Previous Quarterly Editions
Expropriation Risk: 39 39 39 41 Political Violence Risk: 48 48 48 48 Terrorism Risk: 50 50 50 50 Exchange Transfer and Trade Sanction Risk: 55 55 64 64 Sovereign Default Risk: 57 57 57 57
TREND ►
Morocco’s rapid progress in its COVID-19 vaccinations has improved prospects for an early economic recovery, including tourism revival. The government has responded effectively elsewhere, establishing cash transfer schemes to formal and informal-sector workers, and boosting its own finances by drawing down a USD3bn credit line from the International Monetary Fund (IMF).
Nevertheless, COVID-19 could resurge; the government has retained restrictions including a curfew. There is also a strong undercurrent of political disaffection, and tensions within the formal political arena will dominate ahead of the general election due in September 2021.
King Mohammed and his team have taken a leading role in tackling COVID-19, including setting up a dedicated operation tasked with ensuring that Morocco could start vaccinations early. As of mid-April 2021, eight million vaccine doses had been administered among Morocco’s relatively youthful 36-million-strong population. However, Morocco’s drive to vaccinate 80% of its adults by mid-late 2021 could be affected by a slowdown in supplies, following the suspension of Indian exports.
There are also concerns about new COVID-19 variants that could arise. Incidence of new cases peaked at over 6,000 per day in November 2020 but was about 500 per day during March-April 2021. About 9,000 Moroccans have been registered as dead from COVID-19.
The pandemic’s effect on Morocco’s economy was aggravated by a severe drought in 2019-20, which hit agriculture. This was reflected in a contraction of real gross domestic product (GDP) by 15% year-on-year in the second quarter of 2020. Over 2020, the economy contracted by 7.2%. The first quarter of 2021 saw a modest recovery, and 2021 will probably see growth around 5% for the year overall, although nominal GDP in local currency terms is unlikely to match 2019 levels until 2022.
Morocco’s external financial position actually improved in 2020, despite tourism income losses. For instance, COVID-19 did not seriously affect phosphate and agricultural produce exports, and automotive sales recovered in the second half. Import costs fell because of lower oil prices. Remittances were also helpful in reducing the current account deficit. However, the government’s domestic finances were hit hard, and the fiscal deficit doubled to about 7% of GDP. The economic stresses were also reflected in the banking sector, as the stock of non-performing loans rose by about 15% in 2020, and the ratio of non-performing loans to total loans rose to 8.6% from 7.6%.
On the political side, the centralisation of the COVID-19 response (to the king and finance and health ministers) has left Prime Minister Saadeddine El-Othmani marginalised. He led the Justice and Development (PJD) party, an Islamist party that secured the largest number of seats in both the previous general elections (2011 and 2016). The party has been divided since its former charismatic leader Abdelillah Benkirane stepped down as secretary-general in early 2017, after his efforts to form a coalition government failed.
Benkirane has continued to attract support within the party, and he posed a stiff challenge to El-Othmani in March 2021 when he suspended his membership in protest at the government’s passage of a law legalising the use of medical cannabis. Despite the split in the party, the PJD will still be hard to dislodge as the leading party, owing to the fragmentation of the rest of the party system.
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. Examples of such transactions include Bombardier selling its aerospace interests in Morocco to US firm Spirit Aerospace. Nonetheless, businesses can run into difficulties during periods of political tension between their home government and Morocco, usually over the Western Sahara sovereignty controversy.
Western Sahara is the main source of political violence. The conflict has been dormant for years, but 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 outgoing US Trump administration. The deal was to recognise Morocco’s claims over the Western Sahara in exchange for Morocco establishing diplomatic relations with Israel.
Within Morocco itself, there have been sporadic popular protests against corruption, police brutality and deprivation. Disaffection continues to bubble under the service in Morocco’s large informal sector. The hazardous conditions in which many Moroccans work were exposed in February 2021, when 28 workers were killed in Tangiers when floods swept into their basement garment factory. The authorities’ fears of destabilising protests are reflected in a highly oppressive system of surveillance and in tight media controls.
Morocco was one of the main sources in North Africa for fighters that joined the Islamic State (IS) in Syria between 2013 and 2017. An estimated 3,000 Moroccans joined the group, most of them 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, including close liaison with European counterparts.
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 US dollar. The band within which the rate may fluctuate was widened to 2.5% up or down in 2018, and to 5% in March 2020, as part of the response to COVID-19. The 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 the Western Sahara. The European Court of Justice is involved in prolonged deliberations over a Polisario suit (the Polisario movement seeks independence for the indigenous Sahraoui people) 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 76% of GDP, from about 65% in recent years, while external debt has climbed from about 32% of GDP to 40%.
In 2012, the government opened a precautionary and liquidity line (PLL) with the IMF, providing it with the option of bolstering reserves in response to an external shock. This facility was renewed at regular intervals. The government did not use this until March 2020, when it drew down the entire USD3bn available because of COVID-19.
The government issued EUR1bn (USD1.2bn) in Eurobonds in September 2020, followed by a successful USD3bn bond issue in December 2020. This has brought Morocco’s stock of sovereign bonds to about USD12bn. The government has said that it intends to use part of the proceeds of the most recent bond issue to repurchase some of the PLL. Meanwhile foreign exchange reserves stand at about USD35bn, which is sufficient to cover ten months of imports.
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