EXPLAINING MOROCCO'S "LIMITED IMMUNITY"

C O N F I D E N T I A L RABAT 001084

SIPDIS

DEPT FOR EEB/OMA, NEA/RA AND NEA/MAG

E.O. 12958: DECL: 11/19/2018
TAGS: ECON EFIN MO
SUBJECT: EXPLAINING MOROCCO'S "LIMITED IMMUNITY"

REF: A. RABAT 1002

B. RABAT 893

C. RABAT 853

Classified By: Econ Counselor Stuart Smith, Reasons 1.4 (b) and (d).


1. (SBU) Summary: Leaders in Morocco's financial sector
remain confident that it is sheltered from any direct
problems as a result of ongoing turmoil in world financial
markets. The "immunity" stems less from the sector's
inherent virtue, bankers tell us, than from the still limited
nature of Morocco's integration into the world financial
system. They point to two key factors: continued controls on
Morocco's capital account, which limit the ability of
Moroccan individuals and institutions to invest abroad, and
the country's longstanding balance of payments' surplus.
Additional strengths, they argue, include the limited foreign
participation in the Casablanca Stock Exchange (CSE) and the
Bank al-Maghrib's strengthened oversight of the sector. Our
contacts concede that Morocco's immunity is not total: they
believe the country will suffer in the medium term from
follow-on effects from a slowdown in Europe. If the
recession is of short duration, one seasoned observer told
us, however, Morocco's "improved economic fundamentals"
should see it through. End Summary.


2. (SBU) In a recent series of meetings in Rabat and
Casablanca, Econ Counselor and Econoffs found that leading
bankers and analysts largely share the government's belief
that the Moroccan financial sector is sheltered from "direct
contagion" from the ongoing global financial crisis. Our
interlocutors emphasized that the "immunity" stems not from
"superior insights or intelligence," but from the fact that
continuing controls on Morocco's capital account limit the
ability of Moroccan banks and other financial insitutions to
invest in the instruments that are at the root of the crisis.
Such rules, the Bank al-Maghrib's Banking Supervision Chief,
Abderrahim Bouazza, reminded us, make it impossible for banks
to have more than 20 percent of their own funds and 5 percent
of their balance sheet overseas. Insurance companies and
other financial insitutions face similar limits. Moreover,
Moroccan regulations strictly regulate the types of
instruments in which banks can invest, limiting them
generally to government bonds and investment grade assets in
OECD countries. As a result, Moroccan banks have little
foreign exposure on either the asset or liability side.


3. (SBU) An additional benefit of the stringent capital
control regime, Idriss Smires, the Deputy President of the
Banque Centrale Populaire (one of Morocco's three leading
banks),told us, is that it "prevents an attack on the
Moroccan dirham," and thus insulates the country from the
threat of devaluation of the currency, the mechanism through
which many other emerging economies have been hurt by the
crisis. Morocco's longstanding (though narrowing) balance of
payments' surplus and the limited foreign stake in the
Casablanca Stock Exchange both provide additional defensive
reinforcement on this front, he said. (Note: Foreign
investment represents only 7 percent of CSE's transaction
volume. End Note.) Smires cautioned against an exaggerated
sense of triumphalism on account of these advantages,
however. "We are in a different system than countries with
open economies," he said, something that has limited economic
growth during good times but conversely now protects Morocco
in these changed circumstances.


4. (C) Smires and Bouazza also pointed out that while
advanced in comparison to their regional competitors,
Moroccan banks engage in much more basic transactions than do
their European and American counterparts. Most importantly,
with a captive market, there has been little pressure to
branch out into complicated derivatives or to engage in
proprietary trading. The banks have been able to achieve
solid profits carrying out transactions on behalf of their
clients, so they feel "why take risks" when these earnings
are sufficient. As for the fifth of the banking sector that
is controlled by foreign (largely French) banks, Smires noted
that it has been tightly controlled by its French parent
companies, with the result that it has little downside risk,
though these French banks have lost market share to their
Moroccan competitors.


