Index trend
Previous quarterly editions
Expropriation Risk: 48 46 46 46 ►Political Violence Risk:49 49 49 49 ►Terrorism Risk:42 42 42 42 ►Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ►Sovereign Default Risk:56 56 65 65 ►
Overall Risk Temperature: 54 (Medium) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
3
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
2
Gray zone activity by and against Morocco relates mainly to the contested Western Sahara borders issue and the toxic relations between Morocco and Algeria. Morocco has operated through both formal diplomatic channels and via gray zone activity to press its case for sovereignty over the former colony, which Spain relinquished in 1975. The independence-seeking Sahrawi people’s liberation front, the Polisario, poses little military threat to Morocco, which maintains effective control of most of the territory, including mineral-rich areas, the coast and its territorial waters. However, the Polisario retains the backing of Algeria and South Africa, and the Sahrawi cause is supported by left-wing political groups across Europe. This issue also has resonance for supporters of the Palestinian cause. This linkage has become stronger as Morocco’s close security and political ties with Israel have come under scrutiny in the context of the Gaza war.
Morocco’s tenacious campaign to press its claim to the Western Sahara includes strong political and legal engagement, as in the long-running dispute in the European Court of Justice over fishing rights (this is currently in abeyance since a ruling in March 2024 that partially upheld a Polisario suit against the fisheries agreement with the European Union). These efforts can stray into the gray zone. Examples include the lobbying through economic incentives to garner support from African countries for Morocco’s readmission in 2017 to the African Union as well as the backroom deals struck with Israel and the U.A.E. to secure U.S. recognition of Moroccan sovereignty over the territory during the Trump administration.
Companies from countries with policies that are sympathetic to the Polisario can find themselves the target of obstructive measures from the Moroccan authorities. Moroccan intelligence agents are active across Europe, and they use information garnered about Islamist terrorist cells as leverage with governments on the Western Sahara question. Another form of gray zone action involves manipulating migrant flows to deliver political messages. Spain is particularly vulnerable because of the land border between Morocco and the Ceuta and Melilla enclaves.
Most gray zone action against Morocco originates in Algeria. The border has been closed since 1994 after a terrorist incident that Morocco blamed on Algerian agents. More recently, in 2021 Algeria claimed that forest fires in Kabylia, a mainly Berber region east of the capital, had been set deliberately by opposition groups based in Morocco and supported by Israel. That same year, Algeria stopped deliveries of natural gas to Morocco and onward to Spain after the 25-year pipeline transit agreement elapsed. Morocco now imports gas from Spain. Algeria periodically threatens Spain with sanctions, notably the closure of the direct Medgaz pipeline, to dissuade Spain from pumping gas to Morocco. Algeria protested in early 2024 against a bid by Taqa, a U.A.E.-based energy company, to acquire Naturgy, a Spanish company that owns 49% of Medgaz. Algeria suggested that the U.A.E. was acting on behalf of Morocco and Israel. The bid was eventually dropped, without any official explanation.
TREND ►
Morocco has successfully courted foreign investment for years, with incentives such as preferential taxes and special investment zones. Foreign investors are typically induced to establish partnerships with interests connected to the palace. In 2019, Morocco published a new model bilateral investment treaty; this includes protection against direct or indirect expropriation, although it does provide some leeway for regulatory interventions that could be interpreted as indirect expropriation. Two treaties have been signed under the model, with Brazil and Japan. The Japanese treaty came into effect in April 2022, while the Brazilian agreement was ratified by Brazil’s senate in August 2024.
There are no restrictions on companies divesting and selling their stakes to third parties. The government is enacting reforms to simplify the corporate tax regime, in phases up to 2026. This includes applying a standard rate of 20%, rising to 35% for annual earnings of over MAD 100 million ($10.3 million).
Businesses can run into difficulties during periods of political tension between their home government and Morocco, usually over the Western Sahara controversy. However, disputes that have arisen between the Moroccan authorities and foreign investors have tended to be based on commercial rather than political issues.
