Morocco Central Bank Raises Interest Rates

Morocco's central bank raised its benchmark interest rate by quarter of a point today as a response to continuing high inflation. The overnight rate was raised to 3.5 percent from 3.25 percent, the highest level since at least 2003. Moroccan inflation hit a 12-year high of 5.4 percent in May on the high prices of cereal and energy products, almost all of which come from abroad. It fell to 4.8 percent in August from 5.1 percent a month earlier.




The Moroccan government expects the economy to expand 6.8 percent this year, rebounding from last year's 2.7 percent when drought cut crop yields to a seven-year low. Agriculture accounts for as much as 14 percent of the Moroccan economy. Growth accelerated to an annual 7 percent in the first quarter this year after agricultural production picked up.

Does Morocco's Inflation Surge Put Rate Rises On The Agenda?

Moroccan consumer price inflation rose to a year-on-year of 5.1% in July 2008 from 4.7%percent in June. Such a rise has been prompted by rising food costs due to soaring world commodity prices. The latter had risen 9.1 percent compared with July 07

Transport price inflation accelerated to 3.2%, more than double the 1.3% increase seen over the two preceding months, largely because of the government's decision to allow the state-controlled prices for several types of fuel to rise with effect from July 1st. The fuel price increases in July will have ramifications for other categories of inflation, as transport costs will rise and retailers will seek to pass these on to consumers.

As a consequence the Moroccan government revised its annual inflation forecast in June to 2.7-2.9% up from an initial estimate of 2%. The risks surrounding the forecast continue to be on the upside. Externally, they concern the uncertain development of the pricesof hydrocarbons and primary products, while internally, the main sources of uncertainty are linked to the impact of world prices on the subsidization system, particularly for oil products, with a greater-than-expected effect of rising income on inflation and with the credit growth rate (Bank Al Maghrib).

Financial authorities are worried that higher inflation may lead the Central Bank to hike interest rates further. Such worries stem from the fear that monetary tightening would stifle growth, at precisely the time when the government is striving to promote job creation and reduce poverty.

According to their latest report, the Bank Al Maghrib (Central Bank of Morocco) left interest rates on hold - at a rate of 3.25% - at the last meeting, although they did use the now par for the course expression "heightened vigilance" with regard to the development of inflation and risk factors in the coming months.

Moroccan Unemployment Falls in Q2 2008

Morocco's unemployment rate, long a cause for concern, has been dropping steadily this year, on the back of job growth in services and construction. Further institutional reforms to bolster competitiveness and and financial openness are expected to help the trend to continue.

The State High Planning Commission announced on August 7 that Morocco's official unemployment rate dropped to 9.1% in the second quarter, down from 9.6% in the first. This leaves Morocco with some 1.03m unemployed, compared to 1.06m at the end of March. Unemployment stood at 9.8% at the end of 2007, up 0.1% from the end of 2006.

Urban areas saw particularly strong job growth, and the services and construction sectors were the two leading drivers of job creation. Services generated some 152,000 new jobs, with the business process outsourcing (BPO) and telecoms sector proving particularly dynamic. Meanwhile, government infrastructure projects, as well as heavy private investment in real estate and tourism helped boost the construction sector, which created 80,000 new jobs in the second quarter.

Evidently, this trend of falling unemployment rates is a positive one. Joblessness has long been a cause for serious concern in North Africa. Morocco has a lower rate than its Maghreb neighbours - Tunisia has a rate of around 13.9%, and in Algeria it is around 12.3% - but the issue is still a pressing one, both for economic and for social reasons. A 2006 government report suggested that the country needed a net increase of 400,000 jobs annually for the next two decades in order to provide enough employment for its people, given the underlying demographic dynamic.

Moreover, with Spanish construction firms facing much harder times, Morocco may soon face the additional challenge of workers returning from across the Gibraltar Straits, potentially putting further pressure on the authorities to create jobs.

With 30.5% of Morocco's population of 34.3m aged 14 or younger, according to the Central Intelligence Agency (CIA), job creation for the young is one of the government's major priorities. 2007 data indicate that 17.6% of those in the 15-24 age group are unemployed. This rises to around one third in urban areas - rural communities often employ the young in agriculture, including on the family farm, as soon as they leave school, contributing to relatively high youth employment rates (lower levels of official unemployment registration are also a factor).

