New York, July 01, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Morocco to stable from negative and affirmed its long-term issuer and senior unsecured ratings at Ba1.
The outlook change to stable reflects the recovery in real GDP to pre-pandemic levels and the government of Morocco's crisis management capacity demonstrated during the pandemic. The improved governance track record underpins Moody's expectation that the government will be able to implement gradual fiscal consolidation that stabilizes the debt ratio and fiscal accounts, while maintaining social stability in the face of Morocco's exposure to the food and energy price shock triggered by Russia's invasion of Ukraine.
The Ba1 rating affirmation reflects Morocco's economic resilience and the build-up of significant foreign exchange reserves covering over six months of imports at the end of 2021, providing a buffer to absorb the impact of the global commodity price shock. The credit profile is constrained by higher general government debt levels than the median of Ba-rated sovereigns, Morocco's exposure to contingent liabilities stemming from state-owned enterprises (SOEs), comparatively low income levels, and relatively subdued trend growth.
Morocco's country ceilings remain unchanged. The local currency ceiling remains at Baa1, three notches above the sovereign rating, reflecting predictable institutions and low external vulnerability risk, balanced by a large public sector footprint. The foreign currency ceiling at Baa2, one notch below the local currency ceiling, reflects relatively modest transfer and convertibility risks notwithstanding the existence of capital controls, consistent with the pegged exchange rate system, and takes into account the gradual foreign-exchange rate liberalization policy initiated in January 2018, although that process will proceed at a slower pace than initially envisioned.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL467464 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATIONALE FOR CHANGING THE OUTLOOK TO STABLE FROM NEGATIVE
IMPROVED GOVERNANCE TRACK RECORD UNDERPINS CONFIDENCE IN GOVERNMENT'S CAPACITY TO DELIVER FISCAL CONSOLIDATION AND MAINTAIN SOCIAL STABILITY
Supported by the government's targeted investment and income support measures implemented during the pandemic, real GDP recovered to pre-pandemic levels at the end of 2021, buttressing economic resiliency. After slowing to 2% in 2022 due to severe drought conditions and the adverse economic impact of high inflation, Moody's expects average annual GDP growth to converge to 3-3.5% by 2025.
The track record of coherent macroeconomic policies implemented in recent years and during the pandemic is reflected in improving government effectiveness indicators recorded in the Worldwide Governance Indicators, which support Moody's assessment of Morocco's improving governance profile. The government's crisis management capacity demonstrated during the pandemic is reflected in the relatively high coronavirus vaccination rates achieved compared to regional peers, the implementation of digital tools to extend support to households in the informal sector, and the focus on strengthening the social safety net.
Looking forward, the improved governance track record underpins Moody's confidence in the government's capacity to deliver gradual fiscal consolidation and a stabilization in fiscal accounts while ensuring social stability in light of households' significant exposure to higher food prices (food accounts for 40% of the consumption basket). In addition, the previously completed fuel subsidy reform allows the government to address the spike in energy prices in a targeted manner. The continued focus on efficiency improvements in the SOE sector and on business environment reforms incentivizes private investment and supports growth potential, bolstering economic resiliency.
DEBT METRICS EVOLVE IN LINE WITH Ba-RATED PEERS, NOTWITHSTANDING SENSITIVITY TO DOWNSIDE RISKS
Similar to many sovereigns globally, the central government debt ratio increased by about ten percentage points to 75% of GDP in 2021 from pre-pandemic levels. On a general government basis (taking into account the consolidated debt of central and local governments and the social security funds controlled by these entities), the debt stock increased to almost 70% of GDP from 56% in 2019. Looking forward, Moody's expects Morocco's central government debt/GDP ratio to stabilize below 80% over the next three years (below 75% on a general government basis).
This debt trajectory is based on a fiscal consolidation projection that is more gradual than among Ba-rated peers in light of higher social spending targets included in the government's fiscal strategy. Still, Moody's fiscal deficit projections at 6.2% of GDP in 2022 followed by 5.8% in 2023 and 5.3% in 2024 assume resilient revenues and the flexibility to temporarily reduce public investment in order to accommodate higher-than-anticipated spending pressures. The fiscal profile is supported by the continued affordability of the debt stock as measured by interest/revenue at about 10%, in line with the median of Ba-rated peers.
