Bucking the trend: A strong performance in the face of external challenges bodes well

For many countries in North Africa, 2013 was not an easy year, with continuing volatility at home and underwhelming growth in Europe, its primary trade partner. Morocco, however, was very much an exception. The country rebounded from a more modest performance in 2012 to deliver 4.4% GDP growth, with the economy bolstered by a return to form in the primary sector thanks to a strong harvest.

The kingdom did have to grapple with its fair share of exogenous challenges – such as low external demand and high commodity prices – as well as domestic complications including a fiscal deficit and unemployment, but following the government reshuffle in mid-2013, the prospects look far more positive. Action has been taken to reduce subsidies expenditure and, while the Finance Law 2014 stops short of full fiscal reform, amendments have been made to enlarge the fiscal base in an effort to boost tax revenues and redress the fiscal deficit. Reforms have been enacted in a largely pragmatic fashion, with the government maintaining subsidies on products most used by the impoverished, dedicating some Dh4.1bn (€364m) toward the Social Cohesion Fund and committing to the creation of almost 18,000 new public sector jobs.

GROWTH: After 2.7% GDP growth in 2012 to Dh828.2bn (€73.5bn), economic activity in Morocco expanded much faster in 2013, registering GDP growth of 4.4% to Dh864.6bn (€76.8bn). This was driven in large part by the agricultural sector, which typically represents 15-20% of GDP, and significantly contributes to both rural employment and exports. Following a very weak harvest of 5.1m tonnes in drought-stricken 2012, the harvest in 2013 hit a record 9.7m tonnes, leading the agricultural sector to grow by an estimated 20.4% in 2013, according to data from the High Planning Commission (Haut Commissariat au Plan, HCP). The non-agricultural sector grew by 2%, with weak performances in construction (-3%) and mining (-1.6%) offset by growth in industry (+0.5%), retail (+3.1%) and tourism, with hotel nights up 9%. The latter two sectors benefited from increased access to credit and debit cards, the opening of new outlets and an increase in the number of incoming tourists. ON TRACK: In a broader context, Morocco remains on track to deliver its long-term strategic development plan, which encompasses the National Pact for Industrial Emergence (Pacte National pour l’Émergence Industrielle, PNEI) for the export and industrial sectors (see Industry chapter), Plan Vert for agriculture (see Agriculture chapter) and Plan Azur for tourism (see Tourism chapter). These large-scale strategies, which have in many cases been in place for several years, all aim to raise revenues and out- put, attract investment to Morocco, boost employment and promote private capital formation. The PNEI is one of the more successful development strategies of recent years. Established in 2008, it outlines a number of policy objectives focused on areas where Morocco has a comparative export advantage. Initially, six sectors were targeted: electronics, automotive, aeronautics, offshoring, food processing and textiles. Given the success of the programme, pharmaceuticals and chemicals were added in 2013. It is difficult to ascertain the direct impact that these types of programmes have had on the economy, but a few key performance indicators illustrate a highly positive trend: annual exports are up by 17.4% since 2008 and annual foreign direct investment (FDI) has jumped by 39%. Recent entrants include Renault, Bombardier, Dell, Lear, Mitsui and General Electric, and according to the Moroccan Investment Development Agency (Agence Marocaine de Développement des Investissements, AMDI), the number of people employed in these industries rose from 360,000 in 2009 to 450,000 in 2012.

TRADE: Exports to Europe and Africa comprise a significant portion of economic activity. Continuing low levels of demand in the kingdom’s northern neighbours meant 2013 was challenging. Full-year provisional data from the Exchequer shows that exports fell 1.1% in 2013 to Dh182.8bn (€16.2bn), though imports fell at a greater rate, down 2% to Dh379.2bn (€33.7bn), narrowing the trade deficit to Dh196.4bn (€17.4bn), or 22.6% of GDP, against 24.4% of GDP in 2012. The current account balance (i.e. inclusive of remittances from abroad, net FDI and tourist receipts) dropped from 9.7% of GDP in 2012 to 7.7% in 2013. While tourist receipts fell by 1% to Dh46.5bn (€4.1bn) and remittances from abroad by 0.7% to Dh58.4bn (€5.2bn), this was more than offset by the 23% rise in net FDI.

Although the improvement in the trade deficit appears to be primarily due to factors over which Morocco has no control, including lower energy imports (down €373m – or 4% – due mainly to lower prices) and wheat (down €337m – or 31.7% – due to the bumper domestic harvest), there is cause for optimism. In most industries targeted under the PNEI, exports were sharply up in 2013: automobiles by 23% to Dh31bn (€2.75bn), electronics by 12% to Dh7.9bn (€702m), aeronautics by 15% to Dh7.7bn (€684m) and pharmaceuticals by 15% to Dh965m (€86m). With the preponderance of phosphates in the export mix lessening – at 20% of total exports in 2013, compared to 26% in 2012 – and as the PNEI starts to bear fruit, expanding new trade opportunities (see analysis), Morocco is well positioned to see a sustained reduction in its trade deficit.