The government's efforts to cut back a bloated bureaucracy have helped trim the public sector's payroll and ease the burden on the private sector. In 2006, for example, the government introduced a voluntary retirement scheme for the public sector, under which those opting to quit are not replaced.


Thus employment growth in BPO and other technical fields, which are areas that often employ young graduates, is a very welcome trend. If growth in this sector continues, it will be seen as a vindication of the government's policy of whittling down public sector bureaucracy. Indeed, in an increasingly competitive global economy - particularly for services like BPO - it is important that the Moroccan authorities press ahead with supply-side reforms in order to ensure that Morocco remains an attractive location for investment, particularly in the service sector.

Countries - including Morocco - that have liberalised labour markets making it easier to hire and fire workers, have often reaped a dividend of lower unemployment. Lower taxation and easing the bureaucratic burden would further promote business-start ups and job creation. Meanwhile, Morocco's strong trade ties with the EU have supported the growth of export-oriented industries, but commerce across the Maghreb region remains underdeveloped - which constitutes a missed opportunity, given the potential for job creation these fast-growing economies really need to do more to encourage intra-regional trade to thrive.

Moroccan Inflation Rises Again In July

Moroccan consumer price inflation rose to a year-on-year 5.1 percent in July from 4.7 percent in June, official figures showed on Monday. The annual inflation rate was 5.4 percent in May. Food costs, inflated by soaring world commodity prices, were up by 9.1 percent compared with July last year, according to data from the High Planning Commission. On a monthly basis, consumer prices were up 0.2 percent in July versus June as transportation costs grew 5.6 percent, although there was a 0.1 percent decline in food prices.

Analysis


Morocco's annual inflation rate rose to 5.1% in July, from 4.7% in June--this is a marked acceleration from average inflation of just 2% over 2007 as a whole. Food prices continued to expand more quickly than the headline rate of inflation, up by 9.1% year on year in July after gaining by 8.7% in June. Meanwhile, transport price inflation accelerated to 3.2%, more than double the 1.3% increase seen over the two preceding months, largely because of the government's decision to allow the state-controlled prices for several types of fuel to rise with effect from July 1st. The price of petrol has risen by Dh1 (US$0.14) to Dh11.25/litre, with the subsidy amount maintained at Dh3.4/litre. The price of diesel has also risen by Dh1/litre, and that for industrial fuel has increased by Dh500/tonne. However, the government has maintained the prices of regular diesel and butane gas, which account for the majority of demand from households and from the transport sector, and has stressed that it is still spending heavily on subsidies in order to limit the impact of higher oil prices on the average Moroccan's cost of living. Meanwhile, housing costs rose by just 0.7% for a fourth consecutive month--which seems low in light of anecdotal evidence--while the rate of inflation showed little change across the remaining components. Inflation will be substantially higher in urban centres and tourist resorts than in the less well-off rural areas.

The fuel price increases in July will have ramifications for other categories of inflation, as transport costs will rise and retailers will seek to pass these on to consumers. The Economist Intelligence Unit is forecasting that the official rate of inflation will average 5% this year, a marked rise from the very low official rate reported in 2007, before easing slightly to 4.7% in 2009, assuming that world oil and food prices decline next year after this year's surge.

In theory, the government is committed to cutting subsidies in the medium term yet action on this front appears unlikely in the near future, given the country's extensive poverty and the potential for unrest over the rising cost of living (as was seen in the riots earlier this year in the port town of Sidi Ifni). Morocco's subsidy bill contributes to a structural budget deficit, but with tax revenue rising on the back of strong inflows of foreign direct investment, the deficit narrowed last year despite the rising cost of the subsidies. This year Morocco has been promised grants from Saudi Arabia and the UAE, which have pledged US$500m and US$300m respectively to help Morocco cope with the effects of rising food prices. Rather than targeting inflation, the main monetary policy objective of Bank al-Maghrib (the central bank) is to maintain currency stability, by keeping inflation under control and managing the exchange rate. The authorities will be reluctant to raise interest rates in case this leads to speculative pressure on the currency, particularly as the government's inflation forecast remains low. Indeed, the central bank left its policy rate unchanged at 3.25% at its June monetary policy meeting, despite several consecutive months of rising inflation.

