Regulatory reform and new products to bring dynamism to Morocco's capital markets

Economic progress and the country’s natural position as an investment bridge between Europe and Africa have allowed Morocco to establish one of the continent’s largest and most sophisticated capital markets. Despite its advantages, however, the Casablanca Stock Exchange (CSE) has been affected by low levels of liquidity, a scarcity of new listings and an overall lukewarm performance. After witnessing strong returns in recent years, especially in 2016, the kingdom’s capital markets sustained a more modest level of growth in 2017 before enduring some losses in 2018, tied in part to slower GDP expansion. Most notably, the domestic investment environment was affected by an unprecedented consumer boycott campaign that heavily impacted a handful of major firms listed on the exchange, further dampening sentiment, and underscoring the vulnerability of market perceptions and investment fundamentals.

Despite these issues, however, ongoing regulatory changes are expected to help improve sentiment and encourage dynamism over the medium term. A new stock exchange law has set up the necessary base to provide more financial products as well as establish an alternative stock exchange focused on small and medium-sized enterprises (SMEs). Additional measures are focused on improving market liquidity and bringing on new asset classes. “Morocco’s capital markets have reached a high level of sophistication. There are very positive trends in different market segments such as Treasury bonds and undertakings for collective investment in transferable securities, which show significant potential for development,” Fathïa Bennis, CEO of Maroclear, told OBG.

Performance

At the end of 2017 the CSE was Africa’s second-largest stock exchange in terms of market capitalisation, with Dh627bn (€56.4bn), and its third-largest in terms of transaction volume, with Dh69.7bn (€6.3bn), according to the CSE’s latest annual report. After sustaining a few years of bullish optimism, sentiment in the stock exchange moderated in 2018. “There was fear of an economic slowdown, which has been confirmed,” Souhail Chalabi, director at BMCE Capital Gestion, told OBG. “Economic growth is slowing down. In 2018 and 2019 the kingdom will probably register more moderate growth, at around 3%. The results of listed companies on the stock exchange have also suffered somewhat with this downshift,” he added.

The Moroccan All-Share Index (MASI), the exchange’s main indicator, recorded profits of 30.5% in 2016 before slowing to 6.4% in 2017 and dipping to a loss of 8.3% in the following year. Market capitalisation in 2018 dropped by roughly Dh50bn (€4.5bn) to settle at Dh582bn (€52.3bn).

Daily average trading volumes reached Dh150m (€13.5m) in 2018, a 6% decrease on 2017 figures. Although the CSE records a total of 76 companies as of end-2018, most of the trading was driven by a small group of firms. Maroc Telecom, Attijariwafa Bank, BMCE Bank, real estate firm Groupe Addoha and Banque Centrale Populaire (BCP) comprised 56% of trading volumes on the market in 2018, according to local media reports. Such firms also contribute significantly to the CSE’s global market capitalisation. In October 2018 Maroc Telecom accounted for 21.7% of total capitalisation on the exchange, followed by Attijariwafa Bank at 15.6% and BCP with 8.8%.

Building Blocks

Although it displayed dynamic growth during the first decade of the 2000s, the stock exchange experienced muted investor interest from 2009 onwards. A significant element of the slowdown can be linked to the global financial crisis of 2007-08, and the CSE has found it difficult to drive interest and liquidity over most of the post-crisis period. “The slowdown in initial public offerings (IPOs) beginning in 2009 reduced private investor interest,” Badr Benyoussef, chief business development officer at the CSE, told OBG. “At the same time, this lack of interest discourages companies from coming onto the stock exchange.”

IPO

Indeed, recent years have seen subdued activity in terms of IPOs. Between 2012 and 2014 the CSE welcomed one IPO per year. Two companies made it onto the CSE in 2015: fuel distributor Total Maroc entered in May, floating 15% of its shares on the exchange, while insurance broker AFMA Assurance, floated 20% of its capital and was oversubscribed by seven times. The following year saw a single IPO listing, with a state-owned port operator Marsa Maroc floating 40% of its shares in July. It was the first privatisation of a public asset through the domestic stock exchange, the largest IPO in the kingdom in almost a decade and Africa’s third-largest float that year; it was oversubscribed by six times and raised around Dh1.9bn (€170.9m).

After 2017 registered no new issuances, the following year welcomed two introductions. In April 2018 local real estate company Immorente launched an IPO to raise Dh400m (€36m). Similarly, in December 2018 local industrial company Mutandis got the green light to list shares on the stock market with an aim of raising Dh400m (€36m). In addition to being oversubscribed by 2.5 times, it attracted over 3280 investors, according to local media.

