GOVERNMENT, PRIVATE ECONOMISTS CLASH ON MOROCCAN

C O N F I D E N T I A L SECTION 01 OF 03 RABAT 000290 SIPDIS SIPDIS CAIRO FOR TREASURY ATTACHE E.O. 12958: DECL: 04/04/2018 TAGS: ECON EFIN PGOV MO SUBJECT: GOVERNMENT, PRIVATE ECONOMISTS CLASH ON MOROCCAN OUTLOOK Classified By: Econ Counselor Stuart Smith, Reasons 1.4 (b) and (d). ¶1. (SBU) Summary: A March 26th symposium hosted by Morocco's leading economic think tank highlighted the contrasting views of government and independent economists on the overall health of the Moroccan economy. Whereas analysts affiliated with the host Centre Marocain de Conjoncture (CMC) pressed the case for a return to a "stabilizing state," based on prospects that last year's slowdown will continue to impact Morocco in 2008, government officials accentuated the positive, arguing that the fact that non-agricultural growth remained strong even in a year that saw a poor harvest shows that the reforms of the last decade are beginning to pay dividends. They highlighted in particular the fact that Morocco attained a balanced budget last year, even in the face of a difficult international climate and exploding commodity prices. End Summary. ¶2. (U) The CMC's annual symposium attracted leading economists and businessmen from across Morocco. In their presentations, organizers were largely pessimistic, arguing that "globalization has been marked by excess and brutality," and that as a result "the state must act as stabilizer." CMC economists noted that even though it has increased since 1999, Morocco's average growth rate of 4.5 percent has been "disappointing" and has fallen short of its potential. CMC President (and former Minister) Habib El Malki noted that the "social base" of this growth is also very weak. The CMC attributed these shortfalls to Morocco's lack of competitiveness, stemming from the failure of its educational system and its inability to take advantage of new technologies, as well as the fact the country's various sectoral initiatives have not been part of a "global strategy." With a difficult national and international context, CMC economist Larbi Jaidi concluded, "the foundations of the Moroccan economy are ambivalent," and a growth rate of 5 percent in 2008 is unlikely to close the gaps that emerged in 2007. His colleague Mohammed Tahraoui concurred, and suggested that a fiscal stimulus is needed, either through wage increases, a cut in tax rates, or an increase in public investment. ¶3. (U) Moulay Hafid El Alamy, President of the Morocco's largest business organization, the Confederation Generale des Entreprise du Maroc (CGEM),concurred with the CMC assessment in part. Diplomatically he stressed that while Morocco has accomplished much in recent years, "we are not where we want to be." He praised the government's various sectoral initiatives, but argued they are now bumping up against structural constraints, such as the lack of trained labor. He warned against reflexively seeking to increase purchasing power by raising salaries, arguing that "competitivity is key," and that any increases must be "digestible." ¶4. (U) If the private sector and academia were downbeat, government officials not surprisingly accentuated the positive. Ministry of Economy and Finance Secretary General Abdellatif Loudiyi pointed out that Morocco had stood up to the national and international challenges of 2007 very well, with a positive growth rate of 2.2 percent and a non-agricultural growth rate of over 5 percent. He noted that unemployment is below 10 percent, inflation remains under control at 2 percent, and the country's vitality is evident in both the investment rate of 34 percent of GDP and the fact that bank credits expanded at a 30 percent clip in ¶2007. He also highlighted the excellent performance of public finances, with a 20 percent surge in revenues and a slight budget surplus of 0.3 percent of GDP. Loudiyi conceded that fragility exists, particularly regarding Morocco's trade deficit, but argued this was not surprising, given the increase in food imports following the 2007 drought, high energy prices, and Morocco's apetite for capital goods and equipment to feed the country's infrastructure and building boom. ¶5. (U) The Ministry of Finance's views were strongly seconded by Karim El Aynaoui, the Director of Studies at Morocco's independent Central Bank, who emphasized the need to draw a distinction between short-term stimuli and long-term efforts to reform the Moroccan economy. He noted that the bank has a very different perspective from the pessimism other speakers expressed, and argued that there is not a "deficit of demand" RABAT 00000290 002 OF 003 in Morocco: rather the country has entered into a new virtuous cycle that is being pulled by investment and consumption. Given this fact, he suggested that it is difficult to see how the budget can be used to increase growth. Instead, the focus should remain on long-term reforms, which are now starting to achieve "critical mass" that will lead to a sustainable increase in economic growth. Convergence, he reminded his audience, is a very long-term phenomenon in Morocco, and