MOROCCO REMAINS SHELTERED FROM INTERNATIONAL

UNCLAS RABAT 001002 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD MO SUBJECT: MOROCCO REMAINS SHELTERED FROM INTERNATIONAL CRISIS, BUT REPERCUSSIONS FROM EUROPEAN SLOWDOWN LOOM REF: A. RABAT 893 ¶B. RABAT 853 ¶C. RABAT 254 ¶1. (U) Summary: Government and private sector leaders continue to project confidence that Morocco will successfully weather ongoing volatility in international markets. Central Bank Governor Abdellatif Jouahri, Finance Minister Salaheddine Mezouar, business confederation chief Hafid El Alamy and others have repeatedly stressed in recent days that Morocco remains sheltered, thanks to continued restrictions on the country's capital account, which limit the ability of Moroccans to invest abroad. "Autarky" has thus replaced "globalization" as the adjective of choice to describe Morocco's international engagement. Not all agree that the Moroccan economy will be spared in a broader sense, however, The independent Centre Marocain de Conjoncture (CMC) has predicted that GDP growth will slow by 1.5 to 2 percent this year as a result of the international crisis, well above Mezouar's own prediction of slippage of 0.2 percent. End Summary. ¶2. (U) Financial Autarky Has Saved Us: Moroccan government and private sector leaders have congratulated themselves in recent days that the country remains sheltered from the international financial crisis and is not at risk of "direct contamination" from it. This message has been conveyed separately by Government spokesman Khalid Naciri, Finance Minister Mezouar, CGEM President El Alamy, and Central Bank Governor Jouahri in separate press conferences over the last week. In contrast to their earlier tendency to celebrate Morocco's competitiveness and participation in the global economy, the emphasis instead has been on the ways in which Morocco remains insulated from world financial markets, via continued restrictions on the country's capital account. ¶3. (U) Central Bank Governor Abdellatif Jouahri has repeatedly reiterated that Moroccan banks are not exposed to the international credit crisis, as they did not purchase instruments based on subprime or other mortgage assets in the United States or elsewhere. He told the "Economist" newspaper this week that total international exposure is limited to 30-34 billion MAD, or less than 4 percent of banking sector assets. Similarly, even with a broad definition of foreign investment in the Casablanca Exchange, he notes that it represents only 6 percent of market capitalization. Asked about the similar explosion of credit to the real sector that has occurred in Morocco, where mortgage loans, for instance, rose by over 45 percent from 2007 to 2008, he stressed that the Central Bank has carefullly monitored the risks assumed by the banks, and issued a series of circulars to ensure enhanced bank control of them. In a recent meeting with Econ Counselor, Jouahri's deputy, Mohammed Faouzi, noted that lending standards in Morocco remained high, and that even with the rapid growth in credit for mortgages, such loans still only represent 13-14 percent of Moroccan GDP, a fraction of levels in the U.S. or Europe. Where there were abuses in the past, as when certain lenders offered loans for more than 100 percent of the value of a property, the Central Bank stepped in to limit them. The bank also moved recently to raise its lending rate to banks by a quarter of a percent, though it requested that the banks not pass the increase along to their customers. ¶4. (U) From his private sector perch, El Alamy, who is himself the owner of a leading insurance company, has echoed the argument that the international exposure of Morocco's financial sector is extremely limited. In a press conference this week, he was at pains to reassure those worried about the insurance sector, noting that while insurers have had the right to invest up to 5 percent of their assets abroad since new regulations were introduces by the Exchange Office in August 2007, no insurer has yet taken advantage of the possibility. "We preferred to place our money in an economy that we understood," El Alamy noted, arguing thereby that "financial autarky" can sometimes be beneficial. Mezouar echoed this point in his own recent press conference, leading Morocco's preeminent business magazine "Economie et Entreprise" to comment ironically on the sudden conversion of the country's leading advocate of "globalization" into one of "autarky." ¶5. (SBU) But Risks Remain for the Real Economy: Mezouar was critical in his public comments of those who have spread "panic" about the risks to Morocco from the international crisis. He predicted that GDP would slip only 0.2 percent as a result of fallout, and implicitly criticized those like the Centre Marocain de Conjoncture who have predicted a 1.5 to 2 percent fall in growth. Lahbib Idrissi, Deputy Treasury Director at the Ministry of Finance, amplified on this critique in a recent meeting with us, arguing that the CMC's prediction was "intuitive" and not based on any close analysis of specific sectors. He argued that more time is needed to weigh the impact on Europe before one can assess what the fallout here will be. Observers concur, however, that if Morocco's financial sector is not well integrated internationally, its overall economy is increasingly dependent on international, and particularly European developments. Mohamed Terrab, head of the country's largest exporter, the Office Cherifien des Phosphates (OCP),told us last week that he agrees with the analysis that Morocco's dependence on Europe renders it vulnerable to follow-on effects from a slowdown there. Key transmitters, he said, would be export growth, tourism revenue, and flows of both direct investment and transfers from Moroccans resident abroad. The latter three are critical to counterbalance Morocco's structural trade deficit and to maintain the country's external reserves, which now total 9 months of imports (down from 12 last year as a result of rapid import growth). Idrissi concurred, judging that of Morocco's export industries, textiles is particularly vulnerable. ¶6. (U) In recent press interviews, however, Jouahri has also sought to highlight the opportunities that the international crisis may offer Morocco. He suggested that Morocco may even benefit in some sectors such as tourism and off-shoring, as a result of its cost advantage over European rivals. He highlighted Morocco's potential for back-office banking operations, for instsance, in addition to the off-shoring that already exists in the high tech and call center areas. In addition, he opined that as a low-cost destination, Morocco could woo European travelers to substitute Morocco for more expensive European destinations. Already, the Ministry of Tourism has set up a task force to devise strategies to best position Morocco in the new international climate. ¶7. (SBU) Market Mayhem: Meanwhile, the Casablanca Stock Exchange has experienced its own difficulties over the last month, which some ascribe to another impact of the international crisis: the fact that "panic" does not respect borders. Idrissi argued that the fundamentals of Moroccan companies remain strong, and that there are no objective grounds for sharp swings in either a positive or negative direction. Nonetheless, the market has moved sharply downward in recent weeks, giving up its gains for the year (ref b.) Exchange officials told Ambassador in a recent meeting that while the correction coincided with sharp drops in international stock prices, it was due more to Moroccan equities being overvalued on the basis of their price-earnings ratio. Mezouar has encouraged investors not to be swayed by a "herd mentality," and instead to continue to focus on the sound fundamentals of Moroccan companies. ¶8. (SBU) Comment: For now, Morocco is in a waiting and watching mode, with the Central Bank carefully scrutinizing the balance sheets of Moroccan banks and setting up a monitoring unit to keep tabs on developments in international markets. Despite the public confidence of Moroccan officials, if Europe sneezes, Morocco will find it hard not to catch a cold. While there is a potential silver lining for Morocco if European firms do seek lower cost alternatives, as Jouahri has argued, it is hard to believe that tourism, and thus Morocco, will not be negatively affected if the world financial crisis continues. End Comment. ***************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ***************************************** Riley