Overall, between 2010 and 2018 only 13 new companies joined the CSE. Nevertheless, the kingdom has seen the rise of new sectors over that period, which has helped to diversify the economy, create new industrial employment opportunities and further integrate the country’s production capacity in international value chains. Attracting new sectors to the stock exchange would allow for better linkage between the real economy and capital markets, as well as potentially spur investor interest.

“The automobile, aeronautics and green energy sectors are growing quite fast, and are not represented in the stock market at this point,” Benyoussef told OBG. “But the market will likely be able to respond to their investment needs.”

Boycott

In a setback to Morocco’s capital markets, a social media campaign beginning in April 2018 targeted a handful of companies listed on the CSE. The online movement encouraged consumers to boycott products deemed to be too expensive and/ or marketed by companies perceived to be raking in excessive profits at the expense of local consumers. The targets of the campaign were three specific companies and their products: milk from Centrale Danone, the Moroccan subsidiary of France’s food producer Danone; Sidi Ali water produced by Eaux Minérales d’Oulmès; and fuel distributed by Afriquia, which is owned by the Akwa group.

The boycott lasted for months and had palpable effects on the financial results of targeted firms. In mid-October 2018 Centrale Danone announced in a press release that its sales in the kingdom had fallen by 35% between July and September 2018, following a decrease of 40% in the second quarter that year. Similarly, Eaux Minérales d’Oulmès reported that sales of its bottled water had dropped by 18% over the first six months of 2018 compared to the same period of the previous year.

Besides the impact on company bottom lines, the boycott has imbued a greater sense of vulnerability for Moroccan economic operators, and underscored the risks associated with public relations and the perception of economic performance standards of private firms in the current world permeated by social media. “The boycott has created an environment of uncertainty; people do not really understand its causes,” Chalabi told OBG. “The immediate result of this is that investors are wondering whether their companies will be targeted next. The broader, longer-term outcome is that most operators are now paying a lot of attention to their pricing policy and their profits. I believe it has pushed companies to postpone some projects and to be discreet about future growth plans, which has an undesirable effect on the economy,” he added.

Although the origins of the boycott movement are difficult to pinpoint, the event has shed considerable light on the vulnerabilities of some of the country’s largest economic groups, especially those that have a presence on the exchange.

Restructuring

Despite the challenging environment, modifications are being made to the CSE and the regulatory framework surrounding capital markets activity. The exchange was previously owned by Morocco’s licensed stock brokerages, which were required by law to assume a shareholding position; however, demutualisation in 2016 opened the bourse’s shareholding structure to other institutions. As of end-December 2017, 39% of the CSE was owned by eight of the country’s largest banking institutions, including Attijariwafa Bank, BCP and BMCE Bank. State-backed investment fund Caisse de Dépôt et de Gestion held 25% of the exchange, while independent stock brokerages owned 20%, insurance companies held 11% and the Casablanca Finance City Authority – a government-backed initiative to transform the CSE into a financial and investment platform between Europe and Africa – had a 5% share.

A further upgrade to the CSE occurred in mid-2016, when it launched a new electronic trading system with the help of MillenniumIT, a Sri Lankan trading technology firm owned by the London Stock Exchange (LSE) Group. One significant advantage of the new platform is that it allows the CSE to list new products on its capital markets, something sector authorities have been working to introduce through a broader regulatory overhaul.

Sector Reform

Another critical step of the ongoing reform process occurred in 2016 with the establishment of a new independent sector regulator, the Moroccan Capital Markets Authority (Autorité Marocaine du Marché des Capitaux, AMMC). Key functions of the new body separated general oversight and regulatory functions of capital markets from the sanctioning of sector players that fail to abide by the rules. The former functions are now overseen by the AMMC’s administration council, while the latter are under the remit of a separate committee and must be supervised by a judge.

The general regulations were approved in May 2017, allowing for the new watchdog and its sanctioning committee to become operational soon afterwards. Taking into account the proposal of government authorities, the president of the AMMC is appointed by King Mohammed VI.

Benefits are also expected to be gleaned from the new stock exchange law adopted by Parliament in August 2016. A key aspect of the legal change will be to ensure that specifications of the CSE’s regulatory framework can be changed by ministerial decree, rather than through parliamentary-approved legislation. Despite the approval of the new law, however, specific regulatory texts were still awaiting implementation as of February 2019.

Once it has been put into place, the legal reform will also establish an alternative equities market aimed at Morocco’s SMEs. The new platform is expected to have more flexible access rules than the CSE’s main market; however, the specifics had yet to be finalised as of February 2019.

