Fitch Affirms Morocco at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Morocco's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB' respectively. The Outlooks are Stable. The issue ratings on Morocco's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-' and 'BBB' respectively. The Country Ceiling is affirmed at 'BBB' and the Short-term foreign-currency IDR at 'F3'.
KEY RATING DRIVERS
Morocco's ratings balance macro stability and neutral public and external finance indicators relative to 'BBB-' rated peers, with weak structural indicators (including development and governance).
The IDRs reflect the following key rating drivers:-
External vulnerabilities have receded over the past two years, primarily as a result of the sharp drop in oil prices and, to a lesser extent, the development of new export industries. The current account deficit narrowed to 1.9% of GDP in 2015, from 5.7% in 2014, and net external debt declined for the first time since 2007, to 24.8% of current account receipts, aligning most external finance indicators with 'BBB' medians. We expect the sovereign to remain a net external creditor.
Risks to external finances from swings in international oil prices and spillover effects of terrorism in the region on tourism receipts will likely remain but Morocco benefits from a number of buffers. These include strengthened international reserves (which covered more than six months of current account payments at end-2015), rising FDI prospects and a USD5bn precautionary line from the IMF. The expected gradual liberalisation of the exchange rate would also support the country's ability to adjust to external shocks.
Fiscal consolidation and reforms implemented since 2013 have gradually helped bring public finance indicators in line with 'BBB' medians. The removal of energy subsidies caused the central government budget deficit to shrink to 4.3% of GDP in 2015 from 5% in 2014 and the government's fiscal deficit target of 3.5% for 2016 is credible in light of the expected rise in disbursed grants from Gulf Cooperation Council countries. The full implementation of the Organic Budget Law will help strengthen the budget's framework, limiting net new borrowing to investment spending.
General government debt remains higher than peers, at an estimated 49.1% of GDP at end-2015 (BBB median: 42.2%), although it stabilised in 2015 after six years of increases (2008: 32.1%) and Fitch expects it to decline from 2016. Its structure is favourable, with a lower interest rate burden and a smaller share of foreign currency debt than the 'BBB' medians.
Real GDP grew 4.5% in 2015, largely due to an exceptionally strong agricultural season. Fitch expects real GDP growth to fall below 2% in 2016, as a result of falling agricultural output and moderate non-agricultural growth. Traditional growth engines (including construction, tourism, and textiles) are affected by slow growth in the EU and the impact of regional insecurity on tourism arrivals, while emerging industries, such as cars and aeronautics, continue to play a limited role in the country's real GDP growth. Average GDP growth over the past five years is, however, in line with peers, while volatility of inflation and real effective exchange rate is lower than the 'BBB' medians.
Political stability is better than regional peers, though below 'BBB'-rated peers according to the World Bank measure. We expect legislative elections in October 2016 to run smoothly. Exposure to financial shocks is also moderate, with a developed and financially sound banking sector. However, Fitch considers that structural features are weaker than peers with GDP per capita at less than half of the 'BBB' category and World Bank governance indicators also substantially lower than the 'BBB' median. The ease of doing business indicator also ranks below peers.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.
The main factors that may, individually or collectively, lead to positive rating action are as follows:
-Continued fiscal consolidation and reduction in the general government debt-to-GDP ratio
-Evidence of a structural improvement in the current account consistent with declining net external debt-to-GDP ratio
-Over the medium term, increase in per capita income level and an improvement in social indicators
The main factors that may, individually or collectively, lead to negative rating action are as follows:
-A widening of current account deficit and an increase in net external debt/GDP
-A widening of the budget deficit and an increase in general government debt
-Weakening of medium-term growth prospects
-Political and social instability affecting macroeconomic performance
Fitch assumes that Brent crude prices will average USD35 and USD45 per barrel in 2016 and 2017 respectively.
Fitch assumes that the eurozone economies will grow 1.5% in 2016 and 1.6% in 2017 in real terms.