Fitch Ratings has affirmed Morocco’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB+’ with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Morocco’s ‘BB+’ rating is underpinned by a record of macroeconomic stability reflected in relatively low inflation and GDP volatility pre-pandemic, a moderate share of foreign-currency (FC) debt in total general government (GG) debt, and relatively comfortable external liquidity buffers. These strengths are balanced against weak development and governance indicators, high GG debt, and budget and current account deficits (CAD) that are wider than rating peers.
The central government (CG) fiscal deficit rose to 7.7% of GDP in 2020 from 4.1% in 2019 (excluding privatisation proceeds). Covid-19-related containment measures and lower global demand caused a steep fall in revenue while current spending surged to mitigate the health impact and cushion the financial blow on households and corporates. The authorities received about 2.2% of GDP in grants from domestic and international contributors in a dedicated Covid-19 fund, which we include in our fiscal revenue figures.
Plans to improve the delivery of social services and expand social benefits alongside an only modest recovery in tax revenue, lower grants and continued spending pressures from the pandemic will keep the CG deficit at 7.1% of GDP in 2021 and 5.8% in 2022. We forecast a GG deficit, which also includes social security, local governments and extra-budgetary units, of 6.5% of GDP in 2021, after 6.9% in 2020, compared with a forecast ‘BB’ median of 5.2%. We do not expect material alterations to fiscal and other economic policies after the September 2021 parliamentary elections.
Large fiscal deficits will drive a further rise in government debt despite the economic rebound. We forecast GG debt will increase to 68.8% of GDP in 2021 and 70.5% in 2022 from 66.8% in 2020, exceeding the projected ‘BB’ median of 59.1% in 2022. We project debt to be broadly stable from 2023 onwards. Fiscal funding risks are low, reflecting the sovereign’s access to a large and captive domestic investor base, with net domestic funding expected to cover two-thirds of the Treasury’s financing requirements in 2021-2022. Around 76% of CG debt was local currency denominated at end-2020, limiting exchange rate risks for sovereign debt.
The prolonged pandemic shock will aggravate financial vulnerabilities of some state-owned enterprises (SOEs), possibly triggering the crystallisation of contingent liabilities on the sovereign’s balance sheet, although the government’s prudent management policies provide some mitigation. Commercial SOEs had comparatively high debt of 24.7% of GDP at end-2019, of which around 11% of GDP was explicitly guaranteed by the sovereign. At least four SOEs received new guarantees in 2020. Additional contingent liabilities stem from a government guaranteed loans programme, which could reach close to 7% of GDP, although a multi-layered coverage mechanism reduces the risk of a call on the sovereign guarantee.
Fitch assesses the banking sector’s capitalisation ratio as fairly low relative to risks from the concentration of the loan portfolio and the regional expansion of banks. The pandemic shock will cause deterioration in the sector’s asset quality but we deem the ensuing risks for bank solvency manageable and do not expect material sovereign support to banks over the coming two years.
The key tourism sector (6.7% of GDP in average annual gross current account receipts in 2017-2019) will remain depressed in 2021 after gross foreign tourism earnings collapsed 70% year-on-year in April-December last year. Phosphate and automobile exports recorded strong performances in January-February 2021 but some sectors continue to lag, such as textiles and aerospace. We expect overall current account receipts to remain below their 2019 level in 2021 and 2022.
We expect imports to rebound in 2021 as domestic demand for final and intermediate goods starts to recover, along with higher oil prices. We forecast the CAD to widen and average 4.1% of GDP in 2021-2022 as export growth lags. Imports of goods and services contracted by 16% in 2020, which resulted in a contraction of the CAD to 1.8% of GDP. Remittance inflows (5.9% of GDP in 2017-2019) increased in 2020 and will continue to support Morocco’s external metrics.
Relatively large CADs will be mostly debt-financed and net external debt will edge up to 19.5% of GDP in 2022, up from 16.7% in 2020, and close to the forecast ‘BB’ median of 25%. External liquidity risks are mitigated by long-standing support from official creditors and Morocco’s favourable external debt composition. Official loans account for around two-thirds of public external debt and half of total gross external debt.
External resilience is also underpinned by Morocco’s fairly comfortable foreign reserves and improved exchange-rate flexibility. We forecast foreign reserves to increase slowly in 2021 and 2022 after shooting up to USD32.2 billion at end-2020 from USD25.3 billion in 2019. We forecast foreign reserves will cover 7.5 months of current external payments on average in 2021-2022, higher than the ‘BB’ median of 5.4 months. We expect the government to seek a successor Precautionary and Liquidity Line with the IMF, which would offer a safety net in case of external liquidity tensions.
An easing of the disruptions from the health crisis and improved rainfall following a two-year drought will lead to a rebound of real GDP growth to 4.8% in 2021, after a contraction of 7.1% in 2020. We expect fiscal policy to remain expansionary until at least 2022. The launch of a strategic investment fund in cooperation with the private sector, expected for 2021, will support the economic recovery.
ESG – Governance: Morocco has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Morocco has a medium WBGI ranking at the 42th percentile and ranks below the rating category medians on all pillars of the WBGI. Political stability has been preserved in Morocco over the last decade against a backdrop of recurring bouts of unrest in the Middle East and North Africa region, but social tensions have led to recurrent protests in several provinces amid persistently high unemployment, particularly affecting urban youth.
Morocco has an ESG Relevance Score of ‘5’ for Political Stability and Rights as WBGI have the highest weight in Fitch’s SRM. Morocco ranks below ‘BB’ peers on Governance Indicators and unemployment and development gaps are a source of social tensions; this is highly relevant to the rating and a key rating driver with a high weight.
Morocco has an ESG Relevance Score of ‘5’ for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch’s SRM; this is highly relevant to the rating and a key rating driver with a high weight.
Morocco has an ESG Relevance Score of ‘4’ on Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver.
Morocco has an ESG Relevance Score of ‘4’for Creditor Rights as willingness to service and repay debt is relevant to the rating and a rating driver for Morocco, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.