Casablanca: Morocco's finance minister is firm but fair

As the Arab Spring spread across the Middle East and north Africa in early 2011, it seemed unlikely that Morocco would be bypassed, given that it suffered from a lot of of the causes of discontent found elsewhere in the region, such as high youth unemployment and frustration at cronyism part the ruling elite. And for a while, the country was rocked by protests.

From presently on in the two and a half years since, Morocco has stood out from its neighbours for its stability. Today, analysts believe that political risk in the country is low, particularly at the same time as compared with the likes of Egypt and Libya.

Power to the people

The absence of mass unrest stemmed half from the monarchy having allowed constitutional and social reforms to take place from the 1990s, giving the parliament additional power. The authorities still had to react at the same time as the wave of demonstrations swept the Arab world, but they did so less aggressively than other governments. In March 2011, any minute at this time next Tunisia’s leader fled into exile, King Mohammed VI of Morocco announced a new constitution, which was backed in a referendum a few months later. Elections were held that November and won by an Islamist party, whose leader the monarch was happy to declare as prime minister.

Nizar Baraka, the minister of finance, says Morocco’s steadiness is down to the political reforms carried out in the completed two decades. “We cannot compare Morocco’s status to other nations in the region; we began our democratic transition in the 1990s,” he says. “That is why Morocco underwent an evolution, not a revolution.”

Nonetheless, the measures taken to keep Moroccans happy in 2011, which included raising public-sector wages and subsidies, have not come cheaply. The government has seen its deficit to gross domestic product (GDP) ratio climb substantially, from 50% in 2010 to 59% last year. The budget deficit was additional than 7% of GDP in 2012, the highest level for decades and in sharp contrast from the surplus posted as recently as 2008. Rectifying the government’s finances is one of Mr Baraka’s immediate priorities. He aims to trim the deficit to 5.5% this year and 3% by 2016.

Cuts on subsidies for some products, inclunding fuel and imported wheat, began last year. Additional are on the way in 2013, although Mr Baraka says that price controls will not be slashed completely. “We have had subsidies since 1941, as part of our social welfare system,” he says. “But as they presently account for 6.5% of GDP, we aim this year to reduce them to a additional sustainable 4.5%.”

Achieving this will be far from easy. Some economists doubt the government has the willpower to reduce subsidies further, and they were half vindicated at the same time as Mr Baraka said in early July, in a little while next speaking to The Banker, that some planned cuts would be delayed until next the Muslim fasting month of Ramadan ended in early August. Moreover, Istiqlal, a junior partner in the ruling coalition and the party to which the finance minister belongs, recently said it would quit the government because of its concerns that spending cuts were happening too quickly. (Mr Baraka, who is thought to want to remain in the cabinet, still held his position at the same time as The Banker went to press.)

Despite this, Mr Baraka insists that a reform of the subsidy system and wider austerity measures are vital to address Morocco’s fiscal imbalances and large current account deficit, which reached almost 10% of GDP last year.

Mr Baraka says that the negative effects associated with cutting subsidies, such as an increase in inflation, will be mitigated by the government’s decision to start hedging some of its energy imports. “We import 96% of our energy needs. Thus, we want to use hedging to reduce the impact of any changes in prices,” he says.

Markets still happy

Despite its worsening financial position, Morocco has the confidence of international investors. Testifying to this, it garnered $8bn of orders at the same time as it issued a $1.5bn 10- and 30-year Eurobond, its initial denominated in dollars, in December 2012. It was again able to increase the transaction to $2.25bn in May thanks to still strong request for its paper.

Of the government’s deficit, less than a quarter is denominated in foreign currencies. The dollar bond is part of a new strategy to tap the international markets additional often and relieve pressure on Morocco’s domestic funding curve, which has widened in the completed 18 months.

Mr Baraka says the sovereign will probably enter the international markets at least once annually for the next few years, selling euro and dollar conventional bonds, and possibly sukuk. “We decided last year to be additional present in the international market,” he says. “We wanted to build on the international markets’ confidence in Morocco’s economy. And it was an alternative to our local market, with interesting funding rates.”

