MOROCCAN MARKETS RESIST INTERNATIONAL CREDIT

UNCLAS RABAT 000254 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN MO SUBJECT: MOROCCAN MARKETS RESIST INTERNATIONAL CREDIT CRISIS, FOR NOW ¶1. (SBU) Summary: To date, Morocco has largely shrugged off the impact of the international credit crisis. The Casablanca Stock Exchange remains the best performing exchange globally, up 16 percent since January 1. There has been some spillover in Moroccan financial markets, with an evaporation of liquidity for some financing vehicles and an increase in the risk premium on Moroccan debt, but Treasury Director Zouhair Chorfi reassured markets this week that at only 20 percent of GDP, Morocco's debt is easily manageable. Economists argue that as a result of its "limited integation" into the world economy, Morocco will remain largely sheltered from any global slowdown. The key risk most identify is the possibility that Morocco will experience its own housing slowdown and resulting credit crunch. Standard and Poor's warned recently that the country's banking system is "becoming increasingly vulnerable to rapid and untested credit growth that is fueling asset prices." End Summary. ¶2. (SBU) What Crisis?: Ongoing turmoil in international capital markets has had only a limited effect in Morocco. The Moroccan Stock Exchange, a star performer over the last half decade, has continued its march forward and leading economists continue to predict that the economy will grow by above five percent this year. Tarik El Malki, Director of Research at the Centre Marocain de Conjoncture, attributes Morocco's resilience to the country's "limited integration" into the global economy, which, he points out, is not an unalloyed blessing, since it is also testimony to the country's "lack of competitiveness." ¶3. (SBU) Euro-centric: For the credit crunch to significantly impact Morocco, Malki and other experts argue, it would first have to cause a serious slowdown in growth in the European Union. Moroccan trade remains heavily concentrated on "old Europe," with only limited exports going to markets like the United States that face diminished growth. Europe is also the source of significant foreign investment, the bulk of Morocco's tourists, and of most transfers from Moroccans resident abroad. A slowdown in Europe would thus be a body blow to the Moroccan economy, but so long as European growth remains steady, analysts believe Morocco should be spared. ¶4. (SBU) Trade Impact: The additional vulnerability stemming from Morocco's overall dependence on European markets results from the dirham's link to the Euro through its market basket peg. Exporters continue to complain about the issue, most recently in a meeting in Casablanca last week to discuss the first two years of the U.S.-Morocco free trade agreement. The appreciating dirham they argue, has seriously damaged their competitiveness. While it does cushion some of the increase in dollar-denominated commodity prices, they point out that with almost fifty percent of Moroccan imports coming from Europe, the benefit is limited. ¶5. (SBU) National Markets: Lack of integration is also a factor in the Casablanca exchange's strong performance, even as its counterparts elsewhere have fallen. Foreign investors are marginal players, and foreign portfolio investment has historically been modest. It only reached a significant sum in 2004 when government Maroc Telecom shares were sold on the Casablanca and Paris exchanges. Current IMF projections forsee between 60 and 85 million USD a year in portfolio investment through 2010. Continuing capital account restrictions on the ability of Moroccans to invest abroad have also held up the market. While these regulations were liberalized in 2007 for some financial insitutions, practical modalities to carry out the changes have not yet been introduced. Few Moroccan institutions thus hold assets overseas. Even those that have nominal permission to do so, like insurance companies, hold back, since the permission to invest must be renewed annually, and companies are reluctant to take long-term positions that could be cut off on short notice. As a result, wealthy Moroccans have few investment alternatives, and so turn primarily to the exchange and to real estate. ¶6. (SBU) Credit Impact: Where there has been an impact is on Moroccan credit markets, both domestically for Moroccan economic actors, and internationally for Morocco has a whole. Chakib Erquizi, Director for Markets at Morocco's leading bank, Attijariwafa, highlighted two such instances in a press interview last month: the inability of BMCE Bank to find sufficient subscribers to issue a subordinated debt instrument to augment its capital, and the fact that the risk premium for Morocco has increased three fold. Whereas the Treasury was able to sell 500 million in Eurobonds with a spread of 50-60 points in the summer of 2007, that rate has now reached 150 points. Treasury Director Zouhair Chorfi moved to reassure markets this week, however, stressing that at only 20.3 percent of GDP, Morocco's external debt is manageable, particularly given that Morocco's external assets represent 160 percent of the debt total. He stressed that he intends to maintain the current structure of external debt, which has shifted dramatically toward Euro-denominated instruments (now 77 percent of the total, up from 37 percent in 2000). Dollar-denominated assets have declined from 47 to 12 percent over the same period. (Note: this shift when coupled with the Euro's appreciation has increased Morocco's debt burden marginally, but the country is largley insulated as a result of the dirham peg to a market basket of currencies, in which the Euro has a preponderant weight). ¶7. (SBU) Key Risks: If the subprime crisis and the resulting credit crunch seem to have spared Morocco, some see in Morocco's own housing boom the seeds of a potential crisis that could mimic what has occurred elsewhere. In its recent evaluation of the banking sector, Standard and Poor's argued that while the sector has strengthened over the last five years, it is "increasingly vulnerable" as a result of the rapid expansion of its credit portfolio and the increases in asset prices that have resulted. While S and P was careful to note that it did not forsee a major correction in asset prices, other observers have pointed to an emerging slowdown in Morocco's overheated housing market. A recent review of the sector in Morocco's leading economic weekly, "La Vie Eco," suggested that Morocco's middle class, which represents 50 percent of purchasers, is no longer able to find affordable property, as a result of rapid price increases. Experts noted that a significant reduction in loan applications has occurred in recent weeks, and at least one warned that "there is now a real risk of recession in large Moroccan cities." ¶8. (SBU) Officials at the Bank al-Maghrib hotly contest Standard and Poor's assessment, however. They contrast it with the positive rating the banking system received in the most recent Financial Sector Assessment Program report last November. Morocco, banking supervision director Bouazza told us last week, was highly praised for the reforms it has enacted since 2002, and is seen by IMF and World Bank officials as the "benchmark" for the region. ¶9. (SBU) Comment: Morocco has escaped lightly from international market turmoil, but has its own emerging risks as a result of rapid expansion of credit and inflationary pressures (septel). For now, it seems likely to hold its own, particularly given continued strong inflows of foreign direct investment, largely from oil producing states and from Europe. This risk avoidance may not be grounds for unmitigated celebration, however: in Malki's view, "it highlights the urgency of fundamental reforms to make Morocco more competitive globally so that it can improve its integration." Certainly, as Malki's counterintuitive argument suggests, Morocco has avoided the current low, but it has also missed out on significant earlier growth opportunities. End Comment. ***************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ***************************************** Riley