Morocco works to ensure future economic growth

In recent years Morocco has seen steady GDP growth and consistently low inflation – in contrast to its neighbours to the north. The country’s economic performance has both diversified and strengthened on the back of growth in the secondary and tertiary sectors, and has been aided by government efforts to channel capital into other productive industries such as manufacturing, finance and telecoms. Import-dependent for its energy supplies, the kingdom is benefitting from low international oil prices, which together with recent subsidy reforms have helped to reduce its budget and current account deficit (CAD), with most indicators suggesting strong economic growth is in the cards for 2015. There are still bottlenecks that need to be tackled, including less competitive productivity levels and a stubborn unemployment rate, but Morocco appears set to continue on an upward trajectory.

Population Growth

The spike in population has started to slow down in recent decades, according to the High Commissioner of Planning (Haut Commissariat du Plan, HCP), which put the annual growth rate at 1.1% between 2000 and 2010, and an estimated 1% this decade so far, down sharply from 2.6% in the 1970s, 2.2% in the 1980s and 1.7% in the 1990s. According to the HCP’s latest estimates for 2014, Morocco’s population stood at 33.85m people.

GDP & GDP Per Capita

Morocco’s GDP at current prices was worth $103.82bn in 2013 and an estimated $112.55bn in 2014, according to the October 2014 edition of the IMF World Economic Outlook (WEO) database, which was the latest available data as of July 2015. Per capita GDP stood at an estimated $3392 in 2014, according to the fund, up from $1908 a decade previously. In local currency terms, GDP per capita rose from Dh16,924 (€1841) in 2004 to an estimated Dh27,720 (€3016) in 2014. The World Bank classifies Morocco as a lower-middle-income country. On a purchasing power parity basis, GDP per capita stood at current international $7198 in 2013, according World Bank data, on par with Georgia and Guatemala.

According to provisional figures from the HCP, real GDP growth in 2014 stood at 2.2%, representing the lowest level of annual expansion the kingdom has seen since the start of the millennium. This was down from growth of 4.4% in 2013, in large part due to a poorer harvest than the bumper crop witnessed the previous year. Agriculture’s contribution to GDP fell by 1.4% in 2014, compared to a rise of 21.2% the previous year, while non-agricultural growth was 2.3%.

Positive Indicators

However, growth is expected to pick up substantially in 2015, and GDP rose by 4.4% in the first quarter of the year. Early indicators point to a better harvest on the back of healthy rainfall in late 2014 and early 2015, and low oil prices should also help to drive economic expansion. “The year 2015 will be interesting, as for the first time since the international crisis all of Morocco’s economic indicators appear to be positive,” said Karim Gharbi, head of research for capital markets at Moroccan investment bank CFG. Referring to the improved outlook for the CAD as energy imports fall, he added, “The economy is witnessing both a strong recovery and a significant reduction in major risks weighing on it.”

Improving economic prospects in key trading partners are also brightening the 2015 outlook. “Factors helping to drive growth include a gradual recovery in key economic partners, in particular Spain, where GDP is expected to rise by around 2% and unemployment is falling,” said Gharbi. “This is important as the performance of European economies affects Morocco in a number of ways, such as its impact on export demand, remittances, tourism and foreign direct investment. The state of Europe’s economy also has an effect on consumer confidence here.”

Forecasts

As a result of such positive trends, most economic observers are expecting much stronger growth in 2015 than in the previous year. The 2015 government budget is based on anticipated growth of 4.4% for the year as a whole, though this rests on conservative assumptions such as an international oil price of around $103 barrel, according to the Ministry of Economy and Finance (Ministére de l’Économie et des Finances, MEF). Oil prices hovered between $45 and $50 in the first half of 2015, breaking $50 for the first time in late July 2015. The October 2014 IMF WEO database forecast that GDP growth for the year would reach 4.7%, while in January 2015 Ahmed Lahlimi Alami, head of the HCP, said that growth would reach 4.8%. Speaking in February 2015, Gharbi told OBG that he believed expansion may be higher still, at 5%.

A Changing Growth Profile

Services accounted for 50.2% of GDP in 2013, industry for 26% and agriculture for 15.2%, according to the HCP. Given agriculture’s continuing contribution to GDP and the fact that agricultural land is not irrigated, annual GDP growth levels remain dependent on rainfall to a significant extent. However, the degree of this correspondence has been falling by a large factor. “Agriculture is becoming less and less dependent on rainfall, in particular since the launch of the Green Morocco Plan [Plan Maroc Vert, PMW] in 2008,” said Gharbi. “The sector has diversified away from rain-dependent crops such as cereals, and the cereals that are grown here have become less reliant on rain. As a result, a drought in 2014 that might have caused a 10% contraction in GDP a decade ago only caused a fall of around 2%.”