Although Moody's expects Morocco's debt metrics to stabilize at close to current levels in the central scenario, a deterioration in fiscal strength remains the key credit risk in Morocco's credit profile. Morocco's debt trajectory would be particularly sensitive to a significant joint deterioration in growth and in the pace of fiscal consolidation, albeit Morocco's improving governance profile reduces the likelihood of such an adverse joint shock materializing.
RATIONALE FOR AFFIRMING THE Ba1 RATINGS
The Ba1 rating balances moderate economic strength with improving governance and moderate event risk exposure driven by banking sector risk. The credit profile benefits from a large domestic funding base in local currency, and the government's continued access to domestic and external funding sources at favorable terms in order to meet higher gross borrowing requirements at about 15% of GDP over the next three years. The build-up of a significant foreign exchange reserve buffer covering about six months of imports at the end of 2021 helps absorb the global commodity price shock.
The credit profile is constrained by Morocco's higher general government debt levels than the median of Ba-rated sovereigns (at a projected 70% at end 2021 vs the Ba-median of 60%), its exposure to contingent liabilities stemming from state-owned enterprises (SOEs) with outstanding debts amounting to 18% of GDP, comparatively low income levels (GDP per capita at around $8,500 at end 2021, compared to the Ba-median of around $16,500), and relatively subdued trend growth at 2.7% projected for 2017-26 (compared to economies at similar income levels).
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Morocco's ESG Credit Impact Score is moderately negative (CIS-3), reflecting its exposure to environmental and social risks but supported by a track record of policy effectiveness. Resilience to environmental and social risks is constrained by low wealth and high debt levels.
Morocco's credit profile is highly exposed to environmental risks, reflected in its E-4 issuer profile score. Physical climate risk exposure is high and mainly reflects the sovereign's water scarcity that is leading to dwindling groundwater reserves and a strong dependence on rain-fed agriculture. The primary sector accounts for 10-15% of GDP and about 35% of total employment and contributes to a volatile growth pattern, increasing the issuer's sensitivity to environmental risks.
Exposure to social risks is high (S-4 issuer profile score) and primarily reflects rigid labor markets that constrain employment opportunities, including for educated youth. Morocco also underperforms in terms of education performance in the international comparison, resulting in wide disparities between achievements in public and costly private schools. A high degree of gender inequality is reflected in the very low female labor participation rate at less than 25% of the female population aged 15+ which represents a structural constraint on Morocco's growth potential. The high share of food in the consumption basket accounting for almost 40% further increases Morocco's exposure to social risk in case of persistent food price inflation.
Governance is broadly in line with other sovereigns and does not pose particular risk (G-2 issuer profile). Policy effectiveness reflects the government's coherent macroeconomic policies and fiscal reforms that have been implemented over the past few years, including the elimination of most fuel subsidies, the enactment of parametric public pension reform and the shift to renewable energy production. However, governance is constrained by weak voice and accountability and by the high debt ratio that reduces the government's financial capacity to address environmental and social risks.
GDP per capita (PPP basis, US$): 8,497 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 7.9% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.2% (2021)
Gen. Gov. Financial Balance/GDP: -6.4% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.5% (2021) (also known as External Balance)
External debt/GDP: 49.4% (2021)
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 28 June 2022, a rating committee was called to discuss the rating of the Morocco, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength has exhibited modest improvements. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A sustained reduction in debt levels combined with improved trend growth in the non-agricultural sector that helps boost Morocco's comparatively low income levels, would lead to upward pressure on the credit profile.
A continued fiscal deterioration and the inability to stabilize the debt ratio as a result of higher than anticipated deficits or because of a materialization of contingent liabilities in the SOE or from the banking sectors would likely lead to a downgrade. Similarly, a more sustained than anticipated deterioration in the external accounts that result in a significant drawdown of the foreign exchange reserve buffer below four months of imports would likely be more in line with a lower rating level.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL467464 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
EU Endorsement Status
UK Endorsement Status
Participation: Access to Management
Participation: Access to Internal Documents
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
MD - Sovereign Risk
Sovereign Risk Group
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Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653