Morocco diversifying trade and investment to grow economy

Morocco’s trade balance improved substantially in 2014 and is set to perform better still in 2015 thanks to factors such as lower oil prices and improving conditions in major export markets, though it is set to maintain a large trade deficit for the foreseeable future. Levels of inward foreign direct investment (FDI) have grown substantially in recent years, boosted by factors such as a range of incentives for investors and good infrastructure. However, observers say that levels could be higher still if more progress were made in tackling challenges such as corruption. Outward investment is also growing rapidly, much of it going south of the Sahara where Morocco is emerging as a regional economic power.

Balance of Trade

Exports in 2014 were worth Dh200.01bn (€21.8bn), while the value of imports stood at Dh386.12bn (€42bn), giving a trade deficit of Dh186.1bn (€20.2bn). This was down 6.2% on the figure for 2013, owing to a 7.9% increase in the value of exports (from Dh185.39bn [€20.2bn] in 2013) combined with a much smaller 0.6% increase in the cost of imports – a trend Morocco is hoping will strengthen in the long term as it seeks to reduce its dependency on imported energy and increase value-added exports to a wider variety of markets.

A key factor in keeping a lid on the import bill was the falling international price of oil; imports of energy and lubricants, which accounted for 23.9% of all imports in 2014, were down 10.1% by value on 2013, according to preliminary figures from the Office des Changes. This was the result of a 22.8% slump in the value of crude oil imports and a 10.1% drop in the value of diesel and fuel oil purchases, in spite of increases in the volume imported of both products.

Other notable elements of the kingdom’s import bill were industrial equipment, which represented 20% of the total in 2014 (down 3.6% in value terms on the previous year), semi-finished products (21.2%, up 0.1%), consumer goods (18.3%, up 3.3%), and food, drink and tobacco (10.8%, up 15.1% thanks primarily to an uptick in wheat imports as a result of the year’s poor harvest). Meanwhile, exports were boosted by a significant jump in the volume of purchases of Moroccan goods by major trading partner Spain, where there are growing signs of recovery from its economic crisis (see Economy chapter).

The largest category of exported goods in 2014 was finished consumer goods, which accounted for 28.9% of total exports and which were up 20.7% on 2013 figures. The category includes clothing, which accounted for 10.1% of total exports and grew by 5.4% by value in 2014, and cars, which represented 9% of all exports and which rose by 84.8% year-on-year (y-oy) as production at the Renault plant in Tangiers, which opened in 2012, ramped up. Other major export groups include food, drink and tobacco, which accounted for 17.3% of the 2014 total, up 2.3% y-o-y; raw minerals, which accounted for 7% of exports (including phosphate rock with 4.1% of the total), down 6.3% on 2013; semi-finished products with 24.3%, up 6.74% and dominated by phosphate derivatives, which accounted for 15.1% of all exports; and industrial equipment (16.7%, up 5.5%), dominated by cables and wiring.

Trade Partners

The EU is by far Morocco’s largest and most significant trading partner, accounting for some 53.9% of the kingdom’s total external trade in 2013, worth €27.5bn, according to data from the European Commission. Next in line were China with 7% and Saudi Arabia with 6.5%, followed by the US at 6.1%. No other country accounts for more than 5% of the kingdom’s total foreign trade. Some 61.1% of Moroccan exports went to the EU in 2013 and 53.9% of imports came from the bloc, the proximity of which represents a major boon to the kingdom’s export potential. “To be 15 km away from such a large market is a huge comparative advantage,” said Jean-Pierre Chauffour, lead country economist for Morocco at the World Bank. “Even though Europe’s economy is not currently growing fast, even a small increase in Morocco’s market share would make a very large difference.”

Taking individual European countries into account, France was the largest exporter to Morocco in 2013, according to Office des Changes data, with sales of Dh142.38bn (€15.49bn), followed by Spain at Dh131.62bn (€14.32bn) and the US with Dh41.56bn (€4.52bn). However, in 2014, Spain overtook France, with Spanish exports to Morocco standing at Dh150.6bn (€16.39bn), ahead of France in second place with Dh148.6bn (€16.17bn) and the US in third with Dh41.64bn (€4.53bn). France was also the largest market for Moroccan exports in 2013, with purchases of Dh39.85bn (€4.34bn), followed by Spain with Dh35.11bn (€3.82bn) and Brazil with Dh10.56bn (€1.15bn). However, as with imports, Spain overtook France in 2014 to become the largest importer of Moroccan goods, with exports to Spain for the year at Dh43.95bn (€4.78bn), up 25% y-o-y, compared to France with Dh41.09bn (€4.47bn) and third-placed Brazil with Dh9.16bn (€996.6m).