Partly as a result of such improvements, the once economically volatile kingdom has witnessed positive GDP growth almost every year since 1998. Average real GDP growth for the decade until 2013 stood at a healthy 4.4%, with economic expansion continuing through the international slowdown. Gharbi put the country’s long-term potential growth rate at between 4.5% and 5%. Other developments are also changing the nature of the kingdom’s economic patterns. Growth has traditionally been driven to a large extent by household consumption and high levels of domestic investment and foreign trade. However, according to the MEF, over the past three years growth has become increasingly led by high-value-added industrial sectors, with exports growth starting to outpace that of imports over that period.

The informal economy is large. Figures from the IMF suggest it accounted for around 41% of GDP in 2008. However, government estimates for its size based on research conducted by the HCP are substantially lower, at around 14% in 2007. Estimates also put informal employment at as high as 41% of total employment outside of agriculture and the public sector. Commerce accounts for the largest share of such informal economic activity, followed by small-scale manufacturing, according to the French Chamber of Commerce and Industry in Morocco.

Development Strategies

Such changes are in large part the fruit of a number of sector-focused strategies put in place over the last decade to develop the economy and boost industrial development in particular, which the authorities believe is one of the best bets for creating high-quality jobs, as well as having a multiplier effect through the creation of additional employment opportunities in other areas.

In 2008 the kingdom launched the National Pact for Industrial Emergence (Pacte National pour l’ Emergence Industrielle, PNEI) to develop six key industries that the authorities believe Morocco has a competitive advantage in, namely aeronautics, automotive, electronics, food processing, offshoring and textiles.

The PNEI was followed in April 2014 by a new strategy that seeks to accelerate industrial development and create approximately 500,000 new jobs by raising manufacturing’s share of GDP to 23%, up from 14% in 2013, backed by a Dh20bn (€2.18bn) investment fund. The kingdom has also launched a number of other major sector development strategies, including the aforementioned PMV for agriculture as well as plans to boost the role of the tourism and logistics sectors.

Rabia El Alama, managing director of the American Chamber of Commerce in Morocco, told OBG that of all the sectors targeted for expansion, the automotive and aeronautics industries were likely to continue to see substantial growth in the coming years. By contrast, she said that offshoring and IT were not as likely to perform as well due to increasing competition in the sector, mainly from Francophone countries. Gharbi argued that continued investment in these growth sectors would be crucial to the kingdom’s future prospects for development. He told OBG, “Factors such as economic liberalisation and infrastructure investment, as well as a huge increase in bank lending, have allowed the economy to catch up to its potential. However, we can no longer rely on that effect for growth and instead need to ensure the development of sectors in which Morocco has a strong competitive advantage, such as automotive and aeronautics manufacturing, offshoring and textiles.”

Others have suggested that alongside the focus on key sectors, specific classes of businesses would benefit from targeted support. “The ‘ecosystems’ approach to sectoral development has been positive, but it needs to further develop integration of the small and medium-sized enterprises,” Tarafa Marouane, the CEO of holding group SOMED, told OBG. “These companies should not only be used for outsourcing, but also participate in a strategic and structured global vision.”

Inflation

The authorities have kept inflation low in recent years. Annual average inflation has not exceeded 3.9% since 2000, and prices rose by an average of 1.8% a year over the decade to 2014 and 1.24% over the last five years, according to IMF figures. This is impressive given the country’s near absolute dependency on imported energy, which prior to the decline in late 2014 had stabilised at a price point roughly five times greater than at the beginning of the millennium – although the subsidies maintained by the government minimised the impact of high prices on the consumer basket. Inflation was low in 2014, according to the HCP, with the consumer price index rising by 0.4% on the year, partly as a result of below-average GDP growth. The IMF predicts this to rise to 2% in 2015 on the back of stronger economic growth.

Interest Rates

In late 2014 Bank Al Maghrib (BaM) cut its benchmark interest rate twice to end the year at 2.5%. Having stood at 3% since March 2012, the bank reduced it to 2.75% at its quarterly board meeting in September and then again by another 25 basis points in December. The move reflected reduced concerns about inflation, thanks to falling oil prices.

Previously, the bank had held the rate steady out of concern that subsidy reductions could push prices up. In March 2015 the bank opted against a further cut, maintaining the rate at 2.5% for the time being. Nevertheless, Gharbi said that it was possible the rate could be lowered even further at some point during the year. “Inflation is very low, and there is even a risk of deflation being imported from Europe,” he said.

