Index trend
Previous Quarterly Editions
Expropriation Risk: 49 48 48 46 ▼Political Violence Risk:51 49 49 49 ►Terrorism Risk:44 42 42 42 ►Exchange Transfer and Trade Sanction Risk: 63 55 55 55 ►Sovereign Default Risk:65 65 56 56 ►
Overall Risk Temperature: 52 (Medium) TREND ►
Special topic: Relationship with the 'global rules-based order'
Morocco’s position on the global rules-based order is defined to a large extent by the Western Sahara dispute. Since Spain withdrew from this former colony in 1975, the territory has been contested between Morocco and the Polisario Front, a movement fighting for self-determination for the Sahrawi inhabitants. Morocco controls most of the territory. A United Nations-mediated ceasefire in 1991 was intended to allow for a referendum in which the Sahrawi people could vote on their political future. This has not taken place. Rabat has ruled out independence as an option in any referendum, and there have been different views on who might be entitled to vote. Morocco would prefer the region to have administrative autonomy under Moroccan sovereignty.
Rabat has succeeded over the years in eroding regional and international sympathy for the Sahrawi cause. Left-leaning governments in Europe still support the Sahrawis, but the dominant trend in Europe is for engagement with Morocco and acceptance of its view that autonomy offers the best long-term solution.
In 2020, the U.S. Trump administration recognized Morocco’s claim of sovereignty over Western Sahara as part of its Abraham Accords initiative, which aimed at developing relations between Israel and Arab states. Morocco already had a long-standing covert relationship with Israel, including military and intelligence cooperation. It now made that relationship public, although it has not reached the level of full diplomatic ties. The United Arab Emirates, a central player in the Abraham Accords, opened a consulate in Western Sahara, and the U.S. has indicated that it intends to take that step eventually; there has been no revision of the policy under U.S. President Joe Biden.
The Israeli military assault on Gaza in response to the October 7 attack by the Palestinian Hamas movement has checked Morocco’s policy of making its control of Western Sahara a fait accompli. The Gaza war has aroused widespread anger toward Israel across the Middle East, Africa and Europe, including in Morocco itself, where there have been protests at the relationship with Israel. Rabat risks being perceived as out of touch with the prevailing sentiment in the Global South, which resents the Western conception of the liberal international order. The Gaza war has also allowed the Polisario to highlight the parallels between the Sahrawi people’s plight and that of the Palestinians. Morocco has sought to defuse the situation domestically by canceling flights to and from Israel. The Israeli liaison office in Rabat has been closed down. Morocco retains strong support from Spain, France, the U.S. and the Gulf Arab states, so there is little risk of Morocco becoming isolated owing to its ties to Israel or in light of any flickers of support for the Polisario.
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Morocco has successfully courted foreign investment for years, including 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 has yet to come into force.
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 100 million Moroccan dinars.
Businesses can run into difficulties during political tension between their home government and Morocco, usually over the Western Sahara sovereignty controversy; however, disputes that have arisen between the Moroccan authorities and foreign investors have tended to be based on commercial rather than political issues.
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Western Sahara is the main source of political violence. Tensions have grown in recent years because 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. Polisario fighters have sporadically attacked Moroccan government-controlled areas in Western Sahara in recent months. In October 2023, an attack on the town of Es-Semara resulted in civilian casualties. This marked a shift in Polisario tactics as the group has tended to focus on military targets rather than urban areas.
The dispute is a major source of tension between Morocco and Algeria, but the risk of this escalating into conflict is low despite occasional belligerent rhetoric from both sides.
Domestically, there have been sporadic protests against corruption, police brutality and deprivation. The king has also been criticized for his prolonged absences from Morocco; however, the risk of an insurrection against the monarchy remains low.
Morocco was one of the main sources in North Africa of fighters that 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 of instances of Islamist terrorism in Morocco since al-Qaida carried out a major assault in 2003, and the risk of terrorism remains low. This is partly because of setbacks for IS and al-Qaida but also effective Moroccan intelligence services.
There are no significant restrictions on exchange transfers. 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 5% in March 2020, up from 2.5% in 2018. 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 was only 0.3% in February 2024. The central bank raised its base rate by 50 basis points to 2.5% in December 2022 and 3% in March 2023. It is likely to hold that rate for most of 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 a Polisario suit against the European Union (EU), including exports from the territory and its waters in its trade preference accords. The Polisario welcomed a recommendation from the court’s advocate in March 2024, as it called for the suspension of an EU-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 44% of GDP, of which public debt is just under 30% of GDP, according to the IMF. 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 that was approved in April. 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 automotive exports (although phosphate and fertiliser exports fell sharply due to lower prices). Increased tourism revenue contributed to the 15% rise in the services surplus.
