Solid fundamentals to cope with the shock

EcoEmerging// 2nd quarter 2020  
Solid fundamentals to cope with the shock  
The Moroccan economy will see significant consequences from the coronavirus pandemic. Tourism has been at a standstill since  
March and will remain so until May at the earliest. The automotive sector and remittances from the Moroccan diaspora will also be  
hit by the crisis in Europe. However, and provided that the situation improves in the second half of the year, Morocco should be  
able to avoid recession. Macroeconomic fundamentals are solid and the country will benefit from a substantial fall in oil imports.  
Moreover, the authorities have reacted swiftly to dampen the shock.  
The Moroccan economy had been expected to see a return to more  
1- Forecasts  
dynamic growth, after a mixed picture in 2019. Initially expected at  
.5%, economic growth has been revised downward to 2.3% by the  
2019 2020e 2021e  
Central Bank. Given the size of the shock that lies ahead, this could  
prove optimistic, even though we believe that the economy is likely  
to avoid recession this year. The authorities have reacted swiftly,  
and Morocco has only limited exposure to the turmoil in financial  
and commodity markets. Provided that there is a recovery in the  
second half of the year, real GDP growth could reach 0.5% in 2020,  
the lowest level in twenty years. However, forecasts are subject to  
big uncertainties.  
Real GDP growth (%)  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
Currentaccountbalance / GDP (%)  
e: BNP Paribas Group Economic Research estimates and forecasts  
- Contribution of the tourism sector to the economy  
of GDP  
Economy under pressure: the authorities act swiftly  
In addition to a new fall of around 3% in the value added of the  
agricultural sector (12%-13% of GDP, 1/3 of employment) due to  
unfavourable weather conditions, the economy will also suffer from  
the effects of the coronavirus pandemic. Tourism has been at a  
standstill since March. Two-thirds of the tourist season comes from  
June onwards. But with 80% of tourists (excluding the Moroccan  
diaspora) coming from Europe, the losses will be significant in a  
sector that accounts for more than 8% of GDP, which is the highest  
level in the region (Chart 2). Channels of transmission will go  
beyond the sole tourism sector. Europe accounts for 60% of the  
Kingdom’s exports, 68% of remittances from Moroccans living  
abroad and more than 70% of foreign investment. The automotive  
sector, which is now Morocco’s leading source of exports, is  
particularly vulnerable, even though its development is not  
Arabia S.  
Source: WTTC  
Other supportive factors should also be taken into consideration,  
notably the solidity of the financial system whose activity is funded  
thanks to a large base of domestic deposits and which has only a  
limited exposure to the tourism sector (less than 2% of outstanding  
loans). Banks look also well capitalized to cope with rising credit risk  
despite poor asset quality (the non-performing loan ratio is 8%).  
Above all, macroeconomic fundamentals are sufficiently robust to  
absorb a temporary shock.  
A marked deceleration in non-agricultural growth is thus expected  
this year. However, it should not collapse. A monitoring committee  
has been established to respond to the effects of the pandemic.  
Deferrals of social contribution payments until end-June have  
already been announced, as have fixed-rate compensation  
payments for employees of companies in difficulty. Consideration is  
also being given to measures to help workers in the informal sector.  
This will be financed from a special fund of nearly MAD 30 billion  
 External accounts: a manageable shock  
With 15% of foreign-currency receipts generated by the tourism  
sector, automotive exports accounting for 27% of exports and  
remittances from the Moroccan diaspora representing 13% of  
current account receipts, pressure on external accounts will be  
strong. But as an oil importer, Morocco will also benefit from the  
marked fall in the price of the Brent. Even assuming a Brent close to  
USD40/barrel on average in 2020 (and thus a recovery in the  
second half of the year), imports of oil products would fall by more  
than 2 points of GDP, which would help to mitigate somewhat the  
deterioration of the current account deficit (5.9% of GDP in 2020  
2.5% of GDP), of which MAD 10 billion will be provided by the  
government and the remainder by voluntary contributions.  
The Central Bank has also cut its policy rate by 25 basis points to  
%, and has introduced a series of measures that will triple the  
refinancing capacity of banks. With inflation fluctuating at around 1%,  
the monetary authorities have room for manoeuvre for further policy  
EcoEmerging// 2nd quarter 2020  
against 4.6% in 2019). At this level, the coverage of financing  
requirements could prove difficult, given the downward pressure on  
foreign direct investment. Net FDI flows fluctuate around 2% of GDP.  
Furthermore, a larger current account deficit cannot be ruled out.  
However, external account stability does not look threatened.  
- Sovereign spreads  
basis points  
External debt is moderate at 45% of GDP, of which two-thirds have  
been taken out by the government or state-owned companies (with  
government guarantees) at long-term maturities. External debt of  
the private sector reaches only 7.5% of GDP and is mainly in the  
form of trade credits (70% of the total). In contrast to many other  
emerging economies, Morocco is thus largely insulated from the  
turmoil in international financial markets. Morocco’s sovereign  
spreads have widened since the end of February but remain  
relatively low (Chart 3). However, a fresh eurobond issue, following  
that in November 2019, remains in the realm of the hypothetical  
given the current high levels of risk aversion towards emerging  
Morocco Emerging South Africa Turkey  
Source: JP Morgan  
Civil service recruitment has already been frozen, other than for the  
health and interior ministries. Energy subsidies will also fall as gas  
prices come down. Even so, with subsidies accounting for barely  
Forex reserves remain comfortable. At the end of 2019, they stood  
at USD25.3 billion, or the equivalent of 5.4 months of imports of  
goods and services. This is also three times the stock of short-term  
debt. In addition, the authorities went just to announce that they will  
draw on the IMF’s Precautionary and Liquidity Line (PLL). Renewed  
in December 2018 for two years, the PLL makes a total of  
USD 3 billion available. This is not a loan but an insurance to protect  
an economy against an exogenous shock, which means that  
external public debt will be not impacted.  
% of total government spending, the potential gains in this area are  
limited. The greatest flexibility is to be found in capital expenditure.  
With a budget of MAD70 billion (21% of total spending), a 10% cut  
in CAPEX would reduce spending by 0.6 points of GDP. Therefore,  
we are not expecting a significant worsening of the budget deficit  
5% of GDP).  
The government will also continue to benefit from favourable  
conditions to meet its financing needs. The local debt market is  
captive with negligible participation of non-resident investors, and  
liquid. Despite central government debt of 65% of GDP, interest  
payments are moderate at 2.4% of GDP and 11% of tax receipts.  
Around 80% of central government debt is denominated in MAD.  
Greater exchange rate flexibility could also help to absorb the shock.  
The dirham’s fluctuating band has been widened in early March  
from +/- 2.5% to +/-5%. Since the start of the reform in January  
2018, the dirham has been remarkably stable and the Central Bank  
has virtually stopped intervening in the interbank market. Initial  
information suggests that this is still the case even if emerging  
pressures on the MAD suggest that monetary authorities could  
resume their interventions. That’s said, any depreciation of the MAD  
would remain modest. Furthermore, the vulnerability of the economy  
to exchange rate fluctuations is reduced thanks to low inflation and  
the moderate external indebtedness of the government and  
Spending cuts likely to help public finances  
The situation in the public finances does not give cause for major  
concern, even though a reallocation of spending, or even cuts, look  
inevitable. The latest estimates of the Central Bank now assume a  
budget deficit of 4% of GDP in 2020, from an initial estimate of 3.8%.  
However, this slight increase of 0.2 points of GDP does not take  
account of the measures that the government might take to prop up  
the economy, starting with the allocation of MAD10 billion (0.8% of  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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