Although Morocco is seeking to position itself as a hub for trade and investment in Africa, trade levels with the continent remain relatively low compared to investment (see below) – though they are also growing rapidly, by an annual average of around 12% over the decade to 2013, when they stood at Dh14.4bn (€1.57bn). Such strong growth was driven primarily by exports, which grew at an average of 18% per annum, to reach Dh11.7bn (€1.27bn) in 2013 or 6.3% of Morocco’s total exports.

The North African kingdom runs a large trade surplus with the continent, with exports worth around four times the value of imports. In order to further boost commerce with its southern African neighbours, the kingdom is currently in the process of trying to establish free trade agreements (FTAs) with two major African economic blocs (see analysis) and has aggressively sought to strengthen commercial and economic linkages with sub-Saharan markets including Senegal, Côte d'Ivoire and Gabon.

Foreign Exchange

Morocco runs a managed exchange rate regime under which the dirham is pegged to a basket of currencies dominated by the euro. At the time of writing, in late July 2015, one euro bought Dh10.70 and one US dollar was worth Dh9.88.

Some observers have called for a liberalisation of the country’s exchange rate mechanism – a call that has been backed by the IMF. “The idea is to go towards a more liberal regime, close to a free float, though such reforms would have to be gradual as Moroccan companies would need to become used to a more volatile system,” said Karim Gharbi, head of research for capital markets at Moroccan investment bank CFG. “The first step would be to rebalance the currency basket in favour of the dollar – 80% of it is currently made up by the euro, while Moroccan trade is now divided roughly equally between dollars and euros.”

Such changes are now afoot; in April 2015 Bank al Maghrib revised the dirham’s currency basked weighting to 60% for the euro and 40% for the US dollar, down from 80% and 20% previously, and with the aim of promoting a more flexible exchange rate system. Further currency liberalisation could have a major effect on the wider economy; some observers argue what they say is an over-valued exchange rate has limited productivity gains in the kingdom, which have constrained potential GDP growth (see Economy chapter).

Reserves

As of January 2015 the kingdom’s foreign exchange reserves covered five months and nine days of imports, up from a total of four months at the end of 2013, largely the result of an improved current account deficit. A yearlong amnesty on illegal foreign-held assets that began in early 2014 also helped strengthen foreign reserves by encouraging Moroccans to convert such assets into dirhams in order to bring them back into the country.

FDI: FDI inflows into Morocco stood Dh36.15bn (€3.93bn) in 2014, according to data from the Office des Changes, down 7.5% from 2013. While the figure tends to vary from year-to-year, the long-term trend is also sharply up; according to UN Conference on Trade and Development (UNCTAD) data, the average amount of annual FDI inflows into the kingdom stood at $2.25bn for the decade to 2013, more than double the figure of $1.02bn for the previous 10-year period. The total ranked Morocco as the second-largest recipient of FDI in North Africa for the year (behind Egypt with $5.55bn and ahead of Sudan in third place with $3.09bn and Algeria in fourth with $1.69bn) and the fifth-largest in Africa (after South Africa, Mozambique, Nigeria and Egypt). The authorities intend to boost levels further; in late-2014, Moulay Hafid Elalamy, minister of industry, trade, investment and digital economy, told media that he believed the kingdom could double current FDI levels by 2020.

In 2013 heavy industry attracted the largest amount of inflows of any sector, with 38.6% of total foreign investment (up 84.3% y-o-y in value terms), according to data from the French Ministry of Foreign Affairs, followed by real estate at 18.9% and tourism at 8.3%. Together with telecoms and banking, these sectors accounted for around three-quarters of total FDI in the country during the year.

Sources of Investment

France was the largest source of FDI in the kingdom by country, accounting for 36% of the total in 2013, thanks in large part to French company Danone’s acquisition of a stake in Moroccan dairy firm Centrale Laitière during the course of the year. In second place was the UAE with 8.6%, followed by Singapore in third with 8.1%. Investment from the Middle East and Gulf countries in particular has been growing in recent years, with 2014 proving a landmark year in this respect. In May UAE telecoms firm Etisalat bought French company Vivendi’s 53% stake in Maroc Telecom for €4.14bn, following an announcement in April that Gulf states would invest Dh6bn (€652.8m) in a tourism infrastructure project at Casablanca port via the GCC’s joint-investment fund Wessal Capital. The fund intends to undertake similar projects in Rabat and Tangiers.

