EFTA02713714.pdf

MIDDLE EAST ECONOMICS FOCUS ! CM; Five reasons why we're upbeat on the outlook for Morocco • After a difficult few years, the outlook for Morocco is finally brightening. We think the country could be one of the best performing economies in the emerging world over the coming years. • First, Morocco has enormous scope for "catch-up" growth. GDP per capita stood at $3,300 last year, equivalent to just 6% of the level in the US and far below those in most other major EMs. This suggests that Morocco should be able to enjoy robust growth rates simply by getting the basics right in terms of economic policy and adopting technologies available elsewhere. • Second, macroeconomic stability is improving. A combination of tighter fiscal policy, low global commodity prices and booming exports have led to a sharp reduction in the country's twin budget and current account deficits. • Third, the government has undertaken a series of reforms to improve the previously dire business environment. Indeed, Morocco has enjoyed one of the largest improvements in the World Bank's Doing Business survey over the past five years. • Fourth, the drag from Morocco's agricultural sector should ease. A bumper harvest means output is set to rise sharply this year. And further out, the government's Plan Maroc Vert has been commended by a number of international institutions for helping to modernise the agricultural sector and encourage farmers to shift towards crops that are better suited to Morocco's warm, dry climate. • Finally, and perhaps most importantly, we expect Morocco to build on its enormous potential as a manufacturing hub. Morocco has started to establish itself within Western European manufacturing supply chains (particularly in the automobile sector). With more firms announcing their intention to set up plants there, coupled with plans to expand Tangier port, we expect this to continue. • Of course, the outlook for Morocco is not without risks. High levels of corruption and the poor quality of education are major obstacles. Political problems in the rest of North Africa could spill over into the country. And Morocco would be hit if a fresh escalation of the euro-zone debt crisis led to weaker growth and investment flows. But as things stand, we think the Moroccan economy could reasonably grow by around 5-6% annually for the next five to ten years. Jason Tuvey (+44 (0)20 7808 4065) North America Europe Asia 2 Bloor Street West, Suite 1740 150 Buckingham Palace Road #26-03 Income at Raffles Toronto, ON London 16 Collyer Quay M4W 3E2 SW1W 9TR Singapore Canada United Kingdom 049318 Tel: +1 416 413 0428 Tel: +44 (0)20 7823 5000 Tel: +65 6595 5190 Chief Emerging Markets Economist Neil Shearing (neil.shearing@capitaleconomics.com) Senior Emerging Markets Economist William Jackson (william.jackson@capitaleconomics.com) Middle East Economist Jason Tuvey (jason.tuvey@capitaleconomics.com) Middle East Economics Focus 1 EFTA_R1_02136110 EFTA02713714 Five reasons why we're upbeat on the outlook for Morocco Morocco's economy has struggled over the past But in spite of this gloomy recent history, we think few years. But the outlook is brightening and, as the outlook for Morocco's economy is bright. we explain in this focus, we think it could be one There are five key reasons that underpin our view. of the fastest growing economies in the emerging 1. Scope for "catch-up" growth world over the coming years. The first is that Morocco has enormous scope for A difficult few years "catch-up" growth. GDP per capita stood at The past few years haven't been kind to Morocco. $3,300 last year, which is equivalent to just 6% of Although the country managed to avoid the the corresponding figure for the US and below the political upheaval that afflicted Egypt and Tunisia, level in moth other EMs. (See Chart 3.) the economy still weakened. GDP growth has CHART 3: GDP PER CAPITA (% Of US, 2014) averaged around 3.5% since 2011, substantially (0 below the average of 5.0% seen in the preceding 50 50 decade. (See Chart 1.) 40 CHART 1: GDP (% Y/Y) 43 HP 12 12 zo 20 10 Spring t0 10 10 8 8 0 0 Poslatall 6 Spring Anwage 6 1 114 1 .I gp“ s 4 4 Somas - IMF, Capital Economia 2 2 The key point here is that relatively poor countries 0 can, in theory, grow much faster than richer ones 01 02 03 04 OS 06 07 08 09 10 I1 12 13 14 IS simply by getting the basics right in terms of Sons - CEIC, Capital Economia economic policy, replicating technologies and Alongside weaker growth, the unemployment rate production techniques readily available in the has crept up. And, worryingly, this has been driven developed world, and shifting workers from low by a sharp rise in the youth unemployment rate (a productivity sectors (such as agriculture) to high factor often cited as a trigger for the Arab Spring productivity sectors (such as manufacturing). In revolutions elsewhere in the region). (See Chart 2.) other words, EMs can "catch up" with developed countries. CHART 2: UNEMPLOYMENT RATE (%, 4Q AVG.) 22 22 As evidence for this, Chart 4 (over the page) plots 20 . 