Country Risk Rating

B
Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable. - 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 location, close to the European market
  • Strategy to move to high-end markets and diversify industrial production
  • Political stability and commitment to reform
  • Growing integration in the African market
  • Support from the international community, particularly Europe, which is supporting green investments in Morocco to the tune of USD 300 million, through 2 projects.
  • Significant and growing market

Weaknesses

  • Economy highly dependent on the performance of the agricultural sector (14% of GDP and 40% of the population) and, therefore, on the climate and water availability, as well as on the European Union
  • Competition from other Mediterranean countries such as Turkey or Egypt
  • Significant social and regional disparities between urban and rural areas, with recurrent discontent in some regions. Poverty rate remains high.
  • High unemployment rate, especially among young people, low participation of women in the labor market, and lack of housing
  • Weak productivity and low competitiveness
  • Political tensions with regional neighbors

 

Current Trends

Recovery dependent on the European market and tourism

The health crisis, but also a poor harvest due to drought, have strongly affected the country's economic growth in 2020. In 2021, it is expected to experience a modest recovery, partly due to a base effect. Exports of goods and services (39% of GDP in 2019), dependent on European economies, collapsed in 2020. Sales of vehicles and automotive parts (20% of exports of goods and services in 2019) have suffered particularly badly, as have exports of clothing items (7%) and aeronautical parts. On the other hand, exports of fertilizers (10% of exports with rock phosphate and its derivatives), initially hampered by the disruption of Indian supply chains, have resisted ultimately. Sales of agricultural products were also resilient, despite logistical disruptions. In 2021, exports are expected to rebound in line with the economic recovery of key partners. However, their recovery may be limited, as the virus is still circulating in Europe. The European automotive market, the leading source of merchandise exports, is struggling to recover, not to mention aeronautics. The drop in tourism (12% of GDP and employment) has also impacted the Moroccan economy. Travel restrictions and border closures have strongly affected tourism revenues (22% of total exports). The second wave (October 2020) has led to an extension of the mobility crisis, which will continue to weigh on tourism in the first half of 2021. Thus, it is only expected to recover in the summer of 2021. Household consumption (58% of GDP) has declined sharply. However, remittances from the Moroccan diaspora (6% of GDP in 2019), on which a large number of families depend, have held up, as expatriates are likely to draw on their savings. Conversely, the unemployment rate increased (13% in 2020, up from 9.8% in 2019). However, the most significant job losses are in the informal sector (12% of GDP and 36% of the labor force), suggesting a higher unemployment rate. In order to limit the impact on households, the government has allocated, through a special fund to combat COVID-19 (2.7% of GDP), assistance to the most vulnerable households and workers in the informal sector, which is likely to be extended to the first half of 2021. Household consumption is expected to then gradually recover. Investment (28% of GDP in 2019) decreased in 2020. However, a USD 5 billion strategic fund to support production activities and finance public-private investment across all sectors have been set up. The inter-ministerial investment commission has also approved a USD 2.5 billion packages to support 45 projects in energy, telecom, and industry. These investments are designed to create jobs and boost the economy simultaneously. FDI also contracted in 2020 because of the global recession. They are expected to recover moderately, in line with the global economic activity affected by the second wave.

Small decrease in the twin deficits

The public deficit increased considerably because of COVID-19, which led to a large number of additional expenditures while reducing revenues. The decline in government revenue is the result of a drop in customs revenue and domestic taxation. In 2021, the deficit is expected to decline only slightly, as the effects of the crisis are still expected to weigh, especially in the first half of the year. Public debt (67% external at the end of 2020) has mechanically increased, despite substantial privatization revenues.

The current account deficit also widened in 2020. While the usual large trade deficit has narrowed due to the decline in imports offsetting that of exports, the services surplus collapsed with tourism. In order to finance this deficit and rebuild its foreign exchange reserves, which fell (-4.4%) to maintain the dirham's peg to the euro/dollar basket, Morocco was able to draw on USD 3 billion under its precautionary and liquidity line with the IMF. The World Bank, European Union, and ADB also provided liquidity. In December, the Kingdom issued USD 3 billion worth of bonds on the international market. In 2021, the deficit is expected to decline slightly, in line with the moderate recovery of exports and tourism. As the virus is still actively circulating in Europe, their recovery could disappoint. Imports are expected to recover partially, but at a slower pace.

Political and social stability tested by the crisis

The ruling coalition that emerged from the 2016 legislative elections, led by the moderate Islamist Justice and Development Party (PJD) and led by Saaddin El Othmani, is fragmented. It has a comfortable majority (229 out of 395 seats) in Parliament. However, the King and his cabinet play the role of ultimate arbiter and decision-maker. The crisis could exacerbate political and social fragilities. Despite household support measures, rising unemployment and losses of household income suggest that discontent will increase. The high weight of the informal sector, particularly in trade, construction, and agribusiness, does not facilitate the payment of aid, which increases inequalities. The lack of employment opportunities, the vulnerability of rural populations to climate change, the perception of corruption, and restrictions on certain freedoms could fuel frustration. The next legislative elections will be held in October 2021, and the PJD could emerge victorious, thanks to its voters, who appreciate its social conservatism.

Source:

Coface (02/2021)
Morocco