Over the course of 2012, growth in the Moroccan economy slowed, set back by a combination of unfavourable global economic trends, a volatile exchange rate, a hit to its primary sector, agriculture, and limited fiscal reform. Recession in the eurozone, Morocco’s primary trade partner, has made for weaker demand of the kingdom’s exports, and persistently high prices for both oil and food on the global market have compounded the growing trade deficit. Nevertheless, prospects for the kingdom remain positive. The government’s attentiveness and willingness to address the most pressing socioeconomic concerns largely spared it from the Arab Spring turmoil affecting its neighbours, and foreign investor interest in the country remains high.

BUMPY YEAR: In the wake of the regional unrest linked to the Arab Spring, major declines in Morocco’s tourism sector, whose average contribution to GDP was 15% over the last decade, contributed to the national revenue gap. The drop in arrivals was compounded by a drought affecting the agriculture sector, which is a major source of national revenue and employs an estimated 46% of the workforce. According to the Ministry of Economy and Finance, crop yields fell by 40% in 2012 compared to 2011. These, combined with a significant increase in expenditure on social programmes, resulted in a budgetary deficit of 7.1% GDP in 2012. The IMF measured Morocco’s GDP at current prices to be Dh803.2bn (€71.4bn) in 2011, and estimated this would reach Dh847.7bn (€75.36bn) in 2012.

Despite the setbacks, Morocco has been looking to foreign markets to fuel its economic expansion. By relying on export-led growth, the country aims to reduce its balance of payments deficit and high import bill, particularly for energy, which limits the kingdom’s policy flexibility. A review of its subsidies programme, which keeps the price of food and gas low, is also under way to bring the country’s budgetary deficit under control.

PLAN OF ACTION: Morocco remains committed to a number of expansionary fiscal policies launched in surplus years, including greater infrastructural spending and tax breaks aimed at attracting foreign direct investment (FDI), specifically those investments that bring more added value. The trend in public expenditures fits within the country’s broader strategic development framework, enshrined in the National Pact for Industrial Emergence (Pacte National pour l’Emergence Industrielle, PNEI) for the export and industrial sector, Green Plan for the agriculture sector and Plan Azur for tourism. The schemes are part of an effort to raise performance and output in key revenue-earning sectors, as well as boost employment and private capital formation.

Set forth in 2008, PNEI outlines a series of policy objectives focusing on areas of comparative export advantage. The plan has paid off for the country, helping it raise funds to plug holes in its budget gap and maintain economic and social progress. Morocco is the largest recipient of EU funds under a programme targeting the bloc’s neighbours, and it is the main beneficiary of African Development Bank (AfDB) funding, accounting for €1bn of approved funding out of a total €2.7bn budget for active projects. “Morocco has developed sector-focused strategic plans based on accurate and realistic diagnostics,” Amani Abou Zeid, resident representative for AfDB in Morocco, told OBG. “It makes the work easier for donors because it helps us align ourselves to a shared vision with the country,” she said.

The value of PNEI, which emphasises public-private partnerships, was evident with the launch of several recent industrial initiatives. French carmaker Renault opened its Tanger-Med assembly factory in February 2012 in Tangier. The factory is expected to export 90% of its targeted 400,000 cars from the free trade zone. Canadian aeronautics firm Bombardier is also building up a presence in Morocco, and in February 2013 began production at a temporary factory in the Casablanca region, close to where the permanent facility will eventually be located. Canada and Morocco are currently working on a free trade agreement, which would be Canada’s first with an African nation, to promote and protect investment between the two economies.

GROWTH: The budget released in April 2012 highlighted expectations and mechanisms for economic revival. Still, the budget envisioned economic growth would be between 2% and 3%, short of the 4.9% annual growth rate in 2011. According to the High Commission for Planning (Haut Commissariat au Plan, HCP), the main reason for the drop was a 8.7% decline in agricultural output, as well as a 5.4% dip in mining activity, combined with lower remittances and trade with Europe.

