MOROCCO REACHES INVESTMENT GRADE

UNCLAS SECTION 01 OF 02 RABAT 000712

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SUBJECT: MOROCCO REACHES INVESTMENT GRADE


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1. (SBU) Summary: Fitch Ratings' April 19 decision to raise
Morocco to investment grade has been welcomed by Moroccan
government and media as a vote of confidence in the country's
ongoing economic reforms. Fitch noted Moroccan progress
across the range of "economic, political and social areas,"
pointing in particular to the country's current account
surplus, progress in reducing its budget deficit, and
structural transition to a more balanced economy. Risks
remain-- Fitch highlighted an overall Moroccan debt burden
that is above the median for its peer group, continued
vulnerability to both climactic and oil price shocks, and
persistent poverty. Nonetheless, the ratings agency predicts
not only that external debt and liquidity ratios to improve
in 2007 and 2008, but that current reform momentum will be
sustained beyond this year's elections. A similar vote of
confidence was registered earlier in April in Washington,
where World Bank officials praised Morocco's progress,
following a meeting with Finance Minister Oualalou. End
Summary.


2. (U) On April 19, Fitch became the first of the three major
ratings agencies to accord Morocco a rating that is at
investment grade, albeit at the low end of the scale.
Morocco was assigned a foreign currency IDR of BBB-, and a
local currency IDR of BBB, both with stable outlooks. The
country also gained a short-term foreign currency rating of
F3 and a country ceiling of BBB. (Standard and Poor's and
Moody's have also recently upgraded Morocco, but their
ratings remain just short of investment grade.)



3. (U) Especially important for Morocco was the agency's
endorsement of Morocco's recent reform trajectory. Fitch
noted progress across the political, economic, and social
spectra, arguing that this had "translated into continuing
improvements in living standards and the external position,
notwithstanding persistent fiscal deficits." Noting that the
Moroccan current account has been in surplus since 2001
(largely due to growing tourism revenue and transfers from
Moroccans resident abroad-- so-called MREs) and that Morocco
made progress in 2006 in reducing its budget deficit (to 1.7
percent of GDP),Fitch predicted that receipts from tourism,
light manufactured products, and FDI will continue to grow at
a fast pace, allowing continued improvement in Morocco's
external position in coming years. Significantly, it
predicted that this reform momentum will be sustained through
the coming electoral cycle.


4. (U) While conceding that with 40 percent of its population
engaged in agriculture and without significant energy
resources, Morocco is vulnerable to both climactic and oil
price shocks, Fitch argued that Morocco has entered a
"transition phase." Significant investments aimed at
enhancing its comparative advantages in tourism,
"offshoring," and similar sectors, it argued, will limit
these vulnerabilities. Fitch did concede that beyond a high
debt burden, Morocco does continue to have difficulty in
translating its economic reforms into reduced poverty and
unemployment. Nonetheless it saluted its effort to de-couple
the state from the economy, to reduce administrative barriers
to entrepreneurship, and to restructure the banking system
and modernize its financial markets. It identified a key
Moroccan advantage as stemming directly from MRE transfers,
which boost domestic bank deposits and allow a "deep domestic
debt market" with an average maturity of almost seven years.


5. (U) Fitch noted progress in public sector reform that
enabled the budget deficit to be brought below 2 percent of
GDP in 2006, despite a narrow tax base and continued
subsidies for energy and other primary goods. It predicted
the deficit will rise slightly this year, before falling in
coming years. Despite a debt to GDP ratio above the median
for its peers (the reason Moody's did not raise Morocco to
investment grade),Fitch noted that "the external situation
is far stronger," resulting in the Morocco's "unusual"
position as a "BBB" country that is both a public and overall
net external creditor.


6. (U) Fitch's endorsement of Morocco followed by a week
similar compliments from the World Bank. In a meeting on the
margins of the annual World Bank/IMF meetings, Finance
Minister Oualalou reviewed Morocco's recent progress with
bank leaders. They saluted Morocco's work to advance "good

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governance" and stressed the bank's readiness to assist
Morocco's efforts in that area.


7. (SBU) Comment: Fitch's analysis tracks largely with our
own assessment of Morocco's progress, though we would place
greater emphasis on the work that remains to be done in
reducing administrative barriers to business and in spurring
judicial and legal reform. A recent Finance Ministry study
(subject of septel) also calls into question how much of a
contribution exports will make to Morocco's economic growth
in future, arguing that since 1995 their competitivity has
continued to slip, notwithstanding numerous sectoral
initiatives to assist them. Finance Ministry contacts have
expressed pleasure with the upgrade, while arguing that it
should have occurred much sooner, given the positive tone of
rating agency reports on Morocco. End Comment.
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