Major reforms to Moroccan legislation provide range of new products and trading operations

Home to one of the largest capital markets in Africa, Morocco’s bourse, the Casablanca Stock Exchange (CSE), has been slow to develop in recent years, with relatively few new listings, limited liquidity and a mixed performance. However, 2016 saw both the strongest stock market returns and the largest initial public offering (IPO) in years. In the same year a long-awaited new stock exchange law was approved that opened the way for the creation of an alternative market orientated towards smaller firms, as well as new products such as exchange-traded funds (ETFs). Furthermore, various other reforms currently under way are aimed at launching additional asset classes, and increasing market activity and liquidity.

EQUITY MARKET: Based on the CSE’s year-end 2016 market capitalisation, the bourse ranked second in Africa, behind South Africa, according to World Bank figures. Market cap was equivalent to 45.7% of GDP in 2016, the third highest in Africa, behind South Africa and Mauritius at 322.7% and 62.2%, respectively. By early 2018 the CSE’s market cap had risen to Dh660.43bn (€61.2bn), up from the end of 2017, when the figure stood at Dh626.97bn (€58.1bn), according to CSE data. The latter figure was, however, up 7.5% from Dh583.4bn (€54bn) at the end of 2016.

The increase on 2016 is notable given the marked growth recorded last year; the stock exchange’s market cap rose 28.7% in 2016, driven in part by one of the largest new listings in recent years.

According to CSE figures, the largest listed firm by capitalisation as of early 2018 was telecoms operator Itissalat Al Maghrib, known by its French name Maroc Telecom, with Dh129.84bn (€12bn), or 19.7% of total market cap. In second place was the kingdom’s largest bank in terms of total assets, Attijariwafa Bank, with Dh103.3bn (€9.6bn) and 15.6% of the bourse, followed by banking group Banque Centrale Populaire, at Dh53.11bn (€4.9bn) and 8.1%. The largest sector by capitalisation was banking, which accounted for 35.4% of the total, followed by telecoms at 17.2%, and construction and construction materials with 13.6%.

While market liquidity has been weak in recent years, the value of trading rose in 2016, the most recent year for which full figures have been published. The central equity market saw trading worth Dh32.1bn (€3bn) in 2016, up from Dh28.8bn (€2.7bn) the previous year, while the over-the-counter (OTC) market saw transaction volumes of Dh18.4bn (€1.7bn) in 2016, up from Dh11.8bn (€1.1bn) in 2015.

CAPITAL INCREASES: Recent IPO activity has been fairly muted. There were no public share offers in 2017, while in 2016 there was just one IPO, bringing the number of listed shares to 75. The sole 2016 listing was the offering of a 40% stake in state-owned port operator Marsa Maroc in July. However, this was the largest IPO in eight years, raising Dh1.92bn (€177.8m). The transaction was more than six times oversubscribed, indicating strong demand for new listings. It followed two IPOs in 2015, namely, that of fuel distributor Total Maroc and insurance broker AFMA Assurance, and one each in 2014, 2013 and 2012. According to CSE figures, already-listed firms raised an additional Dh9.88bn (€914.9m) in capital in 2016, up strongly from Dh2.05bn (€189.8m) the previous year. However, this was largely due to a capital increase of Dh9.14bn (€846.4m) by construction materials manufacturer and retailer LafargeHolcim Maroc.

As of early 2018 there were no applications for new IPOs awaiting approval by the Moroccan Capital Markets Authority (Autorité Marocaine du Marché des Capitaux, AMMC), the sector regulator. However, the authorities are working on several initiatives to encourage new listing in the coming years. These include a Moroccan edition of the Elite programme, run by the London Stock Exchange (LSE).

The programme provides small and medium-sized enterprises (SMEs) with mentorship and training support, as well as access to a network within the local financial community that can assist in improving their ability to access financing, including the possibility of listing on the CSE. The first round of the programme was launched in 2016, while in November 2017 it entered into its fourth round.