Despite the slowdown in the eurozone and weakened sectors, encouraging projections were supported by the resiliency of certain sectors, like telecommunications and textiles, and the budding manufacturing industries under the PNEI, like automobiles, aeronautics and mining. After a dip in 2010, the demand for Moroccan phosphates – currently, it is the world’s largest exporter – recovered over the course of 2011-12, thanks to an evening out in the commodity’s market price. The price for phosphate, which in 2012 represented 26.3% of Morocco’s total exports, stabilised at $185 per tonne in 2012, down from the $203 per tonne average in 2011, but significantly up on the $122 average in 2010, helping stimulate demand.

INDICATORS: Despite the dramatic drop in agriculture in 2012, as crop yields fell by 40%, from 85m quintals in 2011 to 51m quintals in 2012, due to drought, above-average rainfall in the latter half of 2012 has helped reconstitute the soil, with hopes high that 2013 will be a better year. Cereal production alone is expected to reach 7m tonnes, up from 5.1m tonnes in 2012 and nearing the 8.1m tonnes harvested in 2011. The rebound in agriculture, which typically represents about 20% of GDP, has led the HCP to predict GDP growth for 2013 of 4.8%, up from the 2.7% with which Morocco rounded off 2012. Other sectors are also displaying upward movement. In the tourism sector, hotel nights went up 3%, a better showing than was expected in the wake of the Arab Spring. Other relatively high-performing, non-agricultural sectors in 2012 included: telecoms, making up 14.8% of GDP that year, public sector employment (11.7%), water and electricity (11.6%), automobile manufacturing (8.3%) and textiles (5.6%).

TRADE: In 2012 Morocco imported twice as much as it exported, with exports reaching Dh183.2bn (€16.3bn) against imports at Dh381.7bn (€33.9bn). While total exports in 2012 grew 4.7%, total imports rose 6.3%, and by the end of 2012, Morocco hit its highest trade deficit on record, at Dh197.2bn (€17.5bn). In 2011 Morocco’s main import markets were the EU, the US, Saudi Arabia, China and Russia, in that order, with the EU being the clear leader with 47.3% of all imports. The kingdom’s main export markets in 2011 were the EU, India, Brazil, the US and Pakistan, respectively.

Morocco imports nearly all its energy needs (nearly 95%), weighing heavily on its budget. In 2012 energy imports rose 10%, further compounding the strain. Morocco’s other main imports are capital equipment, which grew 8% in 2012, electronic machinery, iron and steel. In terms of exports, several sectors stood out for their performance in 2012: automobiles grew by 22.2%; agribusiness 11.8%; textile manufacturing 11%, and aeronautic parts 10.3%, according to Ministry of Economy and Finance figures in November 2012. Growth was comparatively higher in industries targeted by PNEI. Meanwhile, the state-run OCP, which has a monopoly on the exploration and extraction of phosphates in Morocco, saw phosphate export sales worth Dh53.7bn (€4.8bn) in 2011, up from Dh40.1bn (€3.6bn) in 2010. The OCP is the top global exporter of phosphate rocks (36.4% of the market) and phosphoric acid (51%).

PARTNERSHIPS: Morocco’s proximity to Europe and its political resilience amid regional unrest in 2011 have been among its strongest selling points to trade partners. The kingdom has done well by securing several free and bilateral trade agreements with key partners, greatly boosting FDI. Through these agreements, Morocco has access to about 1bn consumers, with 60% of the world’s GDP, officials estimate. Key deals include the Agadir Agreement, a free trade association that Morocco signed with Tunisia, Egypt and Jordan in 2001 and which finally came into full force in March 2007. The kingdom has also signed a free trade agreement with the US, which came into effect on January 1, 2006.

Meanwhile, in October 2012, the EU and Morocco extended their existing Association Agreement, which had entered into force March 1, 2000, to include duty-free sales of agricultural and fisheries products between the North African country and the 27-nation bloc. Given Morocco’s ambition to be a gateway to Africa, local exporters are eager to see the kingdom sign a free trade agreement with the West African Monetary Union and resolve its diplomatic dispute with Algeria, which was responsible for closing the border between the two neighbouring countries.

ENERGY NEEDS: One of Morocco’s top aims is to implement new schemes to ease the burden of energy imports. Despite being surrounded by oil-producing states, Morocco has not yet found exploitable hydrocarbons reserves within its own territory. Many believe it is only a matter of time before deposits are found, as the kingdom is in a favourable position given that every other North African country produces oil. This conviction is fuelling continued investments in exploration. Chevron renewed its oil prospecting contract in 2012, a hopeful sign, but commercially viable quantities of oil have yet to be found (see Energy chapter).