20 GOP per capita for a range of EMs as a share of the • Is • 14 US's in 1999 on the horizontal axis, and - subsequent average growth in real GDP per capita - 12 (from 2000 to 2014) on the vertical axis. As the Total • 10 • a Chart shows, low-income EM economies have Youth S-20 6 historically experienced faster growth in real GDP 0) Ot CO 01 01 05 06 07 08 0) 10 11 12 13 14 IS per capita. And those with the lowest incomes Sources - CEIC. Capital Economics tended to grow even faster than the rest. Middle East Economics Focus 2 EFTA_R1_02136111 EFTA02713715  do so by a significant margin over the past four years. However, as we explain in the rest of this CHART 4: GDP PER CAPITA & REM. GDP PER CAPITA GROWTH 10 10 Focus, we think there have been promising it 9 9 8 developments in Morocco which make the a 7 economy more likely to achieve its potential over 3 6 5 5 the coming years. 1 5 43 4 2. Improving macroeconomic stability 2 ic This brings us to our second reason to expect 0 strong growth, which is that the country's 10 40 60 60 COP per Capita 11999. % d 115) macroeconomic vulnerabilities have diminished. Sources - IMF, Capital Economics Notably, the government has made significant Over the past 15 years, Moroccan real GDP per progress in reducing energy subsidies, most of capita grew by an average of 2-3% a year. This is which have now been eliminated. According to respectable, but history suggests that it could do the IMF, overall subsidy spending is likely to fall to much better. As Chart 4 shows, at Morocco's less than 2.0% of GDP by 2017, from 6.6% in current level of income (6% of US GDP), the best 2012. This should help to rein in the budget deficit performing EMs managed to record real GDP per - we expect it fall to under 4.0% of GDP by next capita growth of 5% a year. year, from a peak of 7.4% in 2012. (See Chart 6.) Morocco also has a rapidly-growing population. As the fiscal deficit narrows, Morocco's public Based on projections by the UN, the country's debt ratio - which rose from 47% of GDP in 2008 working-age population is on course to expand by to 65% last year - is likely to stabilise. around 0.8% per annum over the next fifteen CHART 6: BUDGET BALANCE (% OF GDP) years. (See Chart 5.) i Evers a CHART 5: WORKING-AGE POPULATION (PROIECTED ANNUM GROWTH, %, 2015-30) 3.0 3,0 2.5 2.S 20 2.0 1.5 1.5 1.0 1.0 0.5 0.5 OS 06 07 08 09 10 11 11 13 14 15 16 0.0 OA -0.5 0.5 Sources - CEIC, Capital Economia .10 IA Admittedly, the falls in global food and energy prices over the past year mean that the subsidy bill Source - United Nations would have fallen in any case. But the key point is Putting together possible rises in output per that, by reducing subsidies, the fiscal position worker and in the labour force, Morocco's won't worsen again if commodity prices spike up economy appears to have the potential to achieve in the future. annual GDP growth of as much as 5-6% a year. On top of this, a new budget law, currently Of course, even if Morocco has a fast potential making its way through parliament, should help to growth rate it doesn't necessarily mean the strengthen fiscal discipline over the medium-term. economy will grow this quickly. Indeed, it failed to A key pillar of this will be the establishment of a Middle East Economics Focus 3 EFTA_R1_02136112 EFTA02713716 "golden rule" which will only permit net new 3. Business environment improving borrowing by the government in order to finance The third reason why we're upbeat on the outlook capital spending. There will also be a limit on the for Morocco is that the government has made great amount of spending that can be allocated for efforts to improve the previously dire business public sector wages. environment. Recent reforms include measures to simplify construction permits and property law, Of course, "golden rules" can, and have been, reduce the number of administrative documents disregarded elsewhere (the UK's being a case in required for exportation, and eliminate minimum point). But these policies do at least show that the capital requirements for limited liability authorities recognise the importance of