The government expects the economy to grow by 6.8 percent this year from 2.7 percent last year and at an average of 6.3 percent annually over the next four years.

Morrocan Financial Market Improvements

Recent Developments:


Morocco has begun to relax restrictions on transferring money abroad which were imposed following an earlier flight of capital in the wake of a wave of bad debts which hit the banking sector.

To some extent this problem has now been addressed, and the banking sector has been strengthened by extensive reforms with the result that non-performing loans currently stand at 6.5% of total loans as compared with 19% in 2004. Moroccan banks are now generally well-provisioned and have little in the way of foreign exposure on either the asset or the liability side, minimizing the transmission of risks from global financial markets to the real economy, and making the banking system resilient to shocks.

Moreover, the authorities continue to improve supervision with a view to monitoring risks more closely as the economy opens up. As as result, the IMF have stressed that the recent turbulence in the global banking system has not disrupted Morocco's plan to integrate further into financial markets by opening the capital account and moving towards a more flexible exchange rate.

Morocco has in fact been the North African pioneer in the area of financial sector reform - which it began to significantly implement from the mid 1980s. Prior to such reforms, the financial sector was strictly regulated through administered interest rates and direct credit. Morocco's financial sector reforms to date have involved the elimination of credit controls, deregulation of interest rates, easing of entry into the financial services industry, development of capital markets, increased prudential regulation and supervision, and liberalization of international capital flows.

More recent developments have been the near elimination of the so-called “specialized banks,”: government institutions set up to provide directed credit to key sectors of the economy. Such banks turned out to be a major drag on the private financial sector, boosting risk and raising costs, lowering returns to private banks, reducing their supply of credit, and raising the cost of credit for the private sector. These institutions have largely been merged and transferred into the private sector.

Two other recent developments which are worthy of note are:

(1) The preparation of a new set of national accounts using the 1993 UN national accounts system, with the base year being updated from 1980 to 1998. The IMF in a preliminary analysis of the new series point out that:

The nominal GDP for 2006 turned out to be 14 percent above its level in the previous series. The change comes mainly from an upward revision of the value added of the tertiary sector.

The share of the primary sector in real GDP is roughly unchanged in 2006 (14 percent
of GDP), and the 5 percentage point decrease in the share of the secondary sector (25 percent of GDP) has been offset by the equivalent increase in that of the tertiary sector.

Some will see in this new version of the accounts only an attempt to "rig" the numbers. Such a view would be a big mistake. The more rcent the base year for the time series the less distorted the data. So this move towards a recent base year and towards an international standard for national accounts is to be generally welcomed, as is the general upgrading of the "Haut Plan" statistics site.

But there is still a lot to be done, as it is important quarterly data for the national accounts are soon available (these things are not state secrets, to be quietly hidden away) and we also need reliable monthly data for industrial output, retail sales,etc. The better the quality of the statistical data the easier it is to attract investors, especially if your economy is growing rapidly.

(2) The role of the central bank. Bank Al-Maghrib (BAM)was given a new legal status in February 2006, and its autonomy reinforced. At the time the IMF said the following:

Bank Al-Maghrib (BAM) has made significant progress in the implementation of FSAP recommendations to strengthen banking supervision and improve banks’ risk management practices. The imminent promulgation of the new central bank and banking laws will further enhance the supervisory power and autonomy of BAM. To this end, steps have been taken to strengthen banking supervision capacity in BAM and it started to withdraw from both the capital and management of credit institutions. Progress was also made in the restructuring of specialized banks. The Crédit Immobilier et Hotelier is currently seeking an international partner and the Crédit Agricole du Maroc will no longer finance quasi fiscal operations. The authorities indicated that they will not extend their exemptions from prudential regulations beyond June 2007. The staff recommended that all banks be brought to compliance with prudential regulations as early as possible, if necessary by new capital injections. The authorities intend to continue their efforts to implement FSAP recommendations. The World Bank is preparing a financial sector adjustment loan to accompany those efforts. 2005 Article IV Consultation - Staff Report, November 2005

In its most recent Article IV Consultation report (July 2008) the IMF said the following:

BAM is committed to maintaining a prudent monetary stance. In line with the mandate conferred by its new statutes, which granted BAM its autonomy, the central bank’s main objective in 2007 is to continue to keep inflation under control.