While oil prospecting continues, Morocco is also considering a renewable energy self-sufficiency programme. Successful promotion of such would enable the kingdom to meet growing energy needs linked to infrastructure development and FDI inflows, according to Francois Duquette, associate at local law firm Naciri & Associés Allen & Overy. These initiatives would address development-related obstacles, like the rapidly rising rate of electricity consumption, which between November 2011 and 2012 jumped 9.6%.

Beyond solving domestic energy needs, a renewable energy programme could allow the kingdom to switch from being an energy importer to a net exporter to Europe, which is looking for clean energy sources, as well as to West Africa, which generally lacks energy, clean or otherwise, said Duquette. Stakeholders are looking at solar and wind power, which grew 38.1% and 27.1%, respectively, in the global renewable energy industry between 2000 and 2010, according to L’Observateur de l’Entreprenariat, a magazine published by BMCE Bank. Morocco’s wind potential is estimated at 25,000 MW across its territory and 3500-km coast. The potential for solar power is high given the 3000 hours of sunshine the country receives each year, radiating 5 KWh per sq metres per day, according to the magazine.

TRADE DEFICIT: By November 2012, Morocco’s trade deficit had expanded 11.8% year-on-year, and by the year’s end climbed to being the country’s highest on record, at 7.9% of GDP. This is not surprising given the number of trends that have depressed the kingdom’s trade balance. Remittances from the 3m Moroccans living abroad, 2m of them in financially struggling Europe, fell by 4% over the year, while receipts from tourism dropped 2.3% with the sector’s slowdown. Nevertheless, FDI in 2012 grew 14% over 2011, reaching Dh29.2bn (€2.6bn). This, combined with the recovering agriculture sector and expected fall in the global price of oil in 2013 – from about $105 to around $99.70 per barrel – is hoped to ease the imbalance in 2013.

FISCAL POLICY: Despite constraints, falling revenues and slowdown in its largest trading partner, the government has maintained an expansionary fiscal policy, as seen in the budget passed in December 2012. The Dh358bn (€31.8b) budget aims to reduce the the central government’s budgetary deficit to 4.8% of GDP, based on an assumed GDP growth rate of 4.5%, an average oil price of $105 per barrel and an exchange rate of Dh8.5 to the dollar. The new law also hopes to stimulate growth by clarifying the tax system and providing tax cuts. Additionally, although slightly less than the Dh188bn (€16.7bn) budgeted for 2012, public investment is set to reach Dh180bn (€16.0bn) in 2013.

SUBSIDIES: The government has long operated a sizable subsidy programme to alleviate burdens on the poor, and the most recent national budget at first allocated Dh46.5bn (€4.1bn) in subsidies for 2012-13. Subsidies, delivered through the Compensation Fund, a vehicle created to keep sugar, flour and oil costs low, are the main contributor to the national deficit, representing 90% of the figure. By year-end 2012, subsidies cost Morocco Dh54.9bn (€4.9bn) versus Dh41.1bn (€3.65bn) in 2011, representing a 33.5% increase. Meanwhile, the deficit reached Dh62.2bn (€5.5bn) as of December 2012, against Dh40.5bn (€3.6bn) in 2011. While subsidies help the government address pressing social concerns, reform is imminent. Authorities say they are working on a new subsidy scheme for 2013 that would target only those in need. But the social climate remains volatile two years after the February 2011 protests, and taking away any benefits without a clear channel to redistribute the funds is likely to stir unrest.

GAINING GROUND: By year-end 2012, the state’s revenue grew 3.3%, indicating economic growth and improved tax collection. Corporate tax revenue increased 1.7% to Dh43.2bn (€3.8bn); income tax revenue grew 3% to Dh31.9bn (€2.8bn), thanks to the Dh600 (€53) salary increase given to all civil servants in May 2012. Value-added tax, however, fell by 1.1% to Dh52.3bn (€4.6bn). At the same time, Morocco has also been providing tax breaks to international investors as a way of boosting foreign interest. In the offshoring sub-sector alone, 22 firms enjoyed reductions on income tax.