EASY LISTING: The companies that have completed the Elite programme have yet to list on the market, but Hicham Elalamy, director of the support and development department of the AMMC, told OBG that programme-related IPOs were likely to begin by 2020.

The imminent launch of a new alternative market with less stringent conditions, aimed at attracting smaller businesses in particular, will boost the prospect for IPOs in the coming years. Discussions are also under way within the government regarding the potential listing of further minority stakes in state-owned firms, along the lines of the Marsa Maroc IPO. However, in a surprise move, the 2017 Finance Law removed a notable tax incentive: the reduction in the corporate tax rate for recently listed companies.

David Cowan, managing director and Africa economist at Citibank, told OBG that despite the recent reforms, he did not see major incentives for large Moroccan businesses to join the CSE and that factors such as increased transparency requirements for listed firms remained a deterrent. “There are currently not enough companies in Morocco that have sufficiently ambitious investment plans in place that require floating shares on the CSE,” he said.

However, he added that plans for an alternative market could help develop the kingdom’s capital markets, as would efforts by the central bank, Bank Al Maghrib (BAM), to gradually liberalise the exchange rate regime by increasing investor interest, and thereby market liquidity. “Morocco currently has low rates of return for investors, even on a risk-adjusted basis, but a floating-rate currency regime would likely lead to increased interest rates and volatility, boosting investment interest and creating more buying and selling opportunities,” he told OBG. Furthermore, IPOs could be supported by regulations on small business. “Since 2006, one third of IPOs have been realised by private equity firms that work, similar to the ELITE programme, to enhance SMEs’ reporting and governance structures,” Badr Benyoussef, director of business development at the CSE, told OBG.

MARKET PERFORMANCE: Another factor likely to encourage further entries is the CSE’s recent performance, with 2016 being the best year for the bourse since 2006 given market capitalisation growth of 28.7% and the CSE’s Moroccan All-Share Index (MASI) rising 30.5%. According to CSE figures, the best-performing sector indices were holding companies, with a spike of 89.8%, followed by the chemical sector (88.1%), real estate (73.4%), agri-business (53.1%), and oil and gas (49.3%). All of the market’s 23 sector indices recorded gains in 2016, except for engineering and industrial equipment, which was down 1.68%. Factors driving performance included low rates on Treasury bonds, which incentivised investors to seek returns elsewhere, and a 14% rise in listed firms’ profits.

As of early February 2018 the MASI was up 7.7% year-on-year (y-o-y) at 13,075, though the index did fall 11.7% year-to-date during the first three months of 2017. According to CSE figures, the best y-o-y performer by sector was chemical industries, up 38.4%. The second-best performer was the materials, software and computer services sector, up 19.5%, followed by the leisure and hotels sector with 15.1%, whereas, banking shares, the largest sector by market capitalisation, grew by 3.71%. The worst performer was forestry and paper, the index for which fell by 2.6% y-o-y.

BONDS: In addition to its equity exchange, the stock exchange hosts a corporate bond market, which had 44 listed instruments as of early 2018, with a combined face value of Dh9.62bn (€891m). This market is primarily used by the local financial sector to raise funds. Banks accounted for 29 of the 44 listed bonds, worth a combined Dh5.65bn (€523m), or 58.7% of the face value of all listed bonds.

According to CSE figures, seven new bonds were introduced in 2016, up from five in 2015, with a combined face value of Dh938.1m (€86.9m). Total trading on the market was worth Dh3.6bn (€333.4m) in 2016, down from Dh4.4bn (€407.4m) in 2015. This included Dh2.12bn (€196.3m) on the central market and Dh1.48bn (€137m) on the OTC market.

BOURSE SHAKE-UP: The CSE has gone through several important transformations in recent years. In mid-2016 the ownership of the institution changed. Previously, the exchange was jointly owned by all of the country’s licensed stock brokerages, which were obliged to take a share in the bourse, while other institutions were prohibited from doing so.