the country should continue its work on basic reforms to continue that process. ¶6. (C) In a subsequent meeting with Econ Counselor, El Aynaoui noted that he had been surprised by the pessimistic tone of CMC economists, but was inclined to attribute it in part to their desire to demarcate themselves from the government. Politics, he suggested, may also have played a role, given the political ambitions of some participants. (CMC President El Malki is viewed as a leading contender for leadership of the socialist USFP party, which has staked out a position as an independent critic within the governing coalition.) El Aynaoui also critiqued the CMC's overall work, arguing that it is weak technically, and that its simple linear economic models are inadequate. More generally, El Aynaoui echoed the general optimism about Morocco's overall economic position that we hear frequently elsewhere. The 5.5 percent growth that is anticipated this year, he argued, is a "decent performance," and the strong showing of non-agricultural sectors is important. He repeated a theme he emphasized at the conference, that Morocco should not be too fixated on industrial development. It can prosper in certain niches, he argued, but "Morocco can never compete with China" and other low-cost producers. Instead, it should focus on high value-added sectors where labor costs are relatively less important, as well as services. The key constraint facing the country, he argued, is the lack of skilled labor, and "investment in education should be our top priority." ¶7. (C) El Aynaoui also strongly critiqued the CMC's oft-repeated argument that Morocco has not succeeded in basing growth on internal demand. In fact, he argued, such demand rose 9.3 percent in 2006, and another 7 percent last year. While he challenged suggestions that Moroccan purchasing power has not increased, given dramatic improvements in per capita GDP in recent years, he conceded that minimum wages have not kept pace. The key challenge facing the government currently, he argued, is political, with the ongoing "social dialogue" with unions and workers. The "excellent" state of Moroccan public finances gives the government room to maneuver, he suggested, however, and he predicted that the government will see its way clear to increase the minimum wage, though not by as much as workers would desire. The key, in his view, is to keep a tight hold on expenditures for the civil service, to build on the 2006 program of voluntary departures and to keep spending down. ¶8. (C) Comment: Given its need to showcase itself as an independent, outside analyst, the CMC's desire to distinguish itself from its government counterparts is not surprising. In so doing, however, it perhaps went to far in minimizing Morocco's recent achievements in terms of macroeconomic stability. The center is not the only group to have adopted a cautious approach, however. In recent weeks, Finance Ministry and Central Bank officials have noted their frustration with their inability to convince rating agency representatives to raise their ratings for Morocco. A recent Standard and Poor's evaluation of Morocco's banks put them in the 8th of 10 categories, an excessivley harsh judgement in the view of Moroccan officials, and a recent S and P team was also not inclined to raise Morocco's sovereign debt rating to investment grade, given concern about how possible social unrest would impact political stability. (Currently only Fitch accords Morocco the much coveted investment grade ranking.) In El Aynaoui's view, Morocco is now among those paying the price for the excessively optimistic judgments that rating agencies issued in other markets over recent years. ¶9. (C) Comment continued: On the related question of whether fiscal policy should now be used to spur the economy, we share El Aynaoui's scepticism about how useful a fiscal stimulus can be at this point. Ambitious infrastructure RABAT 00000290 003 OF 003 projects are already underway, and the government faces an increasingly heavy burden as a result of high international commodity prices. If there was a mirage in Loudiyi's conference presentation, it was the fact that Morocco's overall 2007 budget surplus concealed 7 billion MAD in payments by the country's Compensation Fund that were shifted to the 2008 budget. The fund's director told us last week on the margins of the conference that rumors that the alloted 20 billion MAD for the fund would be exhausted by midyear are true, and that year-end expenditures may approach 35 billion MAD. In retrospect, he said, action should have been taken to settle 2007 arrears (which constituted 7 of the 20 billion MAD) in that fiscal year. Morocco would have run an overall budget deficit as a result, rather than the small surplus it enjoyed, but the fund's 2008 funding would have been left free and clear to settle this year's charges. Now debate is heating up over whether and how to reopen the 2008 budget and amend it to address the new realities. End Comment. ***************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ***************************************** Riley