One way Morocco hopes to overcome the current economic challenges is by attracting foreign financing, both aid and investment. It is estimated that to stay afloat in 2013, Morocco will need to cover about 9% of its financing from sources abroad. This is an increase from the 8.4% and 8.1% of foreign funding secured in 2012 and 2011, respectively. In December 2012, the kingdom successfully floated a $1.5bn dollar-denominated bond issue with the assistance of Citibank Maghreb. The country had previously secured a $6.2bn precautionary line of credit from the IMF, which helped raise investor confidence in the local economy.

“Morocco’s debut dollar eurobond issue was a well timed re-entry to the international capital markets, setting a benchmark for future issuance by Moroccan companies and financial institutions. The size was in line with the government’s short-term needs, although they could have raised more given the significant interest shown by a diverse pool of international investors,” Walter Siouffi, CEO of Citibank Maghreb, told OBG.

The bond sale raised foreign reserves to Dh140bn (€12.4bn), equal to just four months’ worth of imports, and still markedly below the Dh168 (€14.9bn) at year-end 2011 and Dh192bn (€17.1bn) of 2010. In addition to the bond issue, King Mohammed VI completed an October tour of Gulf countries, which may have helped attract GCC investment. In February 2013 international media reported that the first tranche of a $2.5bn aid package from Gulf states, including Kuwait, Saudi Arabia, the UAE and Qatar, had been delivered.

MONETARY POLICY: The central bank, Bank Al Maghrib, worked hard in 2012 to keep prices stable. Given the lack of liquidity, it injected large sums of money into the economy by providing advances to banks. It also expanded the list of instruments that banks could use as collateral for advances, including certificates of deposits. In addition, it cut foreign reserve requirements by a third, from 6% to 4%, to boost liquidity.

By digging into its foreign currency reserves, Morocco reduced its net external assets, which had already decreased 12.4% in 2011. The added 18% drop in 2012 exacerbated the domestic liquidity crisis. But while the central bank’s move prevented spending from flagging and allowed creditors to continue lending, lenders nevertheless extended considerably less credit. The total value of bank loans fell from Dh65.4bn (€5.8bn) in 2011 to Dh31.1bn (€2.76bn) in 2012.

Fluctuations in monetary policy caused bond rates to rise, setting back the treasury, which is used to replenishing its purse in a more liquid market. Still, Bank Al Maghrib was able to keep inflation under control at 1.8% in 2012 (between 2000 and 2011, inflation hovered at 1.6%). Morocco maintains a conventional peg arrangement with the basket of currencies to which the dirham is tied. This fixed exchange rate increases certainty for exporters and importers. While falling foreign reserves hiked the bond rate, reducing bonds’ monetary value, the move allowed Moroccans to sustain purchasing power in 2012, a key component of the economy. According to the Ministry of Economy and Finance, consumer spending increased 4.25% in 2012, compared with 3.2% in 2011, despite less liquidity.

JOBS: Official unemployment rose slightly but stayed below the 10% mark, up on the six-year low of 8.9% in 2011. The unemployment rate rounded out 2012 at 9.1%. Those most affected by unemployment are young urban graduates, especially women. In 2012 127,000 jobs were created, however about 126,000 positions were eliminated that year as well, 111,000 in rural areas and 15,000 in cities, according to the HCP.

Between 2011 and 2012, 10,000 more people were added to the unemployment registry. The World Bank estimates that 30% of Moroccans between the ages of 15 and 29 (who make up around 44% of the working-age population) were unemployed as of June 2012. Furthermore, official unemployment rates in Morocco do not take into account the large informal economy or those working seasonally.

The persistently high unemployment rate has been a major cause of protests in the kingdom; these peaked in 2011, and have put pressure on the government to make changes. Partly meeting the demand of activists, the government has implemented a number of social and economic reforms, including a 40% increase in public sector jobs included in the April 2012 budget.