Western Sahara is the main source of political violence. Tensions have risen as Morocco has increased its diplomatic efforts to resolve the sovereignty issue in its favor and deployed troops within a buffer zone along the Mauritania border. There have been sporadic attacks by Polisario fighters against Moroccan government-controlled areas in Western Sahara. In October 2023, an attack on the town of Es-Semara resulted in civilian casualties. This appeared to mark a shift in Polisario tactics, as the group has tended to focus on military targets rather than urban areas. The Polisario group has drawn encouragement from the increase in anti-Israel sentiment around the Middle East and Africa, as this has put Morocco’s relationship with Israel in a negative light.
The dispute is a major source of tension between Morocco and Algeria, as noted, but the risk of this escalating into outright conflict is low, despite occasional belligerent rhetoric from both sides. Morocco has recently taken steps to bolster its military preparedness for any conflict through requesting weapons worth $524 million from the U.S., including 18 High Mobility Artillery Rocket Systems (often termed “HIMARS”). The deal was approved by the U.S. State Department in April 2023, and the HIMARS contract was awarded in mid-2024 to Lockheed Martin, with a 2026 completion date.
Within Morocco, there have been sporadic popular protests against corruption, police brutality and deprivation. The king has also been criticized for his prolonged absences from Morocco. He made a rare public appearance after an earthquake in September 2023 that left more than 3,000 people dead and hundreds of thousands homeless, but it took him more than a day to respond to the disaster. This has raised questions about a political system that is so heavily reliant on a remote monarch for important decisions. However, the risk of an insurrection against the monarchy remains low.
Morocco was one of the main sources in North Africa of fighters who joined Islamic State (IS) in Syria in 2013 – 2017. An estimated 3,000 Moroccans joined IS, most coming from areas in the north known for Islamist militancy. There have been concerns that many of these fighters would return to Morocco and become involved in terrorist activity. However, there have been only a handful instances of Islamist terrorism in Morocco since Al-Qaeda carried out a major assault in 2003, and the risk of terrorism remains low. This is partly because of setbacks for IS and Al-Qaeda but also effective Moroccan intelligence services.
There are no significant restrictions on exchange transfers in Morocco. Access to foreign exchange through the banking system is straightforward, although the central bank does maintain some capital controls.
The exchange rate is pegged to a basket weighted 60% to the euro and 40% to the U.S. dollar. The band within which the rate may fluctuate was widened to 2.5% in 2018 and to 5% in March 2020. The International Monetary Fund (IMF) repeatedly urges Morocco to shift to a more flexible system. The central bank has agreed in principle, but there appears to be a residual reluctance to give up control.
The central bank has made relatively light use of its monetary tools to dampen inflation, which averaged about 6% in 2022 and 2023, reaching a peak of 10% in February 2023. Inflation fell sharply in the second half of 2023, reflecting lower fuel and food prices, and the annual rate averaged 1% in the first seven months of 2024. The central bank raised its base rate by 50 basis points to 2.5% in December 2022 and to 3% in March 2023. It lowered the rate to 2.75% in June 2024.
The risk of trade sanctions applies mainly to goods exported from Western Sahara. The European Court of Justice is involved in prolonged deliberations over the Polisario suit against the European Union, including exports from the territory and its waters in its trade preference accords. The recommendation from the court’s advocate in March 2024 was welcomed by the Polisario, as it called for the suspension of an E.U.-Morocco fisheries accord to remain in place and for food exports from the region to be labeled as coming from Western Sahara.
Morocco’s total external debt stands at about 50% of GDP, of which public debt is just under 30% of GDP, according to the IMF (total public debt, including domestic borrowing is about 70% of GDP). The public debt includes a stock of about $13 billion in sovereign bonds.
Positive market sentiment of Morocco’s default risk was reflected in the strong response to the most recent sovereign issue in March 2023, raising $2.5 billion. The total public debt service cost is a manageable 2% to 3% of GDP over the next five years.
Morocco has a solid buffer of foreign exchange reserves, sufficient to cover about six months of imports, and its position has been further reinforced by a $5 billion flexible credit line from the IMF. Sovereign default risk is low.
Morocco’s trade deficit fell by 7.3% year-on-year in 2023, thanks to lower energy import costs and a 27% increase in the value of automotive exports (although phosphate and fertilizer exports fell sharply owing to lower prices). Increased tourism revenue contributed to the 15% rise in the services surplus. The trade account in the first seven months of 2024 was broadly similar to the previous year, with a 5% increase in imports offset by a strong export performance for the automotive and phosphate sectors.