fiscal companies. discipline (something which is sorely lacking elsewhere in the region). And the improving health As a result of these reforms, Morocco has jumped of the public finances should alleviate concerns from a lowly rank of 130 out of 183 in the World about rising debt as well as providing the Bank's Doing Business report in 2010 to a rank of government with scope for a policy response to 71 out of 189 in the latest survey. (See Chart 8.) counter any economic downturn. That is the second largest improvement in ranking over this period (after Rwanda). Alongside a narrowing budget deficit, Morocco's current account position is also on the mend. As a CHART 8: MOROCCO EASE Of DOING BUSINESS RANK large net oil importer, Morocco is a key beneficiary from lower oil prices, and we estimate that the TO • TO 40 • 40 country's energy import bill could fall by as much 60 • 60 as 5% of GDP this year. (See "How the fall in oil 83 • 80 prices will benefit North Africa", 13. January.) t 10) ' 1CO Emier ludo The combination of a lower import bill and rising 120 bats ' 120 140 exports (more on this later) are helping to reduce 011 09 10 11 11 13 14 15 Morocco's trade deficit and, therefore, its current Source - World Rank account deficit. (See Chart 7.) This means Morocco is becoming less dependent on foreign capital Of course, Morocco's business environment is far inflows. As a result, the economy's vulnerability to from perfect. But in spite of these pitfalls, the strains in the balance of payments, which could overall progress made so far is impressive and cause a sharp drop in the currency and/or fall in should help to encourage a rise in investment. domestic demand, are in decline. 4. Modernisation of the agricultural sector CHART 7: CURRENT ACCOUNT BALANCE (% Of GDP) The fourth reason to expect growth to strengthen is that Morocco's agricultural sector (which accounts for around 20% of GDP) should perform well, both over the short-term and longer-term. Agricultural output contracted by 1.7% y/y (in real terms) last year on the back of poor weather conditions. And, overall, the sector has fared poorly since 2010. (See Chart 9 over the page.) 05 06 07 08 09 10 11 17 13 14 15 16 Sources - Thomson Datastream, Capital Economics Middle East Economics Focus 4 EFTA_R1_02138113 EFTA02713717 Nonetheless, good rainfall this year is likely to The upshot is that the manufacturing sector tends result in a bumper harvest, boosting growth. The to experience greater productivity gains than the first signs of this were seen in national accounts rest of the economy. (See Chart 10.) data for the first quarter of this year, which showed CHART 10: EMERGING MARKET LABOUR PRODUCTIVITY BY that agricultural output rose by 12% yly. SECTOR (% Y/Y) (2005 —2013) 6 CHART 9: AGRICULTURAL OUTPUT (% Y/Y) 5 50 so 10 • 4 30 30 3 10 • 20 2 10 • 10 0 0 -10 0 -20 Manul. 1CT 3Yuka Minng Canal. 10iA Rnaa 0001111•FS 40 trade -40 .40 01 07 03 Or 05 06 07 08 Os io 11 12 13 14 15 Sources - OECD, Capital Economics Sources - CEIC, Capital Economics We've argued before that Morocco has many of And we think things should improve in the sector the ingredients to become a successful over the medium-term. The government is aiming manufacturing hub. It has low wages, a young and growing workforce, and a geographical position to modemise the agricultural sector as part of its near rich European markets. (For more, see our Plan Maroc Vert (Green Morocco Plan), launched Focus, "North Africa: A potential manufacturing in 2010 in conjunction with the World Bank. hub?", 15th April 2014.) For small-scale farms, the authorities are trying to In a bid to build on the country's potential as a encourage the formation of cooperatives, providing manufacturing hub, the Moroccan authorities have finance for equipment, as well as shifting farmers put in place a number of incentives to lure away from growing rain-dependent, low-yielding manufacturers to its shores. A free zone near the crops, such as wheat, towards those that are better port of Tangier (TTZ), opened in 2007, is the suited to Morocco's dry climate, such as cherries flagship project of the country's industrial policy. and olives. Meanwhile, larger agricultural projects Goods entering and leaving the free zone are not benefit from subsidies for upgrading equipment. As subject to exchange rate controls, the taxation a result, agricultural output should both increase system is more generous, and administration has and become less volatile. This, in turn, should help been streamlined. to support Morocco's exports and GDP growth. Meanwhile, the