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Fitch: Fresh IMF agreement will support further Moroccan reform

July 30, 2014

Morocco's new two-year Precautionary Liquidity Line (PLL) from the IMF supports Fitch Ratings' assumption that the government will continue to pursue structural reforms and budget tightening. The two-year deal is worth $5 billion, or 4.4 per cent of GDP. The existing two-year PLL, which ends next month, has been a key anchor for the authorities' reform agenda.

As with the previous PLL (worth $6.2 billion), the authorities do not intend to draw the new facility, but it will provide a buffer against potential external shocks, such as a steep rise in oil prices.

The renewal is a reflection of Morocco's performance under the previous programme, with subsidy reform enacted and wages and investment brought under tight control after rapid increases following the "Arab Spring". Expenditure measures helped cut the central government deficit to 5.4 per cent of GDP last year from 7.3 per cent in 2012 and we expect a further fall to 4.3 per cent of GDP by 2015, although this could be affected if oil prices were higher than expected. Earlier this month, Economy and Finance Minister Mohammed Boussaid said implementation of the 2014 budget had so far proceeded "normally and according to plan" despite the downward revision of GDP growth forecasts to 3.5 per cent from 4.2 per cent in the initial budget.

A new budget law (Loi organique des Finances) passed by parliament in July could help maintain fiscal consolidation by modernising the fiscal framework, for example by introducing multiyear, programme, and performance budgeting, and a binding ceiling for wages.

Reforms to energy subsidies also helped Morocco's current account deficit to fall by two percentage points of GDP in 2013, to 7.5 per cent, alongside the strong performance of new export sectors and lower oil prices. We forecast further falls in the current account deficit thanks to further reform, and an improving external environment, including economic recovery in the Euro zone continuing to boost exports, tourism receipts and FDI. In mid-July 2014 net international reserves at the central bank were $21 billion, up from $19 billion in early 2014 and $18 billion a year ago. This suggests an overall improvement in the external position. The EUR 1 billion Eurobond issuance by the sovereign in June 2014 has also helped strengthen foreign reserves.

The Stable Outlook on the sovereign's 'BBB-' rating, affirmed in April, anticipates a further gradual reduction in the twin deficits, supported by continuing reforms. Our next scheduled sovereign ratings review is due on 24 October.

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Source: CPI Financial

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