That is to say that while nothing in this life is perfect, the BAM has been making significant progress towards the achievment of an autonomous status since the promulgation of its new charter in 2006, and is taking its new responsibilities seriously. Rome, it should be pointed out, was not built in a day.


Obstacles to Financial Sector Development:

The financial system, though robust, has to take on excessive quantities of low risk-low return government debt at the expense of riskier, but more productive private sector lending. This “crowding–out” of private sector investment reduces the profitability and growth incentives of the financial sector.

Another fiscal barrier to financial sector development is the extremely high tax burden (tax receipts were 3% of GDP higher in 2007 than in 2006 ). Such a high tax rate reduces rates of return and saving and investment incentives.

Other financial sectors are weaker than the banking sector, especially insurance and security markets, and in the opinion of the IMF the low level of efficacy of the legal and judicial systems is an impediment to the development of the financial sector.

An Overview



With the government forecasting annual economic growth of 6.3 percent in coming years, policymakers have decided Morocco's economy is robust enough to accelerate a move to a more flexible dirham and opening of capital accounts. The Moroccan currency is currently pegged with reference to other major world currencies, and especially the euro. Central Bank Governor Abdellatif Jouahri said in March a more flexible dirham, originally planned for 2010 at the earliest, could be brought forward despite the uncertain outlook caused by the U.S. subprime mortgage crisis.

Moroccan banks are not exposed to the kind of products at the heart of the subprime crisis and are in a strong position after years of improving results, bank officials say. The central bank has shifted to an independent, regulatory role in recent years with a focus on inflation targeting and the government plans further financial sector reforms. Economy and Finance Minister Salaheddine Mezouar said recently that the government also wanted to make the financial market regulator CDVM entirely independent and permit private investors to own 15 percent of once struggling state-controlled lender Credit Agricole du Maroc and its peer Banque Centrale Populaire.

Bank officials are confident Morocco's banks are now strong enough to compete with foreign players. With their coffer full following a domestic lending boom, Morocco's top private sector banks Attijariwafabank and BMCE Bank have broadened their horizons by applying for banking licences and acquiring lenders in other African countries.

This picture of a robust and dynamic financial sector needs to be tempered by the opinion of credit rating agency Standard & Poor's who last February put Morocco in Group 8 of its Banking Industry Country Risk Assessments (Group 1 represents the lowest risk and 10 the highest). S&P pointed to risks to Morocco's banks from what it called rapid and untested credit growth, geographic expansion and cyclicality in the economy.

Central bank officials have described the rating as unfair since, they argue, Morocco's reliance on cyclical farming has been declining, while household consumer and mortgage debt is low by world standards and they consider that banks are not overstretching themselves by expanding abroad.

Morocco tops Maghreb region in remittances

Moroccan officials have heralded a significant increase in the amount of money Moroccan expatriates are sending home. Government efforts are underway to encourage Moroccans living abroad to increase their investments at home, and to allay concerns about bureaucracy and corruption. With money sent home by Moroccan migrants reaching $5.7 billion in 2007, Morocco came in second, behind Egypt, on the recent World Bank list of the top 10 MENA remittance recipient countries. Neighbouring Algeria ($2.9 billion) came in at number five. In fact according to the World Bank, remittances constituted 9.5% of GDP in Morocco in 2006.





Money transfers by Moroccans living abroad have been on the rise for several years running. They are already up to 25.8 billion dirhams for the first six months in 2008

According to the Moroccan Centre for Economics, "Fund transfers made by Moroccan expatriates are a major consideration for the Moroccan economy, not just as a way of supporting household revenues, but also, and more importantly, as a source of extra savings and an essential source of foreign currency."

Moroccan officials who have been pleased with the benefits of the money transfers are bound to become even happier, thanks to a new agreement signed last week with other Arab nations,.

