MOROCCO: UPDATE ON THE EFFECTS OF THE GLOBAL

UNCLAS RABAT 000039

SIPDIS
SENSITIVE

DEPARTMENT PLEASE PASS TO USTR FOR PAUL BURKHEAD

E.O. 12958: N/A
TAGS: ECON ETRD EAID EAGR MO
SUBJECT: MOROCCO: UPDATE ON THE EFFECTS OF THE GLOBAL
ECONOMIC CRISIS

REF: A. 08 STATE 134905

B. 08 STATE 134459

C. 08 RABAT 1084

D. 08 RABAT 1002

E. 08 RABAT 0893

F. 08 RABAT 0853

Sensitive but unclassified - not for internet distribution.


1. (SBU) SUMMARY: Morocco awaits the domestic impact of the
global economic slowdown with trepidation. Government
officials have tempered their earlier comments about how
Morocco is sheltered from the crisis, conceding that while
not exposed to "direct contagion" from "toxic assets," the
country's increasingly open economy cannot escape the impact
of a slowdown among its principal trading partners.
"Vigilance" has thus become the watchword of the day.
Officials express confidence, however, that the Morocco that
must face these follow-on effects does so from a position of
strength. The country's budget position is strong;
international reserves are stable; and despite a chronic
trade deficit, the country has enjoyed a balance of payments
surplus in recent years. In addition, mother nature appears
to be smiling on Morocco, and officials hold out hope that
plentiful rains will bring a bumper harvest that can help
cushion expected downturns in tourism, investment and
transfers from Moroccans abroad. END SUMMARY.


2. (SBU) While little has changed in the underlying analysis
of Morocco's vulnerabilities since our last reporting in late
November, there has been a slight but significant movement in
the tone of Moroccan official statements about the country's
position. Emphasis has shifted from the country's "immunity"
from the crisis to the fact that in a global economy, all
will be impacted to one degree or another. While officials
continue to insist that Morocco is in a strong position to
confront the crisis, they also emphasize "vigilance" is the
order of the day.


3. (SBU) Analysts continue to predict that the global
economic crisis will primarily impact Morocco through its
follow-on effect on the real economy. They identify Europe's
economic slowdown as the key transmission channel, as that
continent remains Morocco's primary trading partner and the
source of most of the country's tourists and transfers.
Particularly vulnerable on the manufacturing side, in most
observers' eyes, are the textile and automobile industry.
Already in November, auto industry officials in Tangier
signaled that parts manufacturers were experiencing a 20
percent decline in production, and were resorting to
temporary furloughs to address reduced demand. The textile
industry has also sounded the alarm, and organized a
symposium in Rabat on January 14 to outline its predicament
and appeal for urgent government assistance. Without
increased government support for exports, industry leaders
argue, the sector will continue to wither away in the face of
declining demand and low-price competition from China.


4. (SBU) Also at risk is continuation of the high level of
foreign direct investment that Morocco has enjoyed in recent
years. Investment rose from 4.5 percent of GDP to 6.2
percent in 2007 (and totaled over USD 4.5 billion),but
appears to have slipped in 2008. Much of that investment
flowed into the real estate sector, which has been
particularly hard hit, especially at the higher end in
popular European weekend destinations such as Tangier and
Marrakech. Gulf, Spanish, and other investors are putting a
number of large projects on hold, and Moroccan companies are
re-orienting themselves away from higher end developments
toward lower-income and "social" housing, market segments to
which they earlier gave a cold shoulder.


