The Moroccan Flag
The flag of Morocco dates back to 1912 and contains red and green, traditional colours in Arab flags. The five-pointed star represents the five pillars of Islam and signifies the association between God and the nation.
Morocco: At a glance
Structure of the economy
Mid-1980s reforms have modernised the economy, with services (51% of GDP) and the industrial sector (25% of GDP) playing an increasing role. Despite efforts to diversify, Morocco remains highly dependent on the agriculture sector, which contributes 15% of GDP and employs 38% of the total labour force. As such, the economy is vulnerable to adverse weather conditions; the incidence of drought in the last decade has become more frequent and the lack of investment in irrigation means that the harvest is subject to very wide fluctuations. This disruption has resulted in erratic GDP growth, which has in turn hampered economic development and left large swathes of the rural population in poverty. The leading exports are agricultural produce, semi processed goods, consumer goods and phosphates. As its biggest trade partner, Morocco has a large sensitivity to the cycle in the EU.
The economy slowed sharply last year as it was buffeted by both the pandemic and an agricultural shock, entering its first recession since 1995. The economic contraction was broad based; domestic demand slowed sharply as lockdowns took hold, exports were severely impaired by the disruption to global supply chains, while tourism revenues almost completely collapsed. At the same time, agricultural production fell sharply as a result of a severe drought. While the last twelve months have been a challenging period for Morocco, the IMF expects the economy to rebound strongly, with GDP forecast at 4.5% in 2021 and 3.9% in 2022; the recovery is likely to be underpinned by a credible domestic vaccine rollout, ongoing recovery in global trade and the normalisation of agricultural output. In fact, the positive view for Morocco was specifically mentioned within the IMF’s most recent World Economic Outlook.
The Central Bank of Morocco reacted swiftly to the pandemic by reducing its base policy rate by 75bps, injecting liquidity into the system, suspending loan repayments for small businesses and loosening capital requirements for the banking system. The central bank continues to support the economic recovery; at its policy meeting in June, interest rates were left at an all-time low at 1.5%. While concerns remain on the inflation front, with CPI reaching 1.7% over recent months, the central bank believes that the price pressure “would be of a temporary nature”. Optimism remains at the central bank, with 2021 growth projections unchanged at 5.3%; “recovery is under way at a steady pace, supported by the easing of restrictions, the accommodative financial conditions and the fiscal stimulus”.
The economic damage wrought by the ongoing pandemic and last year’s drought has resulted in a sharp deterioration of the fiscal outlook, with debt to GDP expected to approach 80% this year. That said, fiscal consolidation is expected over the coming years; the FY21 budget forecasts the fiscal deficit to fall from -7.8% in 2020 to -6.5% in 2021. The prospects for fiscal recovery have been further smoothed by support from the IMF; last year Morocco drew on all resources available under the Precautionary and Liquidity Line (PLL) arrangement, with the quota around $3bn or 3% of GDP. Fiscal resilience is further underpinned by healthy FDI flows and a comfortable stock of foreign exchange reserves; FX reserves are estimated to have increased by 26.6% in 2020, reaching 30% of GDP this year.
Morocco’s political system is a hereditary constitutional monarchy; following a referendum in 1996, new reforms were rolled out to institute a two-tier legislature to further the democratization process in the country. That said, the monarchy keeps a tight grip on power; the King legislates via royal commissions, controls the judicial branch via his appointment privileges and has the power to enact royal decrees. As such, constitutionally, the legislative, executive and judicial branches of government are controlled by the King. Reforms undertaken in the wake of the Arab Spring in 2011 have done little to alter this influence. Although the political backdrop remains stable, high levels of political disaffection are clear to see, with regular street protests expressing socioeconomic/political grievances. Morocco’s municipal, regional and legislative elections will all take place in September 2021.
Bottom line: Silver medal
We are optimistic when it comes to the outlook for Morocco. From a bottom up standpoint, the recovery is on firm footing, underpinned by a recovery in domestic and external demand, and the high prospects for this year’s harvest. This robust outlook for the recovery is reflected by favourable IMF forecasts over the next two years. At the same time, the domestic rebound continues to enjoy support from Central Bank of Morocco; stimulus remains in place despite increasing price pressures. That said, we do note that the fiscal backdrop has deteriorated. However, we believe that there is government commitment to stabalise the fiscal slippage since the pandemic, which has been underpinned by IMF support.
From a structural perspective, as noted in our Roadmap for Q3 and Beyond, we believe that the current backdrop is complicated for emerging markets. That said, in our view, there are selective opportunities to extract alpha from EM. Why? As noted under our investment theme – Sticky Inflation, Structural Headwinds – we stick to our longstanding view that recent price pressures are transitory. As such, we believe that the Fed will introduce a controlled normalisation of monetary policy under the AIT framework, which will encourage extracted in selective carry positions; we believe that with the recovery well under way, Morocco represents a solid opportunity in this respect.
1. United Nations
3. The World Bank
4. Source: https://tradingeconomics.com/morocco/interest-rate
Olympics data: Olympiandatabase.com
All other data is ESLJ, 2021.
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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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