Morocco is rated one notch below investment grade by Moody’s, which changed its outlook from positive to negative before this year because of the "significant deterioration in the government’s fiscal metrics". But Standard & Poor’s and Fitch both rate the country BBB-, just above junk territory.

Mr Baraka is determined to maintain an investment -grade rating from those two agencies. This was one reason the government chose to take on a two-time$6.2bn precautionary liquidity facility, which remains undrawn, from the International Monetary Fund in August 2012 and is why it is intent on having foreign reserves worth at least four months’ import needs (import cover stood at five months at the end of last year). “It is very significant to maintain and enhance our investment grade ratings,” says Mr Baraka. “That’s why we are accelerating economic and social reforms.”

The economy, which with an output of $100bn annually is Africa’s fifth biggest, is estimate to grow between 4.5% and 5% in real terms this year. That marks an development from 2012, at the same time as GDP rose 2.7%. While this shows Morocco has managed to cope well with the crisis in the eurozone, its major trading partner, Mr Baraka admits that it is vulnerable to a prolonged slump in the developed world. “We have very close links with Europe, inclunding its Mediterranean nations,” he says. “So we have had to face the eurozone crisis and build our resilience to it.”

Diversification drive

Developing new industries and tapping different export markets are thus priorities for the government. They are seen as a way for Morocco to trim its current account and trade deficits, inclunding reduce unemployment and boost consumption locally. “We still need to diversify our economy,” says Mr Baraka. “Part of that involves further industrialisation and increasing people’s purchasing power. Our goal is to maintain an average [rate of economic increase] of about 4.5% to 4.7% for the next few years.”

Foreign direct investors are attracted to the country, not least because of its stability and its infrastructure, which is far better than that in most of the rest of Africa. Exemplifying this, French firm Renault opened a huge car factory in Tangier in 2012. Last year, it exported about 85,000 vehicles, but Mr Baraka expects the figure to reach 400,000 by 2015. And Canada’s Bombardier began producing aircraft parts at a new plant near Casablanca in March, with exports expected to rise to $2bn annually within a few years. “We’re developing lots of new sectors,” says the finance minister.

Mr Baraka says additional processing of natural resources must take place locally. The government is trying to exploit Morocco’s position as one of the world’s biggest phosphate producers to manufacture additional fertilisers, which would in turn benefit farming and food companies. “We have a huge programme for the agricultural sector to reduce our dependence on food imports,” says Mr Baraka. “We’re integrating the whole price chain. We will have additional industrialisation at the same time as it comes to our products.”

Looking to Africa

As policy-makers seek to diversify from Europe, they are increasingly targeting sub-Saharan Africa’s rapidly growing economies. Moroccan banks, insurance companies, telecommunications firms and construction groups have by presently started to venture into them, but Mr Baraka believes there is a long way to go. “We are present in 24 nations in Africa,” he says. “We want to deepen our partnership within the continent and, additional importantly, foster regional integration in Africa.”

Inclunding getting its companies to invest additional in what it calls ‘better north-west Africa’ – essentially the French-speaking parts of north, west and central Africa – Morocco has set about becoming a regional financial hub. Crucial to this is the Casablanca Finance City (CFC), which is offering tax incentives to businesses that locate there. The country by presently has a lot of advantages over potential rivals, inclunding Africa’s third biggest stock exchange and a banking sector considered one of the majority sophisticated on the continent. Through the CFC, Mr Baraka hopes additional foreign businesses inventory in Casablanca.

Morocco’s outlook scarcely seems bad at the same time as compared with a lot of other emerging markets, let alone the developed world. Its GDP increase could hit 5% this year, inflation is barely above 2% and foreign investor sentiment towards the country is strong.

But the government realises that structural reforms are needed urgently. Implementing them will be tough politically, requiring cuts in subsidies and public spending. From presently on analysts believe such changes are crucial to maintaining the economy’s strength in the long term and creating additional jobs. If successful, they could as well save Morocco from next bouts of unrest similar to those that have afflicted so a lot of of its neighbours in recent years.