FROM ABROAD: The overall value of foreign investment grew 14% in 2012, and the actual number of projects increased by 3-4% compared to 2011. Three major investments in 2012 were conducted via the Société Nationale des Investissement (SNI). Sofiprotéol, French oilseed giant, bought 41% of major Moroccan agro-industry player Lésieur Cristal for €115m; French dairy firm Danone spent €550m to up its share of Morocco’s largest diary producer, Centrale Laitière, to 67%. US-based Kraft Food signed an agreement with SNI to buy the remaining 50% of local biscuit firm BIMO that it did not already own for Dh1.3bn (€115.6m), providing Kraft with total ownership of the company.

AMDI: In response to the effects that the economic woes in Europe have had on Morocco, the government and the Moroccan Investment Development Agency (Agence Marocaine de Développement des Investissements, AMDI) have spearheaded a campaign to reach beyond the country’s traditional sources of FDI.

“Since the start of the crisis, our goal has been to diversify the sources of FDI beyond the traditional investors of France and Spain,” Ali El Yaacoubi, head of market development research at AMDI, told OBG.

This includes a number of incentive schemes, like tax breaks and infrastructural support, as well as an aggressive approach to promoting the country whereby AMDI proactively courts investors in target industries. The agency is building upon the government’s existing economic development strategy, prioritising sectors such tourism, agriculture, energy, logistics, transportation and industry. In line with PNEI’s vigorous industrial buildup, AMDI is particularly focusing on investments in aeronautics, automobiles, electronics, information technology, textiles and agro-industry.

Arab investors made up 36% of the total 2012 inflows. Most of these investments were in tourism and real estate. “Since AMDI’s creation in 2009, there has been a proactive approach to attract investment to Morocco,” said El Yaacoubi. AMDI has offices in France, Spain, Italy, Germany, the US and, since 2012, in the UAE. The agency is now considering opening additional offices in London and in Asia as well.

In 2010 Morocco was one of the few African countries to see increases in FDI projects. Over the course of 2011, total FDI into Morocco grew 40% to $3.44bn, rounding off the year as the third-highest recipient of FDI on the continent, following Nigeria and South Africa, and landing a spot among the top five for the first time. This led fDi Magazine to label Morocco in 2011 as “African Country of the Future”, another first-ever accolade for the kingdom (see analysis).

BUSINESS CLIMATE: As Morocco aims to attract more investment, it is working hard to improve its competitiveness. Smaller firms, in particularly, may find it challenging to navigate the country’s bureaucracy. In 2009 the government formed the National Committee for the Business Environment (Comité National de l’ Environnement des Affaires, CNEA). CNEA sponsors new business fast-tracking laws by consulting with the private and public sectors to identify key administration bottlenecks. However, many local business actors agree that the real obstacle is not a lack of laws, but rather their implementation. As such, CNEA is also charged with execution of the laws following their adoption and is collaborating with the World Bank to determine the best ways to measure their impact (see analysis).

REFORMS: Morocco is implementing a series of reforms in a bid to both improve social welfare and align itself with EU standards as part of its partnership requirements to expand trade with the European bloc.

These reforms include a revision of the country’s banking laws, opening up the system to Islamic institutions and a liberalisation of the stock exchange, giving more authority to the regulator. Any operational change on the bourse currently requires the passing of a law followed by a text of application, limiting the regulator’s ability to arbitrate. The new law is expected to allow short-selling through borrowing and reselling securities (see Capital Markets chapter).

The reforms will also further open the economy to relatively closed sectors, such as phosphate mining, which remains the monopoly of OCP. Morocco’s mining potential is under-exploited, a situation analysts blame on archaic laws. The current mining code has not been updated since 1951. With the introduction of a new strategy and the passage of a new code, the Ministry of Energy and Mines expects to overhaul the sector and attract new investors (see Mining chapter).

OUTLOOK: Despite the setbacks Morocco experienced over the course of 2012, there are strong indicators pointing to the economy’s capacity to grow beyond current constraints. The government’s commitment and attention to socioeconomic reforms necessary to stimulate growth and alleviate the high unemployment rate, combined with a number of strategies to diversify the economy and attract foreign investment, inspire confidence that the local economy is steadily expanding and growing stronger. Reforms that prioritise job creation, manufacturing and a better business environment are key to the economy’s future and maintaining the interest of those foreign investors it aims to attract.