Morocco: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: A4

Risk Assessment²

Activity still dependent upon the agricultural sector and the European Union, in the turbulent context of the “Arab Spring”
Growth in the Moroccan economy in 2011 will continue to be buoyed primarily by internal demand, with relative momentum picking up in non-agricultural activities. Several sectors should benefit from this, particularly the automotive and construction sectors, with construction being driven by the development of social housing by the government, while production of cereals is likely to be maintained. The determining contribution of internal demand partly explains why growth should be sustained, despite Morocco’s dependence on the European Union (EU), where domestic demand will remain sluggish. Nevertheless, the direct and indirect effects of the “Arab Spring” on the Moroccan economy – consequences for tourism, the return of Moroccans from countries experiencing popular revolts – lead us to anticipate a lower growth rate (4.6%) than that forecast by the authorities. Added to this is the sudden leap in international commodities prices.
Against this turbulent background, the economy continues to rely on the performances of the agricultural sector and consequently on climatic fluctuations, despite increasing diversification in the sectors with higher added value.

Deterioration in twin deficits, but relatively moderate external debt
The country has made efforts to put its public finances in order over recent years and this has resulted in a manageable national debt which is essentially domestic.  2011 is likely to be marked by a degree of austerity, with the reforms underway aiming to effect a sustainable reduction in the budget deficit and the national debt.  However, in the wake of the “Arab Spring”, budgetary extras are in the pipeline in order to buy social peace - social welfare measures, compensation for the increase in oil bills - and the result of this will be an increase in the budget deficit and the national debt during 2011.
Exports should receive a boost, particularly from the increase in sales of phosphates, but the weakness of demand from the EU and high international energy prices will have a negative effect on the commercial balance sheet. In addition, revenues from tourism and expatriate remittances could experience a downturn, resulting in an increase in the external accounts deficit. This is likely to be covered only in part by foreign direct investment flows, although Morocco seems to benefit from a transfer in its favour of projects which would have been realised elsewhere before the Arab revolutions. These investments, arising principally from the EU or the Middle East, are being made more frequently in the framework of public-private partnerships in the case of highway, rail, port or tourist infrastructures.
A large part of the external debt, which is essentially public and which is sustainable, is concluded at concessional terms, which constitutes a definite advantage. The country’s ability to meet its external commitments seems therefore to be ensured, despite the unfavourable shocks the economy has to face.
Furthermore, with a managed exchange rate regime and a comfortable level of reserves, the country can be confident about its ability to withstand a sudden withdrawal of capital. Moreover, the banking system is the most developed of all African countries (apart from South Africa); it is still well-capitalised, liquid and profitable, and the improvement of macro-prudential regulations continues.

Reforms planned in the wake of the “Arab Spring”
In response to growing political and social dissatisfaction and to the riots, against the background of the “Arab Spring”, King Mohammed VI announced in March and presented in June 2011 plans for constitutional reform that aim to rebalance the Sharifian monarchy by reinforcing the powers of the Prime Minister and of Parliament, to increase the independence of the judicial system as well as regionalisation.
Almost all the political parties support the project, which will be subject to a referendum in July 2011 and which does not call into question the basic prerogatives of a monarch who is still popular, since the protests do not challenge his primordial role. Much will depend, however, on the timeframes and on the implementation of these measures, as well as the advancement towards greater social justice.
In this context, the progress made in terms of the business environment appears insufficient, with the population complaining of corruption, clientelism and bad governance; in this respect, the protests have challenged, by name, some members of the king's close entourage.

Strengths

• Natural resources, vast tourist potential, proximity to European market
• Strategy of moving upmarket and diversifying production with priority given to a range of sectors including not only automotives, aviation, electronics, and chemicals, but also textile/leather and agrobusiness
• Skilled labor force, still cheap
• Sound and solvent banking system, little exposure to the crisis
• Political stability of the Sherifian Kingdom
• Thanks to its geographic position and the size of its market Morocco constitutes an excellent base for setting up industries    
• Macroeconomic stability policy

Weaknesses

• Economy still very dependent on agriculture
• Vulnerability of tourism to terrorist attacks
• Energy dependence (oil, coal)
• Poverty and unemployment (particularly of youth): sources of social unrest
•  Dispute over Eastern Sahara with Algeria
• Lack of productivity and competitiveness with the pegging of the Moroccan dirham to a basket of foreign currencies partly responsible for the erosion of competitiveness