Morocco’s Favourable Prospects with Strong Fundaments in 2017

RABAT (Capital Markets in Africa) – Prospects for Moroccan economy in 2017 are favourable with stronger economic growth on the one hand and, on the other, an on-going contraction in the twin deficits, which will help restore the long-term health of the country’s public finances and balance of payments.

As far as the growth outlook is concerned, expectations of GDP growth in 2017 should once again highlight the economy’s sensitivity to the agricultural sector. In addition to the volatile character of the country’s GDP, the fact that non-agricultural GDP has registered only moderate growth has undoubtedly been the stand-out factor since 2013. This is likely to remain so in 2017 economic outlook.

Non-agricultural GDP is expected to grow by about 3% in 2017, well below the growth rate registered between 2004 and 2012. This slowdown can partially be explained by the prevailing global economic situation which remains hesitant, particularly among the country’s main trading partners as well as a less expansionary fiscal policy. Such a slowdown is particularly symptomatic of Morocco’s economy entering a transition phase, resulting in the gradual emergence of new high value-added industries as drivers of the country’s economic development, at the expense of a number of ‘traditional’ sectors. The rapid development of the latter over the past decade has provided a strong boost to non-agricultural activity but the slowdown seen in recent years has been particularly marked.

The future flagship sectors of the Moroccan economy have been broadly identified as automobiles, aeronautics, food-processing and renewable energy while more ‘traditional’ sectors include tourism and phosphates. These sectors have performed remarkably well in recent years. However, their contribution to GDP growth and the knock-on effects on the country’s productive capacity are still inadequate to raise the general level of non-agricultural GDP. Given the likelihood that this situation will continue for a few more years, the scenario of persistently moderate growth of the non-agricultural component is the most likely one for the domestic economy over the coming years.

Growth is likely to be between 4.0% and 4.5% with the top end of the range only achievable if the global economy were to show signs of a much more robust pick-up and if fiscal policy were to become more expansionary. This scenario would seem to be highly unlikely over the short to medium term given the government’s current priorities. Another factor likely to provide an additional stimulus to GDP growth is if monetary policy were to be relaxed further. This is more likely given that the general level of consumer prices has registered only weak growth in recent years with inflation averaging 1.6% between 2010 and 2015.

While the 2017 and medium-term economic growth forecasts will be combined to a significant contraction in the country’s twin deficits, after reaching worrying levels in 2012. This positive trend towards restoring equilibrium on the budgetary and external trade fronts paves the way for a number of major reforms. It enables the government to focus on bringing about further reform in sensitive areas such as pensions reform, particularly with regard to civil servant and state corporation employee pensions with concerns growing over their viability.

Furthermore, it provides the Central Bank with the conditions needed to make a gradual and successful transition towards a floating exchange rate system. This would enable Morocco to become even more integrated within the global economy and adjust more easily to external shocks. The decision taken in April 2015 to revise the composition of the basket of currencies constituting the dirham (euro 60% and dollar 40% versus the previous 80% and 20% respectively) in order to reflect more accurately the country’s overseas trade can be regarded as simply a first step in this direction. The various declarations made by the Central Bank, which has been benefiting from technical support from the IMF in this regard, clearly favour a gradual transition towards a more flexible exchange rate system.

Given the relatively sluggish state of the domestic economy, it is essential that Morocco tackles the shortcomings of its existing growth model and undertakes the structural reforms required to move towards a development model based on productivity growth rather than one governed by accumulating factors of production. Despite the relatively high level of investment in recent years, as illustrated by Gross fixed capital formation (GFCF) of around 30% of GDP, economic growth has averaged only 4.3% annually (3.3% from 2000 to 2013). By comparison, Asian economies, which also enjoy high levels of GFCF, but, have registered economic growth of 6-7% annually. This situation is particularly symptomatic of the structural weaknesses inherent in the Moroccan economy which is over-reliant on public sector investment (public administration and state enterprises have accounted for almost 43% of total GFCF in recent years) with investment being also dominated by the construction sector (more than 50% of GFCF).

By CFG Bank Capital Market Research Team, Morocco

This article features in the February 2017 edition of INTO AFRICA Magazine, insights on Africa’s economic prospects for 2017.