The sector is also expected to be impacted by a new roadmap released in March 2018. Known as Ambition 2021, the plan aims to enhance capital markets infrastructure, boost the exchange’s contribution to financing the domestic economy and shore up its influence in the region. “In a few years, we want to have a much more complete offer in terms of capital markets,” Benyoussef told OBG. “We are aiming to build a stock exchange that is better equipped to offer the services required by investors and firms, and more capable of managing risk, which is very important in a market,” he added.

New Products

New regulations will also allow for exchange-traded funds, which can be swapped in the same way as shares, offer varied holdings and involve lower costs relative to other mutual funds. Opportunities are also expected to arise following the implementation of a 2016 law governing organismes de placement collectif en immobilier (OPCIs).

Similar to real estate investment trusts, OPCIs will allow for the placement of several real estate assets under a fund and distribute the resulting income to shareholders. “OPCIs will work well because banks and insurance companies have considerable real estate assets, and it makes sense to put that in a fund with fiscal advantages,” Chalabi told OBG. “We need to make sure the proper regulation for this is established, but the advantages are clear.” As of early 2019 the law regarding OPCIs was being finalised.

Moves for the establishment of derivatives through the development of a futures market are also under way, with the AMMC and Bank Al Maghrib (BAM), Morocco’s central bank, working on the necessary regulatory framework. Establishing a futures market could encourage further trading, especially in times of slower market performances.

Privatisation Drive

Despite the challenges faced in recent years, with a small number of IPOs and the 2018 boycott driving down sales of listed companies, there are reasons to view the long-term development of the country’s capital markets with optimism. One such rationale is the government’s plan to privatise additional public assets, which will be done through the stock exchange in a number of cases. In October 2018 officials announced that it intended to conduct several privatisations in 2019 to raise between Dh5bn (€449.7m) and Dh6bn (€539.6m) in additional revenues. The move is part of a broader plan to rein in the budget deficit, which the BAM forecast at 3.7% of GDP in 2018.

Privatising public assets would likely help to bring more interest into the stock exchange, allowing the government to sell shares in companies that are strongly representative of the local economy but remain unlisted. In late 2018 potential privatisation targets were still being deliberated by the authorities. Two firms under consideration included stateowned La Mamounia Hotel in Marrakech, which is majority owned by the National Railways Agency, and the Tahaddart combined-cycle power station 30 km south of Tangier. Additionally, Mohamed Benchaâboun, the minister of economy and finance, indicated in October 2018 that the government may consider selling stocks in Maroc Telecom, in which the government currently has a 30% stake.

Using the stock exchange to attract investors to state companies has been well received in previous years. “The floating of Marsa Maroc in 2016 was a successful example of privatisation through the stock exchange,” Chalabi said. “It is now a liquid asset in the portfolio of many institutional investors,” he added.

Elite Programme

Another way in which sector authorities are aiming to increase the number of listed firms is through the Elite programme, developed by the LSE and run by the CSE. By providing training support and mentorship to Moroccan SMEs, the Elite programme aims to improve firms’ ability to attract investment and eventually list on the CSE.

The initiative also supports participating firms by bringing them together with the local financial community. The first edition of Elite took place in 2016, and in early 2019 the CSE launched the sixth iteration of the programme. The goal is to increase the number of companies involved in the scheme from 48 in 2017 to some 72.

The CSE expects that some of these companies might eventually join the stock exchange over the coming years. An extension of the Elite programme into West Africa launched in February 2018 with BRVM. The move will support the flow of capital and financing mechanisms between Morocco and sub-Saharan Africa, where many of the kingdom’s banks and insurance companies are present.

While the development of Morocco’s capital markets has already attracted institutional investors, there are hopes that new instruments will also make the stock exchange more attractive for individual investors. This will be essential in reviving the stock exchange and increasing its presence in the economy. “Our insurance companies and banks have an investment capacity that is much greater than what is actually allowed by the market,” Benyoussef told OBG. “This has put them in a very strong position.”

Outlook

The current institutional investor versus retail investor imbalance is expected to improve as new regulations are implemented, which could trigger a phase of growth on the country’s capital markets. The CSE has been able to make a name for itself as a critical player on the continent; however, lacklustre performances in recent years mean stakeholders must work harder to maintain growth. One significant difficulty has been the bourse’s inability to attract new firms and spur the interest of a large volume of individual investors.

Still, the government’s new roadmap is likely to positively impact the stock exchange over the medium term by helping improve offerings and boost demand. Government plans to list certain public companies and attract private investors is also expected to improve performance.

The establishment of modern trading infrastructure will contribute to the modernisation of the sector, and aid the CSE in attracting local firms that are looking for financing, as well as investors who are looking for returns. Much of the changing paradigm will be accelerated through the Elite programme as an increasing number of businesses become more acquainted with the requirements and advantages of financing themselves through capital markets.