MOROCCO ECONOMIC HIGHLIGHTS: JUNE 2008

UNCLAS RABAT 000546 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON ETRD EAGR MO SUBJECT: MOROCCO ECONOMIC HIGHLIGHTS: JUNE 2008 This message is sensitive but unclassified. Please handle accordingly. ¶1. (SBU) Budget Healthy for Now: Moroccan budget officials are confident that the country can meet this year's target of a budget deficit of less than three percent of GDP, notwithstanding pressures from subsidy and social spending. They note that Morocco had an excellent year last year, with an actual budget surplus, and that tax revenues have been even stronger this year. In fact, Deputy Budget Director Samir Tazi told us last week, Morocco realized 50 percent of its projected 2008 revenue in the first four months of the year alone. Morocco's tax on company profits led the way, with an 85 percent increase in revenue over the same period in 2007. Tazi noted that while some of the increase is due to better tax enforcement, it largely reflects the very healthy situation of the country's 50 largest corporations, which continue to pay the bulk of the tax. Tazi pointed out too that tax revenue has increased an average of 13 percent a year since 2002, roughly 2.5 times the country's 5 percent average growth rate, an indication that Moroccan statistics may underestimate GDP. He conceded, however, that 2009 could be more difficult, given both pressures stemming from spending to subsidize basic commodities and the 16 billion MAD in increased spending and tax cuts (over three years) that the government promised in its recently concluded "social dialogue" with Morocco's unions. ¶2. (SBU) But Petrol Arrears Spark Industry Concern: One element of the subsidy issue that continues to spark special concern, however, is the increasing arrears in government reimbursements to the petroleum industry for subsidized petroleum products. Such arrears reached 6 billion MAD at the end of April, prompting a warning by the industry's lobbying association that unless the government picked up the reimbursement pace, there was a real risk of an interruption in supply this summer. Since that time, the government has increased its monthly payment to operators from 1 to 1.2 billion MAD, with the prospect of a future increase in reimbursements to 1.5 billion MAD. Concerned companies note that the daily finance charge they pay on the outstanding amounts to 1.2 million MAD a day, and that their own lines of credit are being exhausted. (Comment: Tazi and other officials have confirmed press reports that the subsidy system remains under intense study, and that the GOM is working with the World Bank to reform it so it better targets needy populations. Given public angst over increasing prices, whether such a shift is politically possible in the current environment remains an open question. End comment.) ¶3. (U) IMF Mission Praises Moroccan Performance: In a press release following last month's Article IV consultations, the IMF on June 10 praised Morocco's management of the economy, hailing progress on macroeconomic stability and strengthening public finances. It noted the challenge posed by the spike in commodity prices, and judged that while the budget can absorb the pressure in the short term, the government's intention to reform the system to target the subsidies more effectively is a "welcome" one. As in the past, the Mission stressed the need for continuation of sectoral reforms to improve productivity, pointing particularly to the need for reform in the spheres of education and provision of social services. While noting that Morocco's financial sector has escaped fallout from the international credit crisis, it urged continued vigilance in oversight to ensure this remains the case. ¶4. (SBU) Sidi Ifni Riots Highlight Social Tension: Press commentary has attributed last weekend's riot in the southern fishing port of Sidi Ifni to local economic tensions rather than national tensions over the rising cost of living. In the incident, police forcibly broke up a demonstration that had prevented trucks carrying sardine shipments from leaving the port. There were unconfirmed press reports of fatalities, which the Government of Morocco has denied. One interesting and counterintuitive fact that has emerged in press coverage of the incident, however, is that at 3.95 percent, the locality has one of the lowest poverty rates in Morocco. The "Economiste" newspaper noted, however, that the flip side of this picture is a high level of social inequality in the area. The protracted blockade of the port caused serious losses for local fishing interests: reports indicate that as many as 700 tons of sardines were spoiled when the refrigerated trucks containing them ran out of gas. The local Maritime chamber denounced the "laxism" of authorities for not maintaining order and preventing these losses. ¶5. (U) Closing the Book on 2007: Updated figures on 2007 growth show a marginally better outcome than did initial results. The High Planning Commission (HPC) announced that growth totalled 2.7 percent for the year, instead of the 2.2 percent it initially reported. This modest growth (down from 7.8 percent in 2006) came in the face of a 20.8 percent decline in value added from agriculture, as a result of the year's disastrous harvest. HPC attributed the bulk of growth to investment, noting that fixed capital formation rose by 14.3 percent, versus 9.7 percent the year before. Finance Ministry officials remain optimistic that Morocco can achieve growth of over 6 percent this year. ¶6. (U) Inflation Hits the Construction Sector: After food and energy, construction materials have also embarked on an inflationary spiral in Morocco. The National Federation of Contractors (FNBTP) notes that Morocco's prices for construction materials exceed those elsewhere in the Maghreb, and that companies are suffering in the face of a 70 percent increase in steel prices, and increasing cement prices, which have seen cement manufacturers realize profit margins of 35-40 percent. Companies complain that continued Moroccan tariffs and non-tariff barriers prevent them from importing material from countries such as Turkey or Egypt, notwithstanding the free trade agreements that exist with the two countries. ¶7. (U) Trade Balance Slips: Though the IMF termed Morocco's overall balance of payments "sound," the country's overall trade deficit through the first four months of the year nearly doubled, as imports surged by 27 percent and exports only grew by 13.7 percent. The deficit stood at 27 billion MAD, versus 13.9 billion MAD in the same period in 2007. The coverage ratio remained below 50 percent for goods, or 75 percent with services included as well. Phosphates accounted for the bulk of the increase in exports, while energy and food imports led the way on the import side. ¶8. (U) Tourism: Moroccan tourism officials will gather this weekend in Tetouan for their annual meeting against a backdrop of concern that despite continued increases in arrivals and nights spent in country, tourism receipts have not kept pace. Instead, they slipped by 2.3 percent from last year's total to just over 16 billion MAD. Analysts attribute the decline to a fall in arrivals from France, and to discounting in the face of competition from low-cost competitors such as Tunisia and Turkey. ***************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ***************************************** Riley