Fitch Confirms Morocco’s ‘BBB-’ Rating, Highlights Consequences of Govt. Deadlock

The international ratings agency Fitch Ratings has reaffirmed Morocco’s long-term foreign currency issuer default rating at “BBB-” with a stable outlook.
Fitch also put Morocco’s national economic growth forecast at 4.6 percent in 2017, while stressing the dire consequences of the six-months governmental deadlock.
“Morocco’s ratings are supported by macro stability, a track record of prudent economic policies and a budget deficit below the ‘BBB’ category median,” stated the agency in its latest note.
For Fitch, “these factors are balanced against weak development and governance indicators, and high general government debt and current account deficits relative to peer medians.”
A “BBB” rating is a bond rating assigned to an investment grade debt instrument. It reflects an opinion that the issuer, in this case Morocco, has the current capacity to meet its debt obligations but faces more solvency risk than an A-rated issue and less than a BB-rated issue if business, financial, or economic conditions change measurably.
Bond investors rely on bond ratings from organizations like Fitch Ratings to evaluate the default risk associated with both corporate bonds and municipal bonds.
The agency also explained how GDP growth has recovered from its sharp drought-induced slowdown in 2016, expecting it to average 3.8 percent over the 2017-2019 period. For Fitch, this rate will be exceed that of the “BBB” median set at 2.9 percent.
Echoing the findings of several other Moroccan and international economic institutions, Fitch stressed national economic growth’s dependency on the volatile agriculture sector. The agency believe that during the current and upcoming seasons, economic activity would be mainly supported by the rebound in agricultural production.
“After contracting by 63.4 percent the previous year due to the shortage in rainfall, cereal crop output will soar by 187 percent during the current season and will decline in 2018 as favourable base effects will run out,” explained the agency.
As for non-agricultural growth, Fitch expect it to pick up some momentum, “lifted by cyclical tailwinds, including the recovery in agricultural employment, lower food prices and firmer activity in the eurozone.” Consequently, the agency projects GDP growth to “accelerate from 1.2 percent in 2016 to 4.6 percent in 2017 and slow down to 3 percent in 2018.”
The Aftermath of the Governmental Deadlock
For the agency, the six-month governmental deadlock was not without consequences. According to the agency, the delay in the formation of the government and the postponement of the 2017 budget hindered active fiscal consolidation and growth-enhancing reform.
While El Othmani’s government is committed to its predecessor’s industrialisation strategy and debt reducing strategy, for Fitch, the achievement of these policies as well as the reform process will now be slowed down due to the governmental deadlock and possible political challenges.
In Fitch’s view, these heightened social and political tensions have been illustrated by the wave of protests in the Northern Rif region which started in October 2016 and continued during 1H17. “There are also tensions within some governing parties, including the prime minister’s Justice and Development Party (PJD), the largest party in Parliament,” the agency explained.
“We expect fiscal consolidation to continue but to proceed more slowly than projected by the government,” revealed Fitch, adding that past progress has been mostly achieved through the containment of current spending and reform of energy subsidies aided by the fall in oil prices, leading to a reduction in government deficit from 7.2 percent in 2012 to 4.1 percent in 2016.
Although of smaller magnitude, “the residual consolidation could be more difficult to achieve as it hinges upon deeper tax reforms and a broadening of the tax base against the background of a large informal sector,” further explained the agency.
For Fitch, the ongoing fiscal decentralisation reform, the recovery in…
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