Morocco: Fitch Affirms Morocco at ‘BB+’ with Stable Outlook

Fitch Affirms Morocco at ‘BB with Stable Outlook
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Fitch Ratings has affirmed Morocco’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB+’ with an outlook accorded as stable, a recent rating note shows. Morocco was assessed and rated based on Fitch’s view of the country’s risk profile including:

Credit Fundamentals: Fitch said Morocco’s ‘BB+’ ratings reflect favourable debt composition, including a moderate share of foreign currency (FC) in total general government (GG) debt and official creditor support.

This is supported by reasonably comfortable external liquidity buffers, and a record of macroeconomic stability reflected in relatively low inflation and GDP volatility pre-pandemic.

These strengths are balanced against weak development and governance indicators, high public debt and budget and current account deficits (CAD) larger than peers, the rating note stated.

Hit to Recovery: In 2021, GDP growth rebounded to 7.4%, after contracting by 6.4% in 2020. Fitch Ratings analysts forecast growth to decelerate to 1.1% in 2022, due to the worst drought in decades leading to a contraction of agricultural output, and the adverse international environment.

“We expect a pick up to 3% in 2023 (to close to the projected ‘BB’ median at 3.5%), reflecting improved rainfall, recovery of the tourism sector and strong industrial performance. We expect fiscal policy to remain accommodative to support the economic recovery.

“Spillovers from the conflict in Ukraine and prolonged disruptions to global supply chains represent key downside risks to our growth outlook”, the Ratings from said.

Deterioration in Public Finances: The central government (CG) deficit declined in 2021 to 5.3% of GDP from 7.5% in 2020, according to Fitch which noted that tax revenues recovered (up 9% compared with 2020), in line with stronger economic activity.

Fitch analysts project spending pressures from social issues, combined with fluctuations in global commodity prices and the drought, will weigh on public finances in 2022.

The rating note said to mitigate the impact of higher prices, the government will increase spending on subsidies for food, butane gas and the transport sector. Subsidies are expected to represent 2.6% of GDP in 2021, against 1.1% in 2021.

“Part of this will be compensated by higher VAT, import and corporate tax revenue collections due to high inflation. Fitch expects the CG fiscal deficit to remain large at 6.6% of GDP in 2022 and 6% in 2023, exceeding the ‘BB’ median forecast of 3.8% in 2023”.

Fitch explained that Morocco’s new model of development (NMD) aims to increase government spending by 4% of GDP by 2025 to improve education and health and expand social benefits.

This includes a wider social protection system that would progressively ramp up annual spending as coverage widens, and new education and medical staff, representing a permanent increase in spending.

Part of the cost will be funded by a reduction in subsidies, a gradual compression of the wage bill as well as additional revenue from widening the tax base and stronger growth. Nevertheless, Fitch believes current spending will remain below the target by 2025, due to the slow implementation of the NMD.

High Debt, Composition Reduces Risks: Large fiscal deficits and the economic slowdown will drive a rise in CG debt in 2022 to 79% of GDP and 81.6% in 2023, from 74.2% in 2021.

The global rating firm forecasts GG debt, which includes social security and local authority debt, will increase in 2023 to 73% (‘BB’ median 55% of GDP), from 69.8% in 2020.

“We project debt will be broadly stable from 2023 onwards. However, fiscal financing flexibility is underpinned by access to a large domestic investor base and strong official creditor support (71.5% of external debt), containing fiscal funding risks. 77% of CG debt was dirham-denominated at end-2021, limiting exchange rate risks”.

Current Account Pressures Manageable: Fitch expects the CAD to widen to 5.8% of GDP in 2022 from 2.4% in 2021, as the surge in global food and energy prices and disruptions to wheat imports from the Ukraine war will weigh on the trade balance.

Morocco’s exports of phosphates will partly offset the increase in imports, as fertiliser prices have risen further due to a global shortage arising from the sanctions imposed on Russia.

Tourist receipts will likely be higher in 2022, but below the pre-pandemic level. We forecast the CAD will narrow to 3.7% in 2023, as commodity prices ease, and exports continue to increase along with tourism revenues.

“We forecast Bank Al-Maghrib (BAM) stock of reserves to fall in 2022 from USD34.4 billion at end-2021, but to remain above five months of current external payments”.

Inflation pressures: In 2021, inflation averaged 1.4%. In 1Q 2022, inflation accelerated to 4% year on year on average, reflecting increases in food, energy and transport prices.

“We expect inflation to average 4.7% in 2022, before easing to 2.0% in 2023, but there are upside risks to our forecast.”

In March, BAM decided to maintain its policy rate at 1.5% to support the economy and mitigate the impacts of the adverse international environment. If inflationary pressures persist, BAM could tighten its monetary policy in 2022.

Commodity Price Shock: Fitch said Morocco is vulnerable to commodity price movements, noting that the nation imports 90% of its energy needs, and since Algeria closed access to the GME Pipeline, the country will rely more on coal or petroleum products for electricity generation. Energy imports averaged 6.3% of GDP a year from 2017-to 2021.

“We project a higher energy bill in 2022. Moreover, the conflict has disrupted wheat supplies globally. Ukraine and Russia provided around 20% of Morocco’s cereal imports.

“While facing a decline in the domestic production, Morocco will have to look for new providers at a higher cost, putting pressure on the trade balance”.

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