do not incorporate this development into our forecast yet, since it is likely to emerge only at the end of our projection horizon. Morocco also benefits from strong remittances.

The external liabilities position will remain large over the next three years, and we forecast narrow net external debt as a proportion of current account receipts (CARs) to be 20%-30% in 2019-2022. We also forecast external financing requirements will remain covered by CARs and usable reserves over this period.

Key Statistics

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Ratings Score Snapshot

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Related Criteria

• Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research

• Sovereign Ratings List, Sept. 4, 2019
• Sovereign Ratings History, Sept. 4, 2019
• Global Sovereign Rating Trends: Midyear 2019, July 25, 2019
• Sovereign Risk Indicators, July 11, 2019. An interactive version is also available at http://www.spratings.com/sri
• Default, Transition, and Recovery: 2018 Annual Sovereign Default And Rating Transition Study, March 15, 2019

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

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