government is investing in the 5. Emerging as a manufacturing hub TFZ's infrastructure. Two new terminals are under The final reason for optimism on Morocco is that construction at Tangier port will increase capacity the country is capitalising on its potential as a from around 3mn teu (twenty-foot equivalent units) manufacturing hub. to 8.5mn teu by 2017. If fully utilised, this would Historically, a key ingredient of sustained place Tangier among the twenty largest ports in economic growth in emerging markets has been the world and the fourth largest outside Asia. (See the development of a manufacturing sector. This is Chart 11 over the page.) because manufacturing is relatively more open than other sectors to advancements in technology and has more scope to adapt production processes. Middle East Economics Focus 5 EFTA_R1_02136114 EFTA02713718  CHART 11: CONTAINER TRAFFIC BY PORT (nu MN, capacity to build around 60,000 cars per year. But 20 LARGEST IN THE WORLD) large investments by the French car manufacturer 40 40 35 35 Renault, under its Dacia brand, will raise this to to 30 400,000 over the coming years. And Renault has 25 Cowlly it Torskr 25 20 17) 2017 20 hinted that rising wage costs in Romania could IS IS 10 10 prompt it to shift more production to Morocco. 5 5 0 0 Meanwhile, PSA Peugeot Citroen recently q.?„,,, • announced plans to build a factory with an initial °,132k—sar capacity of 90,000 vehicles, which is expected to rise to 200,000 further down the line. Several other Sources — CEIC, Capital Economics large car manufacturers are rumoured to be There are signs that the government's efforts to considering Morocco as a destination for future promote manufacturing are starting to bear fruit, investment. These investments could bring particularly in the automobile sector. Vehicle Morocco's automobile sector into the same league production more than doubled between 2011 and as fairly major emerging markets, such as Poland 2013. (See Chart 12.) And automobiles have and South Africa. overtaken traditional goods, such as textiles, All in all, investment into Morocco's phosphates and agriculture, to become Morocco's manufacturing sector would help to boost exports largest single exported good. (See Chart 13.) and GDP growth, while narrowing the country's CHART 12: VEHICLE PRODUCTION current account deficit. And there could also be IS) Units Om* tics, ICO spillover effects on the rest of the economy. Most 160 140 notably, supply chains could build up in the rest of 6o Morocco to provide intermediate parts and 120 Ito U services. What's more, the introduction of better ro management techniques, the equipping of workers 0 +0 with new skills, and improvements to infrastructure 20 .20 0 -4o could all trickle down and raise productivity in CO CI CO 01 04 OS 06 07 A 09 10 II 12 13 other sectors. Source - Organisation Internationale des Constructeurs d'Automobiks Conclusion CHART 13: SHARE Of TOTAL GOODS EXPORTS (To, 2014) Of course, the outlook for Morocco is not all rosy. The country relies heavily on the euro-zone as a (Wier', 23.7 destination for exports, and as a source of investment and tourism. Hence, a severe re- escalation of the euro-zone debt crisis or, indeed, a period of much weaker growth there, could weigh on the Moroccan economy. Moreover, there is a On, 701 risk that political problems in the rest of North 4.A. 11.7 Africa spillover into Morocco. Sources - Office de Changes, Capital Economics What's more, additional reforms will be needed The momentum in the auto sector seems to be further down the line to improve the business building. Until recently, Morocco only had environment and sustain rapid growth rates. Middle East Economics Focus 6 EFTA_R1_02138115 EFTA02713719 Particular areas of concern include: the labour market, which suffers from high levels of restrictions (such as high costs for firing workers); generally low levels of education, which lead to skills mismatches in the labour market; and corruption. That all being said, the progress made by Morocco over the past few years is impressive and we think the ingredients are in place for a period of strong growth of 5-6% annually over the next five to ten years. (See Chart 14.) This would make Morocco one of the few emerging markets where growth over the next ten years is likely to be stronger than it was over the previous decade. CHART 14: MOROCCO GDP GROWTH (To) 9 9 a Forecast Ayefaseover pal 7 IOyears 7 6 S 4 4 3 1 2 7 0 0 04 06 06 IO 12 14 16 IS 20 Source - Thomson 0atastream, Capital Economics Middle East Economics Focus 7 EFTA_R1_02138118 EFTA02713720