Government Finances

The 2015 government budget sets spending at Dh316.9bn (€34.48bn), of which Dh194.75bn (€21.19bn) is earmarked for operating expenses, Dh54.09bn (€5.88bn) for investment and Dh68.05bn (€7.4bn) for debt servicing, according to the MEF. Government expenditure stood at an estimated 32.9% of GDP in 2014, based on IMF figures, down from 33.9% the previous year and a recent high of 36.1% in 2012. This peak was the result of a combination of factors, including a large subsidy bill driven by high international oil prices. Other factors included increased government spending, such as salary hikes for civil servants against the backdrop of the Arab Spring, increasing operating expenses from Dh152bn (€16.54bn) in 2011 to Dh188bn (€20.45bn) in 2012, a nominal rise of nearly 24%. The IMF forecasts further growth to 31.7% in 2016. The 2015 budget’s total revenue was Dh268.1bn (€29.17bn), up 2.19% over Dh262.33bn (€28.5bn) in 2014. The largest source of revenue was both direct and indirect taxes at around 60% combined, followed by the loan revenues, donations and bequests category with 25.3% Government debt as a share of GDP fell steadily for most of the first two decades of the millennium, from 73.5% in 2000 to a low of 46.6% in 2008, according to IMF figures, before subsequently rising again, reaching 63.4% in 2014. The fund forecasts the ratio to start falling from 2015 onwards. The 2015 finance law forecasts expenditure on debt servicing to stand at Dh68bn (€7.4bn) in 2015, up 15.7% from Dh57.3bn (€6.23bn) the previous year. This represents 22% of planned government spending for the year.

Subsidy Bill

A major contributor to reductions in government spending and net borrowing is a recent reform of the country’s subsidy regime, the cost of which peaked at 6.5% of GDP in 2012, according to MEF data, accounting for almost the entirety of the year’s record budget deficit. For many years the government had subsidised a wide range of fuels, in addition to basic household items such as sugar and bread. However, in September 2013 it began to reduce subsidies for most fuel types, helping to bring down the year’s bill to 4.8% of GDP. And in January 2014 it eliminated subsidies for petrol and fuel oil, helping to achieve a fall to just 3% for the cost of subsidies for the year as a whole. In January 2015 the government also removed all remaining diesel subsidies, except for heating gas, which is largely consumed by low-income Moroccans, as the only subsidised form of fuel in the country and which now accounts for around 60% of the subsidy bill. Mamoun Tahri-Joutei, director of economic intelligence at BMCE Bank, told OBG that the figure should decrease further in 2015 to around 2.3% of GDP. Although the plan was implemented at a time of high oil prices, the removal of subsidies, and for diesel in particular, has been facilitated by declines in international oil prices, substantially cushioning the impact on Moroccan consumers. TahriJoutei told OBG, “It is good that the government is taking advantage of the current positive conditions.”

External Borrowing 

To help fund the fiscal shortfall, which has been twinned with a CAD (see analysis), in June 2014 Morocco issued a €1bn eurobond with a coupon of 3.7% and a maturity period of 10 years. The kingdom had previously tapped international debt markets in May 2013, when it raised $750m by reopening two existing dollar bonds. Morocco has an investment-grade international credit rating of “BBB-” for foreign currency debt and “BBB” for dirham-denominated bonds. Ratings agency Fitch most recently affirmed the rating in April 2015 and said that the outlook was stable.

In October 2014 Mohammed Boussaïd, the head of the MEF, said the government would need to borrow Dh24bn (€2.6bn) in 2015 and might consider a return to international capital markets to help raise this. However, Gharbi said the country’s improving financial system could obviate the need for such borrowing this year. “The CAD has been financed partly through foreign bond sales, which restarted in 2012, when Morocco launched its first dollar-denominated bond. However, with sustained low oil prices in 2015 and some luck, I believe the state will not be obliged to issue more foreign debt,” he told OBG.

Morocco’s international backers are taking measures to further protect the kingdom from unexpected threats to public finances. In July 2014 the IMF announced that it would make a $5bn line of credit, known as a Precautionary and Liquidity Line (PLL), available to Morocco to buffer it from any potential external economic shocks. The institution provides PLLs to countries with “sound economic fundamentals but with some limited remaining vulnerabilities which precludes them from using the Flexible Credit Line,” which is only available to countries with “very strong economic fundamentals.” The provision of the line follows the IMF’s extension of a $6.2bn PLL to the kingdom in 2012. The authorities have said they do not intend to draw on the line short of a “significant deterioration in external conditions.”

