Cablegate: Moroccan Markets Resist International Credit


DE RUEHRB #0254/01 0791626
R 191626Z MAR 08




E.O. 12958: N/A

1. (SBU) Summary: To date, Morocco has largely shrugged off
the impact of the international credit crisis. The
Casablanca Stock Exchange remains the best performing
exchange globally, up 16 percent since January 1. There has
been some spillover in Moroccan financial markets, with an
evaporation of liquidity for some financing vehicles and an
increase in the risk premium on Moroccan debt, but Treasury
Director Zouhair Chorfi reassured markets this week that at
only 20 percent of GDP, Morocco's debt is easily manageable.
Economists argue that as a result of its "limited integation"
into the world economy, Morocco will remain largely sheltered
from any global slowdown. The key risk most identify is the
possibility that Morocco will experience its own housing
slowdown and resulting credit crunch. Standard and Poor's
warned recently that the country's banking system is
"becoming increasingly vulnerable to rapid and untested
credit growth that is fueling asset prices." End Summary.

2. (SBU) What Crisis?: Ongoing turmoil in international
capital markets has had only a limited effect in Morocco.
The Moroccan Stock Exchange, a star performer over the last
half decade, has continued its march forward and leading
economists continue to predict that the economy will grow by
above five percent this year. Tarik El Malki, Director of
Research at the Centre Marocain de Conjoncture, attributes
Morocco's resilience to the country's "limited integration"
into the global economy, which, he points out, is not an
unalloyed blessing, since it is also testimony to the
country's "lack of competitiveness."

3. (SBU) Euro-centric: For the credit crunch to
significantly impact Morocco, Malki and other experts argue,
it would first have to cause a serious slowdown in growth in
the European Union. Moroccan trade remains heavily
concentrated on "old Europe," with only limited exports going
to markets like the United States that face diminished
growth. Europe is also the source of significant foreign
investment, the bulk of Morocco's tourists, and of most
transfers from Moroccans resident abroad. A slowdown in
Europe would thus be a body blow to the Moroccan economy, but
so long as European growth remains steady, analysts believe
Morocco should be spared.

4. (SBU) Trade Impact: The additional vulnerability stemming
from Morocco's overall dependence on European markets results
from the dirham's link to the Euro through its market basket
peg. Exporters continue to complain about the issue, most
recently in a meeting in Casablanca last week to discuss the
first two years of the U.S.-Morocco free trade agreement.
The appreciating dirham they argue, has seriously damaged
their competitiveness. While it does cushion some of the
increase in dollar-denominated commodity prices, they point
out that with almost fifty percent of Moroccan imports coming
from Europe, the benefit is limited.

5. (SBU) National Markets: Lack of integration is also a
factor in the Casablanca exchange's strong performance, even
as its counterparts elsewhere have fallen. Foreign investors
are marginal players, and foreign portfolio investment has
historically been modest. It only reached a significant sum
in 2004 when government Maroc Telecom shares were sold on the
Casablanca and Paris exchanges. Current IMF projections
forsee between 60 and 85 million USD a year in portfolio
investment through 2010. Continuing capital account
restrictions on the ability of Moroccans to invest abroad
have also held up the market. While these regulations were
liberalized in 2007 for some financial insitutions, practical
modalities to carry out the changes have not yet been
introduced. Few Moroccan institutions thus hold assets
overseas. Even those that have nominal permission to do so,
like insurance companies, hold back, since the permission to
invest must be renewed annually, and companies are reluctant
to take long-term positions that could be cut off on short
notice. As a result, wealthy Moroccans have few investment
alternatives, and so turn primarily to the exchange and to
real estate.

6. (SBU) Credit Impact: Where there has been an impact is on
Moroccan credit markets, both domestically for Moroccan
economic actors, and internationally for Morocco has a whole.
Chakib Erquizi, Director for Markets at Morocco's leading
bank, Attijariwafa, highlighted two such instances in a press
interview last month: the inability of BMCE Bank to find
sufficient subscribers to issue a subordinated debt
instrument to augment its capital, and the fact that the risk
premium for Morocco has increased three fold. Whereas the
Treasury was able to sell 500 million in Eurobonds with a

spread of 50-60 points in the summer of 2007, that rate has
now reached 150 points. Treasury Director Zouhair Chorfi
moved to reassure markets this week, however, stressing that
at only 20.3 percent of GDP, Morocco's external debt is
manageable, particularly given that Morocco's external assets
represent 160 percent of the debt total. He stressed that he
intends to maintain the current structure of external debt,
which has shifted dramatically toward Euro-denominated
instruments (now 77 percent of the total, up from 37 percent
in 2000). Dollar-denominated assets have declined from 47 to
12 percent over the same period. (Note: this shift when
coupled with the Euro's appreciation has increased Morocco's
debt burden marginally, but the country is largley insulated
as a result of the dirham peg to a market basket of
currencies, in which the Euro has a preponderant weight).

7. (SBU) Key Risks: If the subprime crisis and the resulting
credit crunch seem to have spared Morocco, some see in
Morocco's own housing boom the seeds of a potential crisis
that could mimic what has occurred elsewhere. In its recent
evaluation of the banking sector, Standard and Poor's argued
that while the sector has strengthened over the last five
years, it is "increasingly vulnerable" as a result of the
rapid expansion of its credit portfolio and the increases in
asset prices that have resulted. While S and P was careful
to note that it did not forsee a major correction in asset
prices, other observers have pointed to an emerging slowdown
in Morocco's overheated housing market. A recent review of
the sector in Morocco's leading economic weekly, "La Vie
Eco," suggested that Morocco's middle class, which represents
50 percent of purchasers, is no longer able to find
affordable property, as a result of rapid price increases.
Experts noted that a significant reduction in loan
applications has occurred in recent weeks, and at least one
warned that "there is now a real risk of recession in large
Moroccan cities."

8. (SBU) Officials at the Bank al-Maghrib hotly contest
Standard and Poor's assessment, however. They contrast it
with the positive rating the banking system received in the
most recent Financial Sector Assessment Program report last
November. Morocco, banking supervision director Bouazza told
us last week, was highly praised for the reforms it has
enacted since 2002, and is seen by IMF and World Bank
officials as the "benchmark" for the region.

9. (SBU) Comment: Morocco has escaped lightly from
international market turmoil, but has its own emerging risks
as a result of rapid expansion of credit and inflationary
pressures (septel). For now, it seems likely to hold its
own, particularly given continued strong inflows of foreign
direct investment, largely from oil producing states and from
Europe. This risk avoidance may not be grounds for
unmitigated celebration, however: in Malki's view, "it
highlights the urgency of fundamental reforms to make Morocco
more competitive globally so that it can improve its
integration." Certainly, as Malki's counterintuitive
argument suggests, Morocco has avoided the current low, but
it has also missed out on significant earlier growth
opportunities. End Comment.

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