5. (SBU) Smires and Bouazza pointed to a number of other
reforms that have strengthened Morocco. As evidenced by the
clean bill of health accorded the Moroccan banking sector in
the IMF's most recent Article IV Consultation report, they
argued that Moroccan banks are much stronger than they were a
decade ago. State banks have been cleaned up, the level of
non-performing loans has been reduced, and banks have largely
provisioned for them. Banking supervision, they argued, is
also much improved, a point that the IMF consultation report
echoes. Bouazza stressed that the bank is proactive, closely
monitoring problem areas. When potential risks emerge, it
has acted quickly to limit them. It thus stepped in last
year when banks began offering residential loans for more
than a hundred percent of the value of a property. It has
also sought to ensure that banks clearly explain the possible
risks of adjustable-rate loans to their clients, to ensure
that they make an informed decision.


6. (C) If Morocco is protected from "direct contagion" from
the financial crisis, Smires was at pains to stress that it
will be impacted in the medium term by the emerging global
economic slowdown. He expressed concern that by stressing
the "immunity" of Morocco's financial sector, Moroccan
authorities are not adequately preparing the public for the
inevitable hit Morocco will take as its primary European
market slips into recession. (Note: Officials at the Finance
Ministry did take advantage of a November 13 economic
conference hosted by Morocco's leading bank, Attijarawafa, to
highlight these risks. End Note.) Like others we have
consulted, Smires concurs that key transmitters will be
exports, tourism revenues, foreign direct investment, and
transfers from Moroccans resident abroad.
Counterintuitively, he noted that in the case of a short
downturn, Moroccan expatriates have historically stepped up
the tempo of their transfers home, as occurred in 2001
following 9/11. This slowdown, he judged, however, will be
more protracted, and will undoubtedly impact this important
component of Morocco's balance of payments. Similarly,
tourism will also slow, as will investment, particularly in
higher end real estate developments in cities like Marrakech
and Tangier.


7. (C) Despite these vulnerabilities in the real economy,
Smires concurred that Morocco is well positioned to ride out
the storm as a result of reforms over the past decade, and as
a result of the fact that its international profile lowers
risk perceptions among foreign partners. While conceding
that an early impact from the financial crisis was a tripling
in the spread on Morocco's bonds over comparable Euro bonds
from 55 to 160 basis points (ref A),he pointed out that this
is just a fraction of the 600 and 800 point spreads that
currently face economies like Dubai and Russia that are more
dependent on foreign financing. He pointed to ongoing
infrastructure projects and initial hints that the
agricultural season will be a good one as possible shock
absorbers that will cushion Morocco's potential "hard
landing," but still saw growth slipping to 2.5 to 3 percent
in 2009 and 2010. "I am pessimistic by nature," he said.
Others, however, including the Moroccan Conjunctural Center
(CMC) have predicted a similar slowdown, and the Finance
Ministry has already lowered Morocco's growth target for 2009
below 6 percent.


8. (C) Comment: Our banking sector contacts concur that
Morocco's financial sector is well positioned to ride out the
ongoing financial crisis, but that the increasingly open
Moroccan economy will take a hit, particularly if Europe
enters a protracted recession. Already, Moroccan
manufacturers are reporting cancelled orders, and most expect
the impact to also begin showing up in remittance,
investment, and tourism flows over the next three to six
months. An additional concern is that the international
crisis may slow plans to gradually liberalize Morocco's
capital account, something that Smires and others believe is
in Morocco's interest, "if it is done properly." If there is
a silver lining in the gloomy mid-term forecast, it is that
Morocco is as well-prepared as it has ever been for the
challenge, and that for the moment the surging inflation that
earlier this year sparked fear of growing social unrest has
been tamed. Prices, Smires reminded us, have always had a
more volatile impact in Morocco than other difficulties, and
at least on that front pressure has eased. End comment.



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Riley