However, following a demutualisation process, its ownership was opened up to a range of financial actors operating in the kingdom, including banks and insurance companies, the state-backed investment fund, Caisse de Dépôt et de Gestion, and the Casablanca Finance City (CFC) Authority. In August 2016 the CSE also launched a new trading and information platform, based on LSE-owned MillenniumIT trading technology. The platform will, among other changes, allow the CSE to list new products such as ETFs on the exchange, which are being introduced as part of wide-ranging regulatory changes.

REGULATORY REFORM: In 2016 there were also a number of major regulatory changes that affected the sector, the foremost of which was the creation of a new independent regulator, the AMMC, which replaced the Securities Ethics Board. The main changes brought about by the creation of this new body was the separation of general oversight and regulation – which is now the purview of the AMMC – from the authority to sanction firms that break markets rules, which is to be overseen by a newly created sanctions committee headed by a judge. “With the AMMC and other stakeholders, the stock markets work to promote Morocco’s capital markets,” Benyoussef told OBG. The AMMC’s general regulations were approved in late May 2017, although the authority had been in operation since 2016. This development has allowed the sanctions committee, the members of which have already been appointed, to become formally operational.

STOCK MARKET LAW: Another key area of reform was the adoption by Parliament in August 2016 of amendments modifying the stock exchange law. The law was published in the government’s Official Gazette in March 2016; however, as of early 2018 the legislation was still awaiting implementation in the form of a ministerial decree changing the general regulations of the CSE. The law introduces greater flexibility in modifying market rules by making several specifications and conditions part of the CSE’s regulatory framework, which can be modified by decree rather than legislation. The latter can only be changed through parliamentary approval.

The market capitalisation of the Casablanca Stock Exchange increased by 28.7% in 2016 and the Moroccan All-Share Index rose 30.5%, making it the best year for the bourse since 2006 Another key reform is the planned creation of a new alternative equities market for SMEs. Conditions for firms listing on the new board will be less stringent than those for the conventional market, although the precise conditions have yet to be finalised and are not set to be announced until the legislation receives final approval. Elalamy told OBG that with the CSE having launched a new trading platform in 2016 that is technically capable of launching an alternative market, the new exchange should be up and running shortly, pending finalisation of the new general stock exchange law.

“Market actors have long been awaiting the creation of an alternative market, and the CSE is currently engaged in a major marketing effort,” Omar Sayarh, managing partner at Sayarh & Menjra Law Firm, a Casablanca-based firm specialising in business law, told OBG, adding that such efforts were needed to boost listing activity. “It will be harder to persuade smaller firms to list than major corporates, but the new market will nonetheless offer SMEs another form of financing for which there will be some demand,” he added. Elalamy explained that the law allows for the creation of sub-boards within the main and alternative markets, with specific, and less stringent, listing conditions. Investment in firms benefitting from such relaxed conditions can also be limited to certain types of investors, whereas investment in other listed shares is open to the general public. This mechanism could, for example, allow for the listing of SMEs under still looser conditions than those for the rest of the alternative market, by limiting investment to institutional investors that are more capable of analysing and taking on greater risks. The new regime also sets out different communication and transparency requirements for different categories of listed firms.

The law makes it possible for foreign firms to list shares denominated in foreign currencies on the exchange, which Sayarh described as an important step. “There will once again be a need for major efforts to convince such firms to list, but I can see double listings by, for example, West African firms on both the Abidjan and Casablanca exchanges,” he told OBG. This move is part of a wider effort to position Morocco as a regional financial centre, particularly for companies seeking access to African markets, with the development of the CFC being a major component of this plan.

NEW PRODUCTS: Importantly, the new stock market law allows for the launch of ETFs – index-tracking investment funds, which offer diversified holdings, can be traded like a share and generally offer lower costs than other mutual funds.

