Country Risk Rating

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average. - Source: Coface

Business Climate Rating

A4
The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.

Strengths

  • Favorable geographical position, close to the European market
  • Strategy to move to high-end market and diversify industrial production
  • Political stability and commitment to reform
  • Growing integration in African market

Weaknesses

  • Economy highly dependent on the performances of the agricultural sector and the European Union
  • Significant social and regional disparities. Although decreasing, the poverty rate remains high
  • Weak productivity and low competitiveness
  • High unemployment and low female participation in the labor market
  • Political tension with regional neighbors

Current Trends

A rebound hampered by sluggish European activity

After declining due to a downturn in agricultural production in 2019, growth is expected to recover in 2020, following the fortunes of the sector. However, the rebound will likely be constrained by weak growth prospects for the euro area. Since about 60% of Moroccan exports head towards Europe - mainly to France, Italy and Spain - the contribution of the trade balance is set to suffer. Automotive exports, which have doubled since 2012 to become the largest source of export revenue, could thus slow down. Tourism revenues are also expected to be affected by the unfavorable external environment. With about 85% of expatriate remittances coming from this region, the European slowdown could also have an impact on private consumption. However, it may benefit from better agricultural prospects (more than a third of households depend on the sector’s revenues) and more accommodative fiscal and monetary policies. The reduction in the reserve ratio and the amnesty for the repatriation of assets and cash held abroad should alleviate the pressure on bank liquidity and lower the cost of credit. Private investment stands to benefit from this and should also continue to be buttressed by FDI, particularly in the automotive sector. Private investment is expected to get support from public investment through the new legal framework for PPPs. Likewise, socially-focused budget measures should support public consumption.

Social measures as a priority

In 2020, the budget deficit is expected to remain stable. The increase in revenues should be driven by further privatization. Measures to regularise the fiscal situation, including the new amnesty for assets and cash held abroad, and efforts to broaden the tax base should improve collection. On the expenditure side, the 2020 Budget will keep the focus on social aspects, with a particular emphasis on the education and health sectors, which is expected to account for 46% of the new civil service jobs created. Recruitment will also contribute to the increase in defense spending. Capital expenditure will be revised upwards as well but is to be financed through the new PPP legal framework. Efforts to control the budget deficit should keep the debt ratio stable.

In 2020, the current account deficit is set to remain virtually unchanged. Slightly weaker domestic demand and lower oil prices are expected to contain the increase in imports, mitigating the impact of the less supportive external environment on the trade deficit. The services surplus will likely shrink, reflecting developments in the tourism sector. Investment profit repatriation will contribute to the small income deficit. Negative economic developments in Spain and France – the source of most expatriate remittances – are expected to affect the surplus in the transfer account. Inflows into the financial account, mainly through FDI, are expected to finance the current account deficit. Foreign exchange reserves, which cover more than five months of imports, provide room for maneuver in the event of an external shock. These reserves have not declined since the Moroccan dirham’s floating band was widened in January 2018 from ±0.3% to ±2.5%. Measures to gradually make the dirham more flexible may continue. The USD 3 billion precautionary and liquidity line concluded with the IMF in December 2018 for two years also mitigates external risk.

The El Othmani II government facing social challenges

In 2019, the decision of the Party of Progress and Socialism (PPS) to withdraw from the majority weakened the coalition that was formed after the 2016 parliamentary elections and that is led by the Justice and Development Party (PJD). However, the coalition still has a comfortable majority (229 seats out of 395). The PPS’s departure was followed by the announcement by King Mohammed VI of a ministerial reshuffle, which resulted in a smaller cabinet still led by Prime Minister Saâdeddine El Othmani. While the social climate remains tense, social issues are expected to dominate the government’s roadmap. The question of social and territorial disparities remains a source of tension. The May 2018 boycott of several large corporate groups and the many demonstrations, including teacher protests, which took place in 2019, testify to high expectations for progress in living standards. The lack of job opportunities, especially for young people, the vulnerability of rural populations to climate change, the perception of corruption and restrictions on certain freedoms could fuel frustrations. The new government is expected to pursue its efforts to improve the business climate. After jumping nine ranks in the 2019 edition, the country has moved up seven additional ranks in the 2020 Doing Business ranking thanks to measures to develop regulatory frameworks for business and cut red tape (53rd out of 190). However, long payment periods, particularly in the public sector, remain a major constraint for the business environment.

Source:

Coface (02/2020)
Morocco