Morocco’s sovereign ratings raised due to continued reforms

Capital Intelligence (CI), the international credit rating agency, has raised Morocco’s long-term foreign currency and local currency ratings by one notch to BBB- and BBB, respectively. The sovereign’s short-term ratings are A3, and the ratings outlook is stable.

The upgrade reflects the implementation of structural fiscal reforms, which have helped put the public finances on a sounder footing and reduce government indebtedness. The ratings are also supported by the improvement in Morocco’s external finances and the good progress being made on economic reform.

The implementation of the government’s medium-term fiscal consolidation programme has helped to strengthen the budget structure and reduce the size of the fiscal deficit. The medium-term target of a budget deficit of no more than 3% of GDP by 2009 has been met ahead of schedule. The central government budget deficit (excluding privatisation receipts) dropped to 2.1% of GDP in 2006 and is expected to remain below 3% of GDP in 2007-08, reflecting improvements in tax administration, efforts to expand the tax base and curb subsidies, and a reduction in the government payroll. The structure of government debt has improved, with more than 80% of the total now in local currency, and the ratio of government debt to GDP is projected by CI to remain on a downward trajectory, reaching 57.7% by 2008 compared to 65.3% in 2005.

Current account surpluses, increased foreign direct investment, and prudent public debt management have contributed to the accumulation of foreign assets and a significant decline in external debt ratios. According to CI’s estimates, Morocco became a net external creditor in 2005. In the public sector, official reserves are expected to exceed public and publicly guaranteed external debt by the equivalent of 30% of current account receipts (CARs), or 13% of GDP, by end-2007. Public external debt service is comfortable, at less than 7% of CARs in 2006-08, and official reserves currently cover external debt falling due within a year more than six-fold.

Through a combination of broad-based structural reforms and initiatives to encourage investment in targeted industries the economy has become more diversified and its resilience to shocks, particularly weather-related and external shocks, has increased. Although overall economic growth will slow to just over 2% in 2007, because of an output contraction in the agricultural sector, non-agricultural growth is expect to increase by about 5% reflecting robust domestic demand, rising investment and the expansion of the tourism sector.

These improvements notwithstanding, a number of important credit-related challenges remain. These include the need to reduce public debt further, improve the business climate, strengthen the export base and create sufficient jobs for a young and growing population.