Morocco joined postal operators in Egypt, Jordan, Qatar, Syria, Tunisia, the United Arab Emirates and Yemen on August 4th in an accord allowing electronic money transfer services through technology developed by the United Nations postal agency, the Universal Postal Union (UPU).

"The postal agency has been trying to improve access for rural populations to secure and reliable money transfer services through formal channels – rather than the traditional informal methods," a UPU statement said.

Moroccan officials understand the importance the money transfers and have encouraged expatriates to invest in Morocco in order to contribute to the social and economic development of their country of origin.

Head of the Council of the Moroccan Community Overseas (CCME) Mohamed Ameur has said that one of his ministry's most important tasks is working with Moroccan expatriates to "promote investment and harness skills".

Along with remittances, expatriates have begun to play an active role in sectors such as agriculture, tourism and ICT.

Many Moroccan expatriates, however, have voiced dissatisfaction with conditions governing investment in their country of origin.

Salah Bourja, who settled in France, told Magharebia that "expatriates who want to invest in their home country are confronted with a number of obstacles, including bureaucracy and corruption."

Morocco Cements Its Future

The expansion of Morocco's cement industry seems likely to be sustained over the medium-term, driven by growing demand from the construction sector. Despite some worries over the economic outlook, cement firms and financial institutions remain confident in the market's future, as indicated by a recent loan deal.

On July 9, construction materials manufacturer Ciments du Maroc sealed a $274m loan package from a consortium of five banks to fund the construction of a new factory near Agadir. The project will cost $480m.

The five banks involved in the deal are Moroccan players Attijariwafa Bank and BMCE Bank, BMCI, Crédit du Maroc (subsidiaries of France's BNP Group and Crédit Agricole respectively) and French outfit Société Générale.

Ciments du Maroc, the local subsidiary of Bergamo-based Italcementi, the world's fifth largest cement producer, aims to start production in March 2009. The plant will have a capacity of 2.2m tonnes of cement and 1.6m tonnes of clinker annually.

The new Agadir plant is designed to meet surging demand for cement in Morocco, and to ensure that Ciments du Maroc keeps pace with its two main challengers on the local market, France's Lafarge Ciments and Holcim of Switzerland, which are also making large investments into their production capacity in the kingdom. Indeed, Lafarge is in the process of doubling its output at its Tetouan base, while last year Holcim opened a new $390m plant with an output capacity of 1.7m tonnes near Settat, 70km south of Casablanca, with the aim of serving the city's market.

The firm's sound performance last year, with its net profit growing 17% to $83.7m at the end of December 2007, partly explains how Ciments du Maroc has managed to secure a sizeable loan in a period of tighter credit.

Besides, the Moroccan cement market grew by some 12.6% during the same period, having averaged 8% growth since 2000, according to international reports. Ciments du Maroc executives expect another double-digit result this year, and are eager to keep up with growing demand.

Cement producers benefit from the booming real estate and construction markets. Some $1.3bn is being invested in the rural road network, while the motorway system is being overhauled. The government has pledged to build 150,000 new low-cost housing units a year and to pour a total investment of $4.4bn into the tourism sector by 2010. The plant at Agadir, located on the coast, seems particularly well suited to supplying resort developments.

Whether the government can match its annual 150,000 residential unit pledge is uncertain, given both the scale of the undertaking and the fact that material prices remain relatively high, but a concerted drive to increase the housing stock remains a priority.

The wider impact of the global economic slowdown and the credit crunch on the local construction sector is still uncertain but it seems to bode ominously for project finance, while low growth and higher interest rates in Europe could damage Morocco's export and tourism markets.

Taking into consideration these adverse developments in the international economic environment, Morocco's government trimmed its growth outlook from 6.8% to a very healthy 6.2% in June. On the bright side though, tourist arrivals grew 11% in the first five months of this year compared to the same period in 2007, while estate agents have reported an increased interest in holiday property. Meanwhile, with global steel futures and oil prices falling back somewhat, both construction costs and overall inflation look likely to ease.

In the long term, as the current construction boom tails off and real estate supply catches up with demand, growth will moderate from current highs. For the time being though, a strong market should support the investments in capacity being made.