For Fitch ratings, the deterioration of Morocco’s public and external finances justifies maintaining the “BB+” rating awarded last October. Treasury net debt is expected to rise to 68.8% of GDP this year. However, the country has a comfortable level of foreign exchange reserves. The solvency of banks is not threatened despite the deterioration in asset quality. The tourism sector is expected to continue to suffer this year.
In October 2020, Morocco lost its “Investment Grade” with the rating agency Fitch Ratings. The default rating of Morocco’s long-term foreign currency issuers then went from BBB- to BB+ with a stable outlook. The agency justified this rating downgrade by the impact of the Covid-19 pandemic on the Moroccan economy and public and external finances.
In a note published on May 5, the agency maintained its “BB+” rating for Morocco, still with a stable outlook.
Even though the country displays macroeconomic stability reflected in relatively low inflation and GDP volatility before the pandemic, it displays weak development and governance indicators. Notably high public debt, larger budget and current account deficits than its peers.
Fitch expects Treasury net debt to rise to 68.8% of GDP this year
Fitch points out that the budget deficit fell to 7.7% of GDP in 2020, against 4.1% in 2019 (excluding proceeds from privatization). “Containment measures linked to Covid-19 and the drop in global demand have caused a sharp drop in income while current spending has increased to mitigate the health impact of the crisis and cushion the financial impact on households and businesses,” explains Fitch.
The agency also points out that the extension of social benefits, along with a modest recovery in tax revenues, lower subsidies and continued spending pressure, will keep the central government deficit at 7.1% of GDP in 2021 and at 5.8% in 2022. “We forecast a public deficit, which also includes social security, local authorities and extra-budgetary units, of 6.5% of GDP in 2021, after 6.9% in 2020, against an expected median “BB” of 5.2%. We do not foresee any significant changes in fiscal and other economic policies after the parliamentary elections in September 2021,” the agency said.
For the rating agency, large budget deficits will lead to a further increase in Treasury debt despite the economic recovery. “We forecast that (net) debt will increase to 68.8% of GDP in 2021 and 70.5% in 2022 against 66.8% in 2020, exceeding the projected median” BB” of 59.1% in 2022 We expect the debt to be broadly stable from 2023,” explains Fitch.
Nevertheless, she specifies that “the budgetary financing risks are low, reflecting the sovereign’s access to a large and captive national investor base, with net domestic financing expected to cover two-thirds of the Treasury’s financing needs in 2021-2022.
A mixed evolution of key sectors
Regarding the banking sector, the rating agency warns about the deterioration in the quality of assets. Nevertheless, the agency believes that the risks related to the solvency of banks remain manageable. It recalls all the same that “the capitalization ratio of the banking sector is quite low compared to the risks linked to the concentration of the loan portfolio and to the regional expansion of the banks”.
The tourism sector will experience a gloomy 2021 season, according to Fitch. “The sector will remain affected by the crisis in 2021, after gross tourism receipts collapsed by 70% year-on-year over the April-December period of last year,” said Fitch. It notes that while exports of phosphates and automobiles recorded good performance in January-February 2021, some sectors are still lagging behind, such as textiles and aeronautics. “We expect that the overall receipts of the current account will remain below their level of 2019 in 2021 and 2022”.
In addition, Fitch anticipates an increase in imports. “We expect imports to rebound in 2021 as domestic demand for finished and intermediate goods begins to recover, along with rising oil prices,” the agency said. Fitch predicts that current account deficits will widen and average 4.1% of GDP in 2021-2022 as export growth slows.
Ultimately, with a reduction in the disturbances linked to the crisis and a good rainy season, Fitch expects “a rebound in real GDP growth to 4.8% in 2021, after a contraction of 7.1% in 2020. We expect the fiscal policy will remain expansionary until at least 2022”. The launch of a strategic investment fund in cooperation with the private sector, scheduled for 2021, will support economic recovery.
Morocco holds substantial foreign exchange reserves
For the agency, Morocco’s external resilience is also supported by Morocco’s fairly comfortable foreign exchange reserves and better exchange rate flexibility.
“We expect foreign exchange reserves to slowly increase in 2021 and 2022 after reaching $ 32.2 billion at the end of 2020 from $ 25.3 billion in 2019. We expect foreign exchange reserves to cover 7.5 months current external payments on average in 2021-2022, higher than the “BB” median of 5.4 months,” explains Fitch.
The rating agency expects Morocco to seek a new precautionary line with the IMF to provide a safety net in the event of tensions.