Other major recent major investments in Morocco in recent years include a $200m aircraft parts plant being built by Canadian firm Bombardier; construction work on the facility began in 2013.

The largest foreign-backed project launched in the kingdom to date is Renault’s car factory in Tangiers, which opened in 2012 and was built at a cost of €700m. The facility produces vehicles under the French company’s budget Dacia brand, 90% of which are exported. Initial production capacity of 200,000 vehicles a year was increased to 340,000 in early 2014, following a €400m expansion project at the plant.

Inés Pérez-Durántez Bayona, economic and commercial counsellor at the Spanish Embassy to Morocco, told OBG that interest from Spanish companies in investment opportunities in the kingdom is growing as a result of the eurozone crisis and Moroccan structural economic reforms. “The climate for business is also improving thanks to factors such as the country’s sector development strategies and infrastructure development; there is also a perception that it is a safe country in which to do business,” she told OBG.

Investment Incentives

Morocco placed 71st out of 189 countries in the World Bank’s 2015 “Doing Business” report, down three places from the previous year. The kingdom ranked highly in the trading across borders category (31st), as well as in those of starting a business and dealing with construction permits, ranking 54th in both categories. However, its performance was weakened by poorer rankings in the categories of protecting minority investors (122nd), registering property (115th) and resolving insolvency (113th).

In the World Economic Forum’s 2014-15 “Global Competitiveness Report” the kingdom ranked 72nd out of 144 countries, on an overall score of 4.2 out of seven (seven representing the best possible performance). It scored particularly highly in the health and primary education category (5.7 out of 7), thanks to factors such as a high rate of primary school enrolment (at 97.5%), and strongly in the macroeconomic environment category (4.7, owing in part to ranking first in the inflation sub-category).

Morocco’s least competitive score came in the innovation category (3.1), due to factors such as comparatively low spending on research and development – something which the country is looking to change by channelling capital into tertiary education. The report lists inefficient government bureaucracy, an inadequately educated workforce and poor access to finance as the three most problematic factors for doing business in the kingdom.

“International companies willing to invest in Morocco see recruiting as one of their main challenges,” Anass Doukkali, a director for the National Agency for Promotion of Employment and Skills, commonly known as ANAPEC, explained to OBG. “These companies can only benefit from further cooperation with local public employment organisations that can help them to better respond to their needs,” he added.

The authorities have put a range of incentives in place to encourage investment in the kingdom. These include an exemption on duties for goods and materials used in investment projects worth more than Dh200m (€21.76m), as well as financial support from the country’s Investment Promotion Fund, which among other measures pays for 20% of the cost of land acquired as part of investment projects and 20% of the cost of vocational training for employees. This is providing that the projects in question are worth more than $200m, employ at least 250 people, involve technology transfer, are based in one of a number of designated geographical areas, or contribute to the protection of the kingdom’s environment.

Another notable investment fund, the Hassan II Fund for Economic and Social Development, contributes to the costs of buildings and equipment for investment projects larger than Dh10m (€1.09m) in any of six priority manufacturing sectors, namely, automotives; electronic assemblies; aviation; nanotechnology, microelectronics and biotechnology; moulds and tools for the automobile and aircraft sector; and aeronautical maintenance and disassembly.

Outward Investment

FDI outflows in 2013 stood at $331.5m in 2013, down from $406.1m in 2012, according to UNCTAD data. The volume of outward Moroccan investment has increased enormously over the last decade; the average for the decade until 2013 was $363m, up 12-fold on the figure for the previous 10 years of $30m. Around half of outward investment in recent years has gone into sub-Saharan Africa and in particular Francophone West Africa.

Turn to Africa

While trade levels with sub-Saharan Africa remain comparatively low, the continent is the largest destination for Moroccan investment; according to a report published in late 2014 by the Ministry of Economy and Finance, 51% of outward Moroccan FDI went to sub-Saharan Africa between 2003 and 2013, peaking at 88% in 2010.

Sectors leading the charge into Africa include banking, which attracted 52% of Africa-bound Moroccan investment between 2007 and 2012, and the telecoms sector – the kingdom’s largest operator Maroc Telecom has around 30m subscribers across sub-Saharan Africa – which drew 32%.