ENERGY REQUIREMENTS: One of the most important factors weighing on both Morocco’s trade mix and its balance sheet is the country’s dependence on imported energy. At a total of Dh102.4bn (€9.1bn) in 2013, energy products represent 27% of all imports. This dependence on imported energy also renders the country’s economy vulnerable to volatile oil prices, imported inflation and energy security issues.

Despite being surrounded by oil- and gas-producing countries, Morocco has yet to find commercial reserves of its own, though the spate of new discoveries on the continent, such as Ghana’s Jubilee Field and Mozambique’s offshore gas deposits, have encouraged both majors and independents to take a closer look at the kingdom’s geology. According to François Duquette, partner at local law firm Naciri & Associés Allen & Overy, energy was one of the most active sectors in terms of transactions in 2013. He noted that drilling programmes are focused on relatively under-explored offshore blocks, with geologists hopeful of discovering similar structures to those found in Venezuela or, more recently, offshore Brazil. However, regardless of what might lie below the surface, it will be some time before any new discoveries could have a significant impact on the kingdom’s energy consumption. In the meantime, Morocco continues to focus on developing its renewable energy capacity, aiming to produce 20% of its total electricity needs from solar, wind and hydro-power by 2020 (see Energy chapter).

SUBSIDIES: One reason why the reliance on imported energy is so challenging is that Morocco has traditionally subsidised fuel prices, a practice that has become more difficult as crude prices have risen. Due to the increase in energy prices over the last 10 years, fuel subsidies have consumed almost 90% of the nation’s Compensation Fund and are largely responsible for the budget deficit. Morocco reported a budget deficit of 5.4% of GDP, or €4.17bn, in 2013, with subsidies representing 90% of this.

In an effort to address inefficiencies in the system – according to the IMF, the majority of subsidies benefit the richest 20% of the population – and in part due to conditions linked to its €4.5bn precautionary credit line signed with the IMF in 2012, Morocco is reforming its subsidy system.

In mid-2013 a system was introduced whereby petrol, diesel and fuel oil prices were indexed to international benchmarks. If the benchmark price changed by more than 2.4% over a two-month period, the retail price was altered accordingly.

However, in January 2014 the government went a step further, announcing the elimination of subsidies on petrol and fuel oil.

Given that the lower-income segments of the country’s population remain extremely vulnerable to inflation, subsidies on wheat, sugar and cooking gas will be maintained, while diesel will remain on the indexation system. The government has budgeted Dh35bn (€3.11bn) worth of food and energy subsidies for 2014, down from Dh42bn (€3.73bn) in 2013 and Dh55bn (€4.88bn) in 2012.

FISCAL OUTLOOK: The changes made to the subsidy system are reflected in the overall 2014 budget, which, after years of pursuing an expansionary fiscal policy, is more austere in tone, envisaging an enlargement of the tax base and continued caution in capital spending. The 2014 budget is based on GDP growth of 4.2% (+0.03% in the agricultural sector, assuming an average cereal harvest of 7m tonnes and +4.8% in non-agricultural), an oil price of $105 per barrel and an exchange rate of $1:Dh8.5.

While the budget allocates Dh49.5bn (€4.4bn) towards investment – a 16% rise year-on-year (y-oy) – this follows a sharp drop in 2013 budgeted investment spending, which was cut in April 2013 by Dh15bn (€1.33bn) from a planned Dh58.9bn (€5.23bn). Total government spending is expected to increase by 2.9% y-o-y to Dh306.2bn (€27.2bn), in part due to current expenditures – the majority of the rise stems from debt repayments. Government indebtedness reached just over 61% of GDP in 2013, and is forecast to hit 63.1% in 2014. Meanwhile, receipts are expected to drop in 2014 by 6.7% to Dh264.4bn (€23.5bn), with the budget deficit as a percentage of GDP falling to 4.9% from 5.4%.

GOVERNMENT REVENUES: Total government receipts fell by 1.6% in 2013, primarily due to lower corporate tax (CT) revenue. Treasury data shows that to the end of November 2013, CT revenue was down 9.8% y-o-y to Dh32.1bn (€2.85bn) – a large portion of which was due to the phosphate sector’s performance. This was partially offset by an increase in domestic value-added tax (VAT) receipts (+3.9% to Dh19.5bn/€1.73bn) and registration fees and stamp duty (+3.5% to Dh11.1bn/€986m).

