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Rating Action:

Moody's changes outlook on Morocco's Ba1 rating to negative from stable

Global Credit Research - 11 Feb 2013

London, 11 February 2013 -- Moody's Investors Service has today changed the outlook on Morocco's Ba1 government bond rating to negative from stable. The Ba1 rating itself was affirmed.

The key drivers of the decision to change the outlook to negative are as follows:

(1) The significant deterioration in the government's fiscal metrics, as reflected in rising budget deficits since 2011. This is due to the country's decision to increase public-sector wages and let the subsidy bill rise in response to rising oil prices so as to maintain social peace. Moody's expects the deficit to have remained significant in 2012. As a consequence, the public debt ratio, which had been on a declining path until 2009, is now increasing again.

(2) Very large external deficits and high external funding requirements. Moody's estimates that the current account deficit amounted to close to 10% of GDP in 2012 and also is likely to remain at an elevated level in 2013, compared with a broadly balanced current account as recently as 2007. While the Precautionary and Liquidity Line -- granted by the International Monetary Fund (IMF) in July 2012 -- provides some comfort as it can contribute a substantial share of the required external financing, Morocco's external funding requirements are large at around 10% of GDP.

Moody's has today also lowered Morocco's local-currency bond and deposit ceiling to Baa1 from A3. The foreign-currency bond and deposit ceilings were affirmed at Baa2/P-2 and Ba2/NP, respectively.

RATIONALE FOR NEGATIVE OUTLOOK

The first driver of Moody's decision to change the outlook on Morocco's sovereign rating to negative is the deterioration in the government's fiscal metrics, which has been mainly driven by the authorities' decision to accommodate the sharp increase in oil and other commodity prices by maintaining widespread subsidies on oil and basic food commodities. While the government has acknowledged the need for substantive reform to the system, it has so far implemented only two minor steps to reduce its large subsidy bill (amounting to around 6% of GDP versus an average of 2%-2.5% of GDP in the decade up to 2011): raising administered fuel prices in June 2012 and reducing some agricultural subsidies in September last year. More recently, the authorities have indicated that they will implement substantive reforms to better target subsidies in the course of 2013. With oil prices only expected to stabilise near 2012 levels in 2013, timely implementation of these measures will be needed if the country's public finances are to get back on a sustainable path and avoid a further rise in the public debt ratio.

The second driver of today's outlook change is the rapid rise in Morocco's external vulnerability, again mainly driven by the rising oil price as oil products account for around 23% of total imports. In addition, exports of both goods and services (as well as remittances from abroad) are negatively affected by the slowdown in Morocco's key EU trading partners, which will be only partly compensated by stronger export growth to other regions. To finance the external deficit, Morocco has drawn extensively on its foreign-exchange reserves, which have declined to USD 15.8 billion as of year-end 2012 (liquid foreign currency reserves, excl. gold) or less than four months of import cover (goods & services). Given the continued high current account deficit, external funding needs will remain high at around 10% of GDP. The IMF line (if fully used) would cover around 60% of the funding needs. In addition, Morocco recently received a first tranche of financial aid from several Arab states, amounting to around 2.5% of GDP. Still, the funding requirements are large and require sustained foreign direct investment inflows and a further build-up of external debt. External-debt indicators are not out of line with similarly rated peers, but are worsening rapidly.

RATIONALE FOR UNCHANGED Ba1 RATING

Despite the above challenges, Moody's has maintained Morocco's government bond rating at Ba1 to reflect the following key considerations:

(1) The Moroccan authorities have established a positive track record of consistent, stability-oriented economic policies over the past decade. Inflation has been low and stable for many years now and the authorities have long pursued policies to improve social indicators for the population at large. The political situation in Morocco is more stable than elsewhere in the region.

(2) While the fiscal and external credit metrics have been deteriorating, they are not out of line with Morocco's closest peers.

(3) The availability of IMF funding under the Precautionary and Liquidity Line significantly reduces the risk of a balance of payments crisis. In addition to providing an insurance against unfavourable external financing developments, Moody's considers that the IMF's involvement will also act as an external policy anchor.

WHAT COULD CHANGE THE RATING DOWN/UP

Risks to Morocco's Ba1 sovereign rating are mainly skewed to the downside, as reflected in the negative outlook. In particular, the failure of the government to follow through with its announcements regarding subsidy and public pension reforms would likely lead to a negative rating action. A much deeper and longer-lasting recession in Europe that has knock-on effects for Morocco's growth perspectives and external accounts would also exert downward pressure on the rating as could a sharp escalation of social and political tensions, with a negative impact on the authorities' ability to deliver on fiscal and economic reforms.

Moody's would return Morocco's rating outlook back to stable if the government implements measures to arrest the deterioration in the public finances. Upside rating potential would also develop if the authorities succeed in achieving budgetary results that would reverse the rising trend in the debt ratio. Also, higher economic growth rates through increasing competitiveness and a stronger external position would be needed for an investment-grade rating.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

This rated entity or its agent(s) did not participate in the rating process. Moody's was not provided, for purposes of the rating, access to books, records and other relevant internal documents of the rated entity.

Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kathrin Muehlbronner
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Morocco's Ba1 rating to negative from stable
No Related Data.

 

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