5. (SBU) Additional Moroccan vulnerabilities include other
elements in the country's balance of payments that have
enabled Morocco to enjoy a balance of payments surplus, even
as it has run a significant (and growing) trade deficit.
Officials expect a sharp drop in tourism receipts: weakness
is already evident in tourist arrivals in recent months.
Similarly, with the economic slowdown in Europe, officials
are braced for a decline in transfers from Moroccans resident
abroad, another significant positive entry in the balance of
payments ledger. Tourism officials are meeting the week of
January 12 in Marrakech to map their strategy to respond to
the crisis. Some continue to express hope that proximity and
affordability can moderate the downturn, and even permit
Morocco to attract value-oriented tourists who prefer a
destination that is lower cost than nearby European

alternatives. Given that Morocco has never been
characterized by the mass low-cost tourism that exists in a
number of its Mediterranean rivals, this hope appears
exaggerated.


6. (SBU) The financial sector itself remains in a relatively
good position. As last year's IMF Financial System Stability
Assessment concluded, the sector is "stable, adequately
capitalized, profitable, and resilient to shocks." Continued
restrictions on the capital account precluded Moroccan
institutions from investing in "toxic assets," while neither
banks nor corporations have significant external financing.
Foreign participation in the Casablanca stock exchange is
limited, so analysts see little risk that a withdrawal by
foreigners can severely destabilize the market. The exchange
has declined in recent months, however, as investors have
taken profits after a long bull run, and at least in part
from the psychological impact of widespread declines
elsewhere. As for the banks, liquidity is no longer as
abundant as it was up until the end of 2006, but the Bank
al-Maghrib (central bank) continues to inject liquidity into
the market, and has adjusted its monetary reserve requirement
from 16.5 percent to 15 percent to give the banks additional
breathing room. Treasury officials note that this
"conservative" level can be tweaked further, if necessary, to
free up additional bank capital. Officials concede that real
economy developments will inevitably have some impact on the
banks, but note that with a lower level of non-performing
assets (down three percent to 7.9 percent in 2007),the banks
are better able to meet such challenges.


7. (SBU) Yet to be determined is the impact on Moroccan
government finances. The government's budget is relatively
conservative, foreseeing a diminishing increase in tax
revenues and an oil price of USD 100/barrel. While that tax
increase margin is usually comfortably exceeded (in 2008 tax
receipts rose over 28 percent, and the average increase has
been above 20 percent since 2005),few expect that
performance to be matched this year. Analysts note, however,
that the economic slowdown has had some positive impacts for
Morocco, notably in the diminishing price pressure on oil and
other primary commodities. Government subsidy spending,
important to keep inflation under control and thereby assure
social stability, will ease this year, and that has permitted
the government to ramp up investment spending.


8. (SBU) In addition to the stimulus this spending will
provide, Moroccan officials also hold out hope that
exceptionally abundant rains this year will permit a bumper
agricultural harvest. Given that agriculture remains between
16 and 20 percent of Moroccan GDP, a significant increase
there offers the potential to balance the expected weakness
in exports and tourism. Finance Ministry officials also
remind us that internal demand remains a principal motor of
Moroccan growth, and given that much of it is for basic
consumption, they anticipate that it will hold up well next
year. Government officials will closely monitor aid levels,
but appear confident that in the short run they will also
hold steady. To date, none of Morocco's principal donors
have announced plans to scale back their programs here.


9. (SBU) In sum, even officials who caution that the economy
will slow in 2009, believe that it can be at or near 5
percent growth for the year, down from predictions of 6
percent six months ago. In predicting this level of growth,
Morocco's Director of the Treasury and External Financing,
Zouhair Chorfi, noted recently that if last year's run-up in
commodity prices required that Morocco develop new
agricultural and energy strategies, this year's troubled
world economy requires that it "accelerate and enlarge its
reform effort." If the crisis has this impact, which is far
from certain, this would constitute the silver lining of the
global downturn. In a meeting with the Consul General in
Casablanca, the new head of Morocco's electricity office
pointed out that he plans to accelerate reform efforts in the
energy sector, and is already working to actualize natural
gas and other energy projects. Even absent such
reinforcement of the reform effort, however, it appears
likely that agriculture will permit Morocco to experience
positive growth this year. The challenges will increase
significantly, however, if the recession in Europe continues
into 2010.


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Riley