Foreign Aid

The kingdom is also receiving increased support from its biggest aid donor, the EU, and is the largest recipient of aid under the bloc’s European Neighbourhood Policy. In July 2014 the EU announced that it would provide Morocco with €890m of support under the policy for the period between 2014 and 2017, equivalent to a rise of 15% a year compared to aid for the period from 2011 to 2013. The aid will be focused on supporting reforms in four key areas, namely ensuring fair access to basic services, bolstering democratic governance, boosting employment and sustainable and inclusive economic growth, and improving the state’s institutional capacities.

The US is also a major donor to the kingdom. It provided $697.5m in aid to Morocco under a Millennium Challenge Corporation compact that ran from 2008 to 2013 and focused primarily on boosting agriculture, fisheries and artisanal industries.

“Morocco’s artisanal and handmade products are becoming more attractive in export markets,” Fatema Marouane, minister of handicraft and social and solidarity economy, told OBG. The kingdom has also been declared eligible to apply for a second compact, which would be worth around $480m.

Employment

Despite steady growth in recent years, the unemployment rate has stubbornly remained at between 9% and 10% over the last decade or so, having fallen steadily over the previous 10-year period. In 2014 the official figure rose to 9.9%, its highest level since 2005 and up from 9.2% the previous year. While 21,000 new jobs were created in 2014, this was not enough to keep pace with population growth. Weak job creation was in large part a result of the net loss of 32,000 jobs in the textile and garment industry. Urban unemployment rose 0.8 percentage points to 14.8%, while the rural joblessness rate grew by 0.4 percentage points to 4.2%. Unemployment affects urban youth in particular, as 62.6% of the jobless total was accounted for by Moroccans between the ages of 15 and 30, 80.1% of who lived in urban areas. In September 2014 Lahcen Daoudi, minister of higher education, scientific research and executive training, said that youth unemployment would continue to increase unless average GDP growth could be raised, echoing many previous assessments along similar lines.

Constraints

The HCP predicts a much stronger performance in 2015, thanks to expected robust GDP growth, and it forecasts the net creation of 170,000 new jobs over the year. Nevertheless, a number of factors appear to be constraining job creation. “Morocco’s long-term growth rate has been respectable for some time and is better than during the so-called ‘lost decade’ of the 1990s. However, it is not on the same slope as many other emerging markets, such as BRICS countries, and it is not enough to absorb the growing workforce,” said Jean-Pierre Chauffour, lead country economist for Morocco at the World Bank.

Chauffour told OBG part of the reason for this is a low return on investment levels. “The country is investing around 35% of its GDP, and non-agricultural GDP growth averages around 3-3.5%. For similar investment rates, Asian countries have achieved double that level,” he said, adding that without improved productivity high levels of investment would not be enough to boost growth. “Low productivity partly results from the fact that Moroccan companies tend to be both small and old compared to those in other countries, resulting in a lack of dynamic new businesses in the country. The exchange rate also appears to be overvalued, and is thereby favouring non-tradable activities such as services, transport and real estate, which traditionally see low productivity gains,” he also said, while citing challenges in the education system and low levels of societal trust and social capital.

However, productivity appears to be improving. According to the MEF, in recent years total factor productivity has moved into positive territory. Chauffour told OBG that the authorities understood the issues that need to be addressed to tackle such constraints. “Morocco has developed a number of plans to address these problems, and the king has spoken about how future wealth creation will have to be focused on immaterial wealth such as education and social capital, which is encouraging,” he said.

The kingdom is also looking to rebalance the basket of currencies to which the dirham is pegged, a potential first step towards greater liberalisation of the currency that could boost tradable activities. BaM is the body currently responsible for conducting monetary policy, the primary aim of which is to ensure price stability (see Trade & Investment chapter). The kingdom’s exchange rate peg to some extent limits the ability to which it is able to conduct independent monetary policy; nevertheless, as the IMF noted in its most recent Morocco country report, the existence of capital controls allows the monetary authorities some room for manoeuvre, and they have successfully maintained low levels of inflation in recent years.

Outlook

Morocco’s growth forecast for 2015 and 2016 is very bullish, and set to outpace that of 2014, supported by a better harvest, signs of recovery in its dominant trading partner and low oil prices. Raising average growth levels over the longer term will depend on a range of factors, such as improving competitiveness and productivity, and bolstering the education system. “There is nothing to stop Morocco doing better – it has political stability, well-trained senior civil servants, and a dynamic and creative young population,” said Chauffour. Inés Pérez-Durántez Bayona, economic and commercial councillor at the Spanish Embassy in Morocco, concurred: “The kingdom’s sector strategies and infrastructure development efforts are both well focused, so the challenge lies mainly in ensuring Morocco continues in the right direction.”

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The Report: Morocco 2015

Economy chapter from The Report: Morocco 2015