Younes Benjelloun, Partner and CEO, CFG Group, on the bond market

Younes Benjelloun, Partner and CEO, CFG Group

Morocco enjoys the most developed bond market in North Africa and one of the most advanced in the entire continent. This relatively high level of development was first begun with a set of reforms that have been gradually implemented by the Moroccan government, thus allowing for the emergence of a strong Treasury bonds market.

Following this, the evolution of certain macroeconomic and banking factors over the last few years has led to the increasing disintermediation of the financing of the economy along with the expansion of the market for corporate bonds.

The growth of the Treasury bond market was made possible by a succession of reforms undertaken by the Moroccan state in the mid-1990s, which lead to an explosion of Treasury bonds on the market.

This benefitted investors through higher liquidity and the possibility of making arbitrations between the various types of existing maturities and yields. At the same time, it was also a boon to the Moroccan state, which was then able to increase part of the domestic portion of its total debt while optimising the cost of financing.

However, over several years, the development of the Treasury bonds market was not followed by the significant growth of the corporate bond market. Up until a few years ago, this segment of the market was marked only by the presence of major private Moroccan enterprises and state-owned companies making use of the state guarantee.

But in the last few years a combination of factors has facilitated the expansion of the corporate bond market; foremost among them, the decrease in the rates of Treasury bonds’ (benchmark rates) has allowed the corporate bond market to become more competitive compared to banks in terms of the cost of financing, and the chronic deficit of the balance of payments has resulted in the contraction of bank liquidity and the slowdown of bank deposit growth (the banking sector loan-to-deposit ratio has exceeded 100% for the first time ever). This last situation naturally brought banks to increase their financing through capital markets. They went about this mainly via certificates of deposit and subordinated bonds.

This has also led banks to allocate a higher proportion of their loan books to households in order to safeguard their interest margin given the rise in the cost of their resources, thus pushing private companies to make more substantial use of the bond market for their debt financing. Thus, the outstanding corporate bonds stood at $9bn at end of 2012 (representing 26% of corporate bank loans) compared to $3bn in 2007 (representing 14%).

The Moroccan bond market, in all its compartments, has seen strong momentum over the last few years, and it is very likely that this trend will continue going forward with the increasing disintermediation of financing from the economy. In terms of yields, the corporate bond market today presents a limited range of spreads, ranging from 50 to 250 basis points depending on the quality of issuers.

With the market’s development expected to continue for the foreseeable future, this range of spreads is forecast to widen through better appreciation of the risk by investors who are associated with each bond issue. And in this respect, the inevitable and natural development of a credit rating system will play a major role in both the transformation of these spreads and the bond market overall.

This is also likely to be accompanied by higher financial discipline at the issuer level under market pressure, with the projected development of bond issues, including financial covenants.

Following the recent impressive development of the corporate bond market, the natural next step will be the emergence of a more sophisticated market through the development of securitisation and the introduction of derivatives. This expected evolution should significantly enlarge the size of the market, boosting its liquidity and improving its efficiency.

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Younes Benjelloun

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The Report: Morocco 2013

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