Analyst
Sinan Lu
Lusinan@dagongcredit.com

                                                   
Sovereign Credit Rating
 
Local currency/outlook BBB+/stable
Foreign currency/outlook BBB+/stable
Rating time October, 2010

Rationale

Dagong assigns “BBB+” on both local and foreign currency sovereign credit ratings for Kingdom of Morocco (“Morocco”), which is based on a comprehensive analysis on Morocco’s financing requirements and its debt repayment risks.

In the last 5 years, Morocco’s total debt burden and annual debt repayment obligation have declined significantly due to the improvement of fiscal conditions and the sustained economic growth. By the end of 2009, central government’s debt outstanding was around 345.18 billion Dirham, about 47.1% of the GDP,, which is the medium level in Africa. The ratio of local and foreign currency debt to GDP was 36.4% and 10.7% respectively. The average debt maturity is relatively longer due to the low percentage of short term debt. The ratio of annual interest payment to GDP also declined, approximately 2.4% in 2009. It is expected that the government will continue its expanding fiscal policies in 2010, the same as last year, in order to stimulate economic growth. Dagong expects that government’s financing requirements will reach 15.0% of the GDP, and central government’s outstanding debt will increase to 48.5% of the GDP in 2010.

Morocco’s debt repayment risks are shown as follows:
The development strategy is made based on the actual condition of the nation, and their policies are relatively consistent and stable. The government’s sound governance over the nation, together with increasingly improved domestic security status and international relationship is conducive to the implementation of development strategy.

Morocco is a relatively small and primary economy. Although it is less vulnerable to the financial crisis, the economy remains fragile because it highly depends on agriculture and EU economy, and the unemployment issue is unchangeable in a long term.

Morocco’s financial sector is improving, and suffered less from the financial crisis. However, the growth of domestic credit is delayed after the crisis, and the SMEs have difficulty in financing for a long time, which might both impose negative impact on economy growth.

The fiscal balance has ameliorated over time. Although the fiscal balance deteriorated after crisis, its deficit is still relatively small compared with the average level in Africa. In addition, the government showed strong capacity of financing in the domestic market with a comparatively low cost, ensuring capital support on local currency debt repayment.

The surplus of current account for years inflates Morocco’s external reserve, so as to strengthen the guarantee for external debt. The impressive capability in external financing is a plus for the foreign currency debt repayment.

Outlook

Given the decline of agricultural output and sluggish recovery of EU economies, Morocco’s economy growth is expected to be slower in the short term, and the improvement of current account balance is limited. In addition, the fiscal condition will be deteriorated due to the expanding fiscal policies. However, the solid governance over the nation is fundamental to accelerate the reform in economic structure, financial sector and fiscal discipline, which is conducive to increase the economic growth potential and improve its ability to resist against the strike in the future. The government is expected to modify its expanding policies since 2011 along with the steady economic recovery. And then, the government’s fiscal status will be better. accordingly, Dagong assigns stable outlook to Morocco government’s local and foreign currency sovereign credit ratings in the coming 1~2 years.