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Fitch Affirms Morocco at 'BBB-'; Outlook Stable
October 10, 2017 / 2:18 PM / 2 months ago

Fitch Affirms Morocco at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 10 (Fitch) Fitch Ratings has affirmed Morocco's Long-Term Foreign-Currency Issuer Default Rating 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 ratings are supported by macro stability, a track record of prudent economic policies and a budget deficit below the 'BBB' category median. These factors are balanced against weak development and governance indicators, and high general government debt and current account deficits relative to peer medians. GDP growth has recovered from its sharp drought-induced growth slowdown is 2016 and Fitch forecasts it will average 3.8% over 2017-2019, higher than the 'BBB' median of 2.9%. Economic activity will be mostly lifted by the rebound in agricultural production. After contracting by 63.4% the previous year due to the shortage in rainfall, cereal crop output will soar by 187% during the current season and will decline in 2018 as favourable base effects will run out. Non-agricultural growth will pick up some momentum, lifted by cyclical tailwinds, including the recovery in agricultural employment, lower food prices and firmer activity in the eurozone. Consequently, we project GDP growth to accelerate from 1.2% in 2016 to 4.6% in 2017 and slow down to 3% in 2018. The six-month delay in the formation of a government following the October 2016 legislative elections and the deferred adoption of the 2017 budget brought active fiscal consolidation and the growth-enhancing reform drive to a temporary halt. The new six-party coalition remains committed to its predecessor's industrialisation strategy, targeting an increase in the industrial sector's share to 23% of GDP by 2020 from 18.5% in 2016. It has also confirmed the previous government's target of reducing central government (CG) debt to 60% of GDP from 64.7% in 2016, but the target now is to be achieved one year later than previously envisaged, in 2021. The reform process may be slowed down by political challenges. Heightened social tensions have been illustrated by the wave of protests in the Northern Rif region which started in October 2016 and continued during 1H17. There are also tensions within some governing parties, including the prime minister's Justice and Development Party (PJD), the largest party in Parliament, in Fitch's view. We expect fiscal consolidation to continue but to proceed more slowly than projected by the government. Past progress has been mostly achieved through the containment of current spending and reform of energy subsidies aided by the fall in oil prices, leading to a reduction in CG deficit from 7.2% in 2012 to 4.1% in 2016. Although of smaller magnitude, the residual consolidation could be more difficult to achieve as it hinges upon deeper tax reforms and a broadening of the tax base against the background of a large informal sector. The ongoing fiscal decentralisation reform, the recovery in oil prices and heightened social tensions could also lead to some deviations from the envisaged consolidation path. We forecast the CG deficit to decline to 3.6% of GDP in 2017 from 4.1% in 2016, in line with the revised budget target (3.5%). This improvement will be mostly driven by cyclical factors, with higher growth boosting tax receipts and VAT reimbursements being normalised from their exceptionally high level in 2016. As fiscal consolidation resumes, we forecast the CG deficit to fall to 3.2% in 2018 - against a government target of 3.0% - and 3.0% in 2019. The general government (GG) deficit which also includes social security, local governments and extra-budgetary units will also narrow to 1.4% in 2019 from 2.4% in 2016, reflecting the lower CG deficit. We project GG debt to decline gradually from 50.1% in 2016 to 48.1% in 2019, still higher than the 'BBB' median of 42.3%. CG debt will also gradually fall to 62.5% in 2019 from 64.7% in 2016. Refinancing risks are low due to a moderate interest burden and high share of dirham-denominated debt while the average maturity has been lengthened to 7.4 years in 2016 from 5.5 years in 2013. Relatively high guarantees on state-owned enterprise (SOE) debt, estimated at 13.8% of GDP at end-2016, generate significant contingent liabilities for the government. However, the risk of their materialisation on the sovereign's balance sheet is low, in our view. The envisaged reform of the SOE governance and oversight could offer more transparency on total contingent liabilities arising from the sector. The 2016 reform has improved the sustainability of the civil servants' pension system and reduced its long-term cost for the budget. Risks for the sovereign stemming from the banking sector are moderate. The profitability of Moroccan banks' is sound, funding is stable and largely based on deposits and liquidity ratios are adequate according to Fitch's assessment. However, the ratio of non-performing loans to total loans was 7.6% at end-2016, higher than the 'BBB' category median of 3.7% and asset quality is weakened by the high concentration of the loan portfolio. While potentially enhancing their profitability, the regional expansion of Moroccan banks in Africa will increase their exposure to riskier operating environments and debts of sovereigns that are lower rated than Morocco. The sector's capital adequacy ratio was 14% at end-2016, lower than the 'BBB' median of 15.8%. Morocco's external position will improve slowly. We forecast the current account deficit (CAD) to narrow to 3.8% in 2019 from 4.4% in 2016, reflecting the gradual improvement in the structural trade deficit. Manufacturing exports will continue to forge ahead, lifted by the expansion of emerging industries and the penetration of new markets across Africa. This will be partly offset by lower world market prices of phosphate and derived products, which accounted for 25% of exports over the last five years, a higher energy bill due to the rebound in oil prices and sustained imports of capital goods reflecting continued investments in domestic manufacturing capacities and infrastructure. Net external debt has increased rapidly, reaching 16.6% of GDP in 2016 up from -0.6% in 2010 but external financing risks are moderate, in our view. The composition of gross external debt is relatively favourable with a high share of debt owed to official creditors. Foreign-currency reserves are comfortable but will decline to 5.7 months of current account payments in 2017, down from 6.3 in 2016. This is attributable to the persistent CAD, increasing FDI outflows due to the regional expansion of domestic companies and some purchases of foreign-currency instruments in anticipation of the upcoming broadening of the dirham's floating bands. The expected gradual widening of the dirham's floating bands will have only a modest impact on macroeconomic stability and external financing conditions in our view. The current Precautionary Liquidity Line with the IMF offers a safety net against external financing stress. Morocco's governance and development indicators are a major credit weakness. GDP per capita is well below 'BBB' and 'BB' medians. Medium-term growth prospects are constrained by barriers to competition, the large informal sector, perceived corruption and low labour force participation rate. Youth unemployment is high and there are regional disparities. 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 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 Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that may, individually or collectively, lead to positive rating action are as follows: - Continued fiscal consolidation leading to a material reduction in general government debt-to-GDP - Sustained improvement in the current account balance consistent with declining net external debt to GDP -Over the medium term, the implementation of structural reforms bolstering growth potential and leading to an improvement in development indicators The main factors that may, individually or collectively, lead to negative rating action are as follows: -A rise in government debt to GDP ratio -Deterioration in Morocco's external position with a widening current account deficit causing further accumulation of external debt -Weakening of medium-term growth prospects -Security developments or social instability affecting macroeconomic performance or leading to fiscal slippages KEY ASSUMPTIONS We expect global economic trends and commodity prices to develop as outlined in Fitch's Global Economic Outlook. We assume that Brent crude prices will average USD52.5/barrel in 2017, USD52.5/barrel in 2018 and USD55/barrel in 2019. We assume that eurozone GDP will grow 2.2% in 2017, 1.8% in 2018 and 1.4% in 2019. 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-' Contact: Primary Analyst Mahmoud Harb Director +852 2263 9917 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Jan Friederich Senior Director +852 2263 9910 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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