However, although the CSE’s new trading platform is capable of hosting such a market, further legislative reform, in the form of changes to the law on mutual funds, is required before trading can begin. Elalamy told OBG in mid-2017 that there remained a substantial amount of work to do on the legislation, and that it was not yet clear when it would be ready. In addition, a law allowing for the creation of a market in investment vehicles similar to real estate investment trusts (REITs), known locally as organismes de in 2016. As of early 2018 the law was awaiting the publication of applicatory regulations before it went into effect. Elalamy told OBG that this was a priority for the authorities and that it should be ready in the coming months, allowing the OPCI market to enter into operation in 2018 (see Legal Framework chapter).

FUTURES MARKET: Plans are also in place for the creation of derivatives in the form of a local futures market. A law allowing for the establishment of such a board was passed in 2015; however, several steps are required before it can be fully implemented, most prominently the creation of a clearing house, which Elalamy told OBG would take some time.

The plan is for the institution to be owned by a new holding company that will also own all of the kingdom’s major market institutions. This includes the CSE, securities depository Macroclear and the futures exchange. This new company has yet to be established, but work is under way and Elalamy said it would take at least until the middle of 2019.

A regulatory framework for the futures market is also needed. The AMMC and BAM will be jointly responsible for its regulation, and the two institutions have already begun work on establishing a suitable framework. The authorities hope the establishment of such an exchange will help to revitalise the sector by allowing for greater trading opportunities during periods of market contraction, thereby boosting liquidity. “Currently, when the market goes down, no one wants to trade stocks,” he told OBG.

In order to further create opportunities for hedging and trading, the authorities are working on reforms to Law No. 41-05, passed in 2014, that allow for securities lending and would in effect permit short selling. The revised law will relax some of the restrictions on such transactions contained in the original law, which Elalamy described as quite strict. However, he noted that securities lending activity was nonetheless developing fairly rapidly, reaching Dh325bn (€30.1bn) in 2016, up 55% on the previous year. Around twothirds of such lending concerns Treasury bonds, with mutual funds being the main lenders and banks the principal borrowers. The Ministry of Economy and Finance (MEF) is working on the law, though Elalamy noted that with such a large number of bills currently on the ministry’s plate, progress would likely take time.

SUKUK: Another priority for the regulatory authorities is the finalisation of a framework covering the issuance of sukuk (Islamic bonds). In late 2016 the government said it wished to issue a sovereign Islamic debt instrument in the first half of 2017 as part of an effort to establish an Islamic finance sector in the kingdom. While this ambition has not yet come to fruition, it is still in the pipeline.

A 2015 banking law already allows for the creation of Islamic banks, the first of which opened its doors in May 2017. In addition, an insurance law passed in 2015 provided for the creation of takaful (Islamic insurance) companies. A sovereign sukuk issuance would provide an investment vehicle in which newly established Islamic banks and takaful firms could invest their funds, as well as provide a benchmark rate for local businesses to issue corporate sukuk, providing another avenue for Islamic financial institutions and interested investors more generally.

“The sovereign issue will be a strong signal for the launch of a market in corporate sukuk,” Sayarh told OBG. The current OPCI legislation and 2013 law amending the country’s legislative framework for securitisation both contain elements related to sukuk issues, and the AMMC is working with the MEF, in consultation with the country’s sharia board, to finalise regulations and implementation protocols for sukuk-related activities. This will effectively establish a regulatory framework for sukuk issuances.

Citibank’s Cowan said there was likely to be significant investor interest in a Moroccan sovereign Islamic bond. “There is demand for Islamic products in Gulf countries, so it makes sense for the Moroccan authorities to take advantage of that, though there are also numerous other international sources of liquidity that they should look at tapping into,” he told OBG.

OUTLOOK: While new listings have been relatively few and far between since 2012, the range of reforms launched recently and additional legislation in the pipeline appear likely to boost interest in the CSE. These changes should provide a range of new products and allow investors to make a profit during times of both rising and falling share prices.

Relaxing listing conditions for smaller firms, which are often in greatest need of capital, will provide a welcome change for the sector. The market’s strong performance in 2016 and 2017, the continuing development of CFC and efforts to make Morocco a regional financial centre more generally will add further momentum, cementing the kingdom’s status as one of Africa’s most important capital market.