Fitch Solutions expects that Morocco’s fiscal deficit will shrink slowly over 2019 and 2020, revenues will outstrip spending, and the debt to GDP ratio will decrease.
Rabat – Since Morocco’s budget deficit came in at 3.5 percent of GDP in 2018, down from 3.6 percent of GDP in 2017, Fitch Solutions expects the ratio to continue to decrease in the coming quarters.
In its recent report titled “Economic Analysis – Continued Gradual Fiscal Consolidation Ahead In Morocco,” Fitch Solutions, a unit of Fitch Group, forecast the fiscal deficit at 3.4 percent of GDP in 2019 and 3.3 percent in 2020.
Spending to grow mainly on public wages and capital projects
Fitch Solutions Macro Research, formerly BMI Research, said that Morocco’s high spending growth in 2018, estimated at 4.9 percent, kept fiscal consolidation relatively slow.
On the downside, the report, shared with Morocco World News, predicts an increase in public wage spending since the government allocated a bigger budget to social sectors, primarily education and health, in the 2019 Finance Bill.
The government allocated MAD 68 billion for education in 2019, an increase of MAD 5.4 billion from 2018, and MAD 16.3 billion for the health sector, up 1.6 billion from the previous bill.
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“This will involve some 40,000 new hires in the public sector which, coupled with salary increases, should serve to drive higher wage spending in 2019.”
The trend, according to Fitch Solutions, “should also continue into 2020 given that it is an election year, and as the planned reinstatement of mandatory military service in September 2019 generates new wage obligations in the defense sector.”
The obligatory military service will cost Morocco an estimated MAD 500 million according to the 2019 Finance Bill.
Morocco’s spending on capital projects will also grow apace. The government is committed to developing rural regions by investing in infrastructure and creating jobs, the report explained.
Fitch Solutions cited major infrastructure projects in rural regions such as the $1 billion Nador West-Med port project with its $500 million highway link.
The government’s spending will also include “substantial investments into the Green Morocco plan, which seeks to improve agricultural efficiency, output, and drought resiliency.”
Despite the considerable increase expected in government spending, the report anticipates rapid growth in revenue.
Revenues to depend on privatization initiatives
The revenue growth, which is likely to outstrip spending, according to the report, will “rely on the successful