Another example of a Moroccan company with a growing African focus is OCP S.A., which has been a joint stock company since 2008 and was formerly the state-owned organisation known as Office Chérifien des Phosphates. OCP Group is a main player in the global phosphate industry and has been operating in international markets since 1920. The company has exclusive access to Morocco’s phosphate rock reserves, the largest global reserve base according to the USGS, making it an important producer of low-cost phosphate rock. The firm is focusing heavily on African sales and opened its first sub-Saharan representative office in Abidjan in early 2015; it is also considering opening another such office in East Africa soon and has been running extension programmes for small farmers in countries such as Mali and Senegal.

The African fertiliser market has grown relatively fast in recent years, yet the proportion of potentially cultivable land that is in use is relatively low. Fertiliser usage rates among farmers are also low by international standards, indicating plenty of room for growth. OCP S.A. says its aim is to expand the overall market rather than increase its market share. OCP S.A. more than doubled its sub-Saharan sales in 2014, as compared to the previous year, while also quadrupling sales between 2006 and 2014. The company is investing in – as well as selling to – the continent; in March 2014 it signed a $2.3bn agreement with Gabon (following an official visit by King Mohammed VI to the west African country) that will see the construction of four fertiliser factories – two in Morocco and two in Gabon – that will use Moroccan phosphate and Gabonese natural gas as feedstock. Output capacity could reach 2m tonnes of fertiliser annually by 2018.

Finance City

In order to position itself as a regional trade and investment hub, with an eye towards Africa-bound capital flows from Europe, the government in 2010 established a special investment regime to be based in a new financial city under construction, known as Casablanca Finance City (CFC). Firms granted CFC status can benefit from a range of advantages, including tax incentives (such as an exemption from corporate tax for service firms during their first five years of CFC status as well as a reduced tax rate for regional and international company headquarters established in the CFC), reduced restrictions on foreign exchange and measures to facilitate work permit and residency visa processes.

In order to qualify for CFC status, firms must earn at least 70% of their income outside of the kingdom. In June, Chinese technology giant Huawei became the latest name to establish its regional headquarters at CFC, and joins insurance player AIG and banking group BNP Paribas Regional Investment Company, which both received CFC status in early 2014. At the end of 2014, 60 firms held CFC status, with a target of 100 set for 2015, Said Ibrahimi, director-general of CFC, told the media in late 2014. In March 2015, the Global Financial Centres Index ranked CFC second as a financial centre in Africa and 42nd globally. “Morocco has understood that countries positioning themselves as regional hubs need a financial centre,” said Pérez-Durántez Bayona, adding, “No other country is doing something similar, so it is a real opportunity for Morocco. There is still work to do but Spanish firms are following the development with interest.”

Governance

 As regards governance issues, the kingdom ranked joint 80th out of 175 countries and territories in Transparency International’s 2014 Corruption Perceptions Index, with a score of 39 out of 100. This was a slight improvement on a score of 37 in 2013 and 2012. Abdessamad Saddouq, secretary-general of local anti-corruption non-governmental organisation Transparency Maroc, noted that there has been an improvement in terms of the prioritisation the government places on improving governance. “The new Constitution met some popular demands, in particular regarding corruption, and the Party of Justice and Development [the Islamist party leading the current government coalition] put fighting corruption at the heart of its election campaign; however, in the three years since then there have been few concrete measures against corruption.” However, he said that there was a bright spot on the horizon in the form of efforts under way to put together an anti-corruption strategy. “The process was launched in early 2014 and is working well, with civil society in particular participating heavily,” he told OBG. “There are also a lot of laws in the pipeline on issues such as conflicts of interest and governance, and a major reform of the justice system is under way.”

Saddouq explained that positive reforms to tackle the problem were crucial to boosting levels of investment in the kingdom. “Morocco has good infrastructure, is close to Europe and has lots of FTAs, but only attracts around $3bn of FDI a year,” noting that there is room to increase that.

Outlook

Growing investment in sectors such as manufacturing are helping to boost high-value exports, which should help to reduce the kingdom’s trade deficit. Investment opportunities in Morocco are also set to grow thanks to the recent passage of a public-private partnership law. Improvements in the attractiveness of the kingdom’s investment environment will depend on if and when negotiations on the establishment of a Deep and Comprehensive Free Trade Agreement with the EU resume, as well as on government efforts to tackle problems through initiatives such as the anti-corruption strategy current in development.

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The Report: Morocco 2015

Trade & Investment chapter from The Report: Morocco 2015

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