Despite no privatisations taking place in 2013 – having made a Dh3.3bn (€293m) contribution in 2012 – non-fiscal revenues to end-November were marginally up (+0.3%), due in large part to receipt of Dh3.8bn (€337m) in foreign aid towards the Land & Property Development and Natural Catastrophe funds. The latter has been a recurring theme in recent years, with Morocco having increasing recourse to foreign financing – both aid and investment – to fund its economy.

FINANCING: In 2013, with national savings equal to 26.4% of GDP versus an investment rate of 35.3%, the funding deficit was 8.1% of GDP and the vast majority – just over 87% – of this gap was sourced from foreign investors, through both direct investment and debt. HCP forecasts a slightly lower funding gap of 7.9% in 2014, but once again expects most of the deficit to be met by outside sources.

Since issuing its first dollar-denominated bond for $1.5bn in December 2012 (a 10-year, $1bn tranche and a 30-year, $500m tranche), Morocco raised a further $750m in May 2013 through reopening the same notes. Both times the transactions were oversubscribed and priced relatively inexpensively; the yield on the 10-year tranche was only 4.25%, and it has since been trading at nearly 4% in the secondary market as investors take into account measures taken by the government to reduce subsidies. This bodes well for the €1bn in Eurobonds Morocco signalled it planned to issue in 2014 as a means of covering its budget deficit.

MONETARY POLICY: The central bank, Bank Al Maghrib (BAM), continued its efforts to keep prices and money markets stable in 2013 (see Banking chapter). With liquidity in the banking system constrained, BAM continued to inject large sums of money into the economy, largely through overnight and seven-day advances. Benchmark interest rates were maintained at 3% throughout the year and the monetary reserve ratio was kept at 4%. Given the liquidity situation, Treasury bond yields continued to increase in 2013, with the six-month and 12-month deposit rates each gaining 47 basis points y-o-y.

Most notably, and reversing a downward trend seen since 2009, Morocco’s foreign currency reserves rebounded by almost 7% to end 2013 at Dh150bn (€13.3bn), equivalent to four months and 10 days of imports – one of the exceptions in North Africa.

While the trade deficit reduction and the increase in FDI helped reverse the trend, foreign currency reserves were additionally boosted by the two bonds throughout the year, and an influx of development funds and credit lines from a number of the kingdom’s trading partners.

Despite the pre-emptive measures taken by BAM, inflation rose from 1.3% in 2012 to 1.9%, according to HCP, though it remains well below the peak of 2008 (3.7%) and in line with the average of 1.7% between 2000 and 2012. Inflation was at its highest in food products (+2.4%), while deflation was seen in communication (-9.2%) and education (-5.5%). However, consumer spending kept pace, registering y-o-y growth of 3.6% (+4.25% in 2012), according to HCP estimates. BAM forecasts inflation of 2.5% in 2014, easing toward 2% by the end of the year, the increase being largely due to higher fuel prices.

Morocco kept the dirham pegged to a conventional basket of currencies in 2013. One dirham was worth on average $0.1178 in 2013 (vs. $0.1148 in 2012) and €0.0887 (vs. €0.0893 in 2012). While this fixed rate increases certainty for importers and exporters, calls have been made from the World Bank to move to a liberalised currency, a move opposed by BAM. The bank believes that while the likely resulting devaluation of the dirham could benefit exports, it would also risk upsetting foreign investors in Morocco.

EMPLOYMENT: Official unemployment in Morocco is reported at 9.4%, slightly up on the 9.1% reported in 2012. HCP data indicates that some 139,000 jobs were created on a rolling year basis to the end of September 2013. Almost 98% of these jobs, or 136,000, were created in rural areas, and 3000 in urban areas. However, 136,000 jobs were eliminated in 2013, notably in the construction (54,000) and industry (27,000) sectors.

As in previous years, those most impacted by unemployment remain urban graduates, particularly women. According to Jean-Pierre Chauffour, lead economist and regional trade coordinator for MENA at the World Bank, female participation in the labour force in Morocco is around 26%, versus nearer 50% in other major emerging markets such as Indonesia, placing it in the lower quintile of countries surveyed.

However, the HCP indicates that some progress has been made with youth employment. Morocco’s average unemployment rate for youth aged between 15 and 24 is estimated to have eased from 20.2% to 19.1%, while that for graduates is thought to have fallen from 17.2% to 16.5%, although the World Bank estimates that urban youth unemployment is as high as 35.4% in some areas.

FDI: Morocco has seen some impressive growth in recent years in terms of direct capital inflows. The kingdom has taken a number of steps to improve overall investment attractiveness and channel financing to specific sectors, with notable success. Even amid still-slow growth in Europe and turbulence elsewhere in North Africa, FDI in Morocco hit a new record in 2013, growing by 25% to reach Dh40.2bn (€3.57bn). Net FDI grew 23% y-o-y to hit Dh28.9bn (€2.57bn). Historically the majority of FDI inflow went to real estate and tourism, but this changed in 2012, with industries targeted under the PNEI plan (notably aeronautics and automotive) attracting the lion’s share of foreign interest.

The trend continued in 2013, with the largest three investments that year all being in industry. In February 2013 French dairy company Danone finalised an investment of Dh6.1bn (€542m) to increase its stake in Centrale Laitière to 67% through the purchase of a 37.8% interest from the Société Nationale des Investissements (SNI). Also in February, Mondelez International finalised its acquisition of SNI’s 50% interest in biscuit manufacturer BIMO for Dh1.3bn (€115m), taking its ownership to 100%. In April 2013 SNI announced it was ceding 27.5% of its stake in sugar refiner Cosumar to Singaporean food-processing giant Wilmar for Dh2.3bn (€204m).

According to AMDI, the government is aiming to make Morocco one of the top three destinations for FDI in Africa, boosting total capital inflows to $6bn within the next five to 10 years. The targets are ambitious given the uncertain external situation, although efforts to diversify FDI sources have borne fruit in recent years. An AMDI campaign begun in 2011 to encourage new investment from outside France and Spain, which formerly comprised the two largest source markets, appears to have been a success, with Ministry of Economy and Finance data indicating that the make-up of main investors has changed significantly. Provisional 2013 data shows that France remains the top spender, investing a total of Dh14.6bn (€1.3bn, 36% of the total) in 2013, while the second-largest investor was the UAE (Dh3.4bn/€301.9m, 8%), followed by Singapore (Dh3.2bn/€284.2m, 8%) and Switzerland (D2.8bn/€248.6m, 7%). Spain, long Morocco’s second-largest investor, invested Dh1.1bn (€97.7m, 2.8%) in 2013.

BUSINESS CLIMATE: Morocco has made huge efforts to improve its business environment and attract more investors in recent years, including some generous incentives. The government provides financial or material support to all investments that meet at least one of five criteria under Morocco’s Investment Charter. The project must: invest more than Dh200m (€17.8m); create 250 jobs or more; launch in a targeted province; promote transfer of knowledge; or contribute to the environment. In such cases, the government offers to contribute up to 20% of the land cost, 5% of the infrastructure cost and up to 20% toward the cost of training Moroccan staff. These investments are also exempt from VAT and import duties for three years on goods and materials needed to set up the project.

In addition to these financial incentives, in 2009 the government formed the National Committee for the Business Environment (Comité National de l’ Environnement des Affaires, CNEA). The CNEA was tasked with improving Morocco’s competitiveness and creating an optimal environment for investors by fast-tracking new business laws to simplify doing business, primarily targeting administrative bottlenecks. The CNEA’s efforts are paying off, with Morocco gaining eight places to rank 87th of 189 in the World Bank’s 2014 “Doing Business” survey. Significant progress was made in a number of categories: starting a business (+14 places to 39th), paying taxes (+37 places to 78th) and resolving insolvency (+15 places to 69th). The improvements were related in part to reforms that had been proposed by the CNEA, including the online declaration and payment of taxes, and the reduction of the minimum level of capital required to set up a business.

There are still challenges, particularly in terms of financing and land access, as well as investor rights. However, moves are being made to expand credit access for small businesses, and in 2013 the time and number of procedures required to register property were also reduced. There is also a proposed law under discussion that would invest the country’s Competition Council, an anti-trust body designed to ward off oligopolies but lacking sanctioning power, with greater enforcement rights.

Key reforms are also being pursued to revise the kingdom’s finance sector regulations, open the system to Islamic institutions, introduce securities lending (through which limited short-selling will be allowed) and increase the authority of the financial regulator (see Banking chapter). In addition, the National Strategy to Modernise the Civil Service was also launched in 2013. The strategy has the aim of modernising and improving public services and creating an efficient, open and transparent system that is conducive to doing business in Morocco.

In addition, the government has also declared 2014 the year of pension reform in an attempt to ward off looming challenges facing the country’s largest pension fund, Caisse Marocaine des Retraites (see Insurance chapter). Elsewhere, reforms to open the economy to relatively closed sectors, such as phosphate mining, are under consideration. The government upgraded the chemicals sector to the PNEI plan in 2013 in an effort to maximise the value of phosphate production, particularly in terms of local content and value addition (see Mining chapter).

OUTLOOK: Although 2013 was far from easy across much of the world, Morocco saw impressively robust performance thanks to better-than-expected harvests and some much-needed reforms. With the 2014 budget setting a more dynamic tone as the government takes steps to redress key fiscal balances, there are strong indicators pointing to the economy’s ability to continue to grow.

There are certainly still challenges – including the uncertain external environment – but the government’s commitment and attention to the socioeconomic reforms necessary to stimulate growth, improve social cohesion and reduce the high unemployment rate, combined with its strategy to diversify and attract foreign investment, inspire confidence that the economy is growing more robust.