This is a note which is good for morale and which will undoubtedly delight the monetary authorities of the Kingdom in these difficult times. While several comparable countries have seen their sovereign rating downgraded, the American rating agency Fitch Ratings maintains the Kingdom’s sovereign rating at BBB- with a stable outlook.
The agency has indeed published a note in which it analyzes the risks of the Covid-19 pandemic on the Moroccan economy, especially on its external finances.
They assure that Morocco has the potential to overcome the challenges of this global health crisis
The agency Fitch Ratings, explains in a new report that the disturbances of the world economy due to the Covid-19 will undoubtedly exert pressures on the deficit of the current accounts of the Kingdom.
These pressures would be linked to the deterioration of certain key sectors of the Moroccan economy (and also providers of currencies) such as tourism and the automotive industry, due to the disruption of the global value chain.
Also, says Fitch, “the slowdown in global growth could weigh on the phosphate industry and foreign exchange reserves, while drought will impact agricultural exports.”
Opposite, the rating agency specifies that the fall in oil prices and the decline in domestic demand for fuels (due to the state of health emergency), will reduce the pressure on the energy bill of the Kingdom. Fitch notes that energy imports represent 6.9% of the country’s GDP.
Proven external resilience
For the agency, Morocco has several safety mattresses allowing it to manage these new pressures.
Thus, “Morocco’s external resilience is supported by a precautionary agreement (LPL) of 3 billion dollars with the IMF, on which the government has not appealed. Morocco also has relatively comfortable foreign exchange reserves of 25.7 billion dollars (about five months of current account payments)”. Fitch added that restrictions on residents’ financial transactions abroad limit the risk of capital flight.
“Before the pandemic shock, Morocco’s fundamentals did not indicate any significant short-term risks for macroeconomic stability or the exchange rate. Inflation is low and the real effective exchange rate has not appreciated significantly in recent years,” said the agency.
For Fitch, the monetary authorities’ latest move on the exchange rate regime (widening of the bands of fluctuations) is also able to absorb the current shock.
It still expects the transition to a fully flexible exchange rate, in line with IMF recommendations, to take several years.
According to the American rating agency, the flexibility of the dirham would considerably strengthen the Kingdom’s shock absorption capacity and would also allow Bank al-Maghrib (BAM) to switch to a monetary policy targeting inflation.
Risk contained for the banking sector
According to the note, the vulnerability of the economy to the depreciation of the dirham is contained. The share of external debt in public debt is moderate, around 30%.
Bank loans to individuals are in local currency (Dirham). Moroccan banks do not depend on the international financial markets and have very small net foreign exchange positions. However, banks are largely funded by MRE deposits and transfers.