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Fitch changes Morocco’s rating from stable to negative

In question, the shock of the Covid-19 pandemic on the Moroccan economy, the indicators of which should deteriorate in 2020. This expected revision does not suit Morocco, which plans to raise money internationally.

The international rating agency Fitch Ratings revised the outlook for the long-term credit rating in Moroccan currencies, from stable to negative. The rating, “BBB-” has remained unchanged.

This revision was expected given the impact of the Covid-19 crisis on the Moroccan economy, like all other countries in the world. However, it is bad news because to finance its plan of support and economic recovery, Morocco intends to exit the international financial market to raise money.

Certainly, the precautionary line and liquidity (PLL) of the IMF of 3 billion dollars that Morocco has just used will give it an advantage in terms of repayment capacity. But the country will have to borrow on less favorable terms than last year; on the one hand because of this revision of the outlook of the rating and on the other hand because of the general situation of the financial markets.

In any case, here are the main forecasts of Fitch which led to the revision of the prospect of the note of Morocco:

– The shock of the Covid-19 pandemic will cause the largest contraction in GDP in 25 years as well as a sharp increase in Morocco’s external and budgetary deficits and debt ratios. The country’s credit profile will deteriorate despite a proactive political response in line with the authorities’ long-standing commitment to prudent economic policies.

– The drop in exports, tourism and remittances will double the current account deficit to 8.3% of GDP in 2020, against an already high level of 4.1% in 2019.

– The sharp drop in oil prices, the cessation of import-intensive investments and the increase in foreign subsidies will bring some relief, limiting the deterioration of the current account balance. Fitch forecasts a return to a deficit of 5% of GDP in 2021, stimulated by a recovery in tourism and an increase in manufacturing export capacity.

– The current account deficit will be mainly financed by external loans, which will bring the net external debt to 27% of GDP in 2021, against 16.8% in 2019, which was already higher than the current “BBB” median of 8%. Fitch predicts that public borrowing from official creditors will cover about two-thirds of the deficits accumulated in 2020-2021. It also expects the government to seek a successor PLL agreement with the IMF in the coming months and extend its billion dollar five-year Eurobond maturing in October.

– Fitch does not anticipate further progress in reforming the dirham’s exchange rate regime over the next two years and anticipates that the government’s plan to move to a floating regime will be completed beyond the current forecast horizon.

– Given the large current account deficits and the still limited exchange rate flexibility, foreign exchange reserves will be reduced to around $ 22.9 billion at the end of 2020, compared to $ 25.3 billion at the end of 2019. Foreign exchange will always provide comfortable coverage both against payments in current account, at six months (median “BBB”: 6.6 months), and gross cumulative external financing needs of Morocco, which Fitch estimates at 22.8 billion dollars in 2020-2021, in a rollover of the short-term part composed mainly of trade credits.

– The blow to tax revenue will lead to a widening of the budget deficit at 7.2% of GDP in 2020 against 4% in 2019. The authorities expect a smaller net impact on the budget, at around 2% of GDP compared to to their initial deficit target of 3.8% of GDP excluding privatization revenues. The public deficit, which also includes social security, local authorities and extra-budgetary units, will amount to 5.6% of GDP in 2020, compared to 2.3% in 2019, slightly above the BBB medians forecast of 5.3%.

– The Treasury’s net debt will reach 58% of GDP in 2020 against 52.5% in 2019, higher than the median “BBB” forecast of 50%. It will drop to 55% of GDP in 2021, driven by the revival of growth and a recovery in the budget deficit to 4.6% of GDP in 2021.

– The coronavirus shock could increase the need for government support to public enterprises in the water, energy and transport sectors, although some large public enterprises have solid balance sheets. In March, the Ministry of Finance signed a comfort letter to reassure the creditors of Royal Air Maroc. Public enterprise debt is relatively high, at around 25% of GDP, of which around 14% of GDP is guaranteed by the sovereign.

– Morocco’s GDP is expected to contract by 4.5% in 2020, ending 22 years of continuous growth. The deterioration of the external context will be aggravated by the disruption of activity in the non-market sectors following a two-month blockage to stem the spread of the pandemic. At the same time, a shortage of precipitation during most of the current agricultural season will have an impact on the cereal harvest, leading to a contraction in agricultural GDP.

– Economic activity will rebound as the world economy emerges from the pandemic shock, helped by the diversified economy of Morocco and the ongoing development and industrialization plans. GDP is expected to grow by 6% in 2021, thanks to the normalization of cereal crops, the resumption of infrastructure projects, the continuous expansion of manufacturing supply and the slow recovery of world tourism and trade.

– The economic shock should lead to a deterioration in the quality of bank assets. Fitch considers that the capital buffers were tight before the shock, given the risks associated with the relatively high concentration of the loan portfolio and the expansion abroad of national banks in countries where the operating environment is more low. The risk of any need for government assistance to banks is somewhat mitigated by regulatory initiatives by Bank al-Maghrib (BAM) to improve capital coverage and monitoring of asset risks. The improved liquidity supply and BAM’s regulatory forbearance should mitigate the risk of credit crunch.

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