Previous Quarterly Editions
Expropriation Risk: 41 41 41 45 ▲ Political Violence Risk: 48 48 48 48 ► Terrorism Risk: 50 50 50 48 ▼ Exchange Transfer and Trade Sanction Risk: 64 64 64 55 ▼ Sovereign Default Risk: 57 57 57 47 ▼
TREND ▼
Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Morocco is affected by global warming, with rising temperatures and disruptions to rainfall patterns leading to a severe depletion of water resources. This has had a serious impact on agriculture, which is a key sector for employment, national economic output and exports. Over the past 40 years, the incidences of drought have become more frequent, occurring once every two to three years rather than once in five. Moreover, prolonged dry
spells are often interspersed by episodes of flooding, which damage farmland through erosion and do not yield gains to address water storage. The government reckons the average temperature in Morocco has risen by 0.9 degrees Celsius since 1960, and it has based its long-term mitigation policies on a scenario of a further rise by up to 3 degrees Celsius by 2050.
The Moroccan economy was hit hard by a combination of COVID-19 and poor rainfall over the 2020/21 winter season. This was reflected in a 6.3% real terms contraction in gross domestic product (GDP) in 2020. Improved rainfall over the subsequent season helped to lift the economy to 7.2% growth in 2021. However, there has been little rainfall over the winter of 2021/22, and the government has lowered its GDP forecast to 2.9% growth, on the assumption of a sharp contraction in agricultural output. A poor cereals harvest will increase Morocco’s exposure to the increase in global wheat prices because of the Russian-Ukraine crisis. Morocco is also heavily dependent on imported petroleum and coal, prices of which have risen sharply.
The Moroccan government has a multi-layered strategy for addressing the risks from climate change. These include heavy investment in renewable energy and both medium-term and long-term plans to improve water security. Morocco is also engaged in adapting its large automotive industrial sector to meet rising global demand for electric vehicles, and it has attracted investment in developing its substantial reserves of cobalt, a critical component in electric vehicle batteries.
A target to have 42% of electricity generation capacity made up of renewables by 2020 was narrowly missed, but by this date 37% of installed capacity was non-thermal, including about 20% wind and
solar, and 17% hydroelectric or pumped storage. The contribution of renewables to actual electricity output was lower, with wind accounting for almost 12%, and solar and hydro about 4% each. The bulk of Morocco’s power production comes from coal at about 60%. Reliance on coal has increased following Algeria’s October 2021 decision to close the gas pipeline across Morocco to Spain. However, this has been temporarily offset by increased electricity imports from Spain, and Morocco will soon start importing liquefied natural gas. Several new wind, solar and pumped storage power projects are underway.
In 2019, the government approved a long-term water strategy up to 2050, with an interim plan for 2020-27. The central element is to increase the number of storage dams, capturing water running off the Atlas Mountain range. There are currently about 150 such dams with a capacity of 19 billion cubic metres. The target is to lift capacity to 27 billion cubic metres by 2027. However, the actual storage in most of the existing dams is well below capacity, and the successive droughts have also reduced Morocco’s groundwater resources. The plan aims to improve the supply of water to agriculture, which accounts for about 87% of Morocco’s water use, while upgrading irrigation systems and increasing wastewater recycling.
Desalination is an important element in urban water supply strategy. Morocco already has several small desalination plants, mainly serving tourism resorts and towns in the disputed Western Sahara. Work is underway on a large desalination plant in Casablanca, with capacity of 300 million cubic metres per year.
Morocco has signed up to the Paris Agreement on climate, which seeks to limit national temperature rises to 1.5 degree Celsius if possible, even though the country has not yet made an explicit commitment to achieving net zero emissions. Overall, climate is central to government policy, although it must also be noted that for now, coal remains the principal source of electricity generation.
TREND ▲
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. There are no restrictions on companies divesting and selling their stakes to third parties. Businesses can run into difficulties during periods of 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.
TREND ►
Western Sahara is the main source of political violence. Tensions have risen including as Morocco has increased its diplomatic efforts to resolve the issue in its favour and deployed troops within a buffer zone along the Mauritania border. Also problematic was a deal struck in December 2020 by the Trump administration to recognise Morocco’s claims over Western Sahara in exchange for Morocco establishing diplomatic relations with Israel. The Biden administration has refused to rescind this recognition.
Morocco’s decision not to vote on the March 2022 United Nations’ General Assembly resolution denouncing Russia’s part in its crisis with Ukraine may reflect political sensitivity over Western Sahara, as Morocco’s critics argue the absorption of the territory amounts to an internationally prohibited use of force to change borders.
Within Morocco, there have been sporadic popular protests against corruption, police brutality and deprivation. Disaffection continues to bubble in Morocco’s large informal sector. The authorities’ fears of destabilising protests are reflected in a highly oppressive system of surveillance and tight media controls.
Morocco was one of the main sources in North Africa of fighters that joined Islamic State (IS) in Syria in 2013-17. An estimated 3,000 Moroccans joined IS, most coming from areas in the north known for Islamist militancy. There have been concerns 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-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 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, as part of the COVID-19 response. 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 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, including exports from the territory and its waters in its trade preference accords. In October 2020, Morocco imposed various restrictions and tariffs on goods imported from Turkey, claiming that Turkish exporters had abused concessions provided under a 2016 free trade agreement.
Morocco’s debt has increased due to COVID-19, but is not particularly burdensome by regional standards, and the risk of sovereign default is low thanks to historically high reserves. Gross public debt has risen to 77% of GDP, from about 65% in recent years, while external debt has climbed from about 32% of GDP to 40%.
In March 2020, the government drew down the entire USD3 billion available from the IMF’s precautionary and liquidity line (PLL), due to COVID-19. The government issued EUR1 billion (USD1.2 billion) in Eurobonds in September, followed by a successful USD3 billion bond issue in December. This has brought Morocco’s stock of sovereign bonds to about USD12 billion. The government used part of the proceeds of the most recent bond issue to repurchase about one-third of the PLL. Meanwhile, foreign exchange reserves stand at about USD35 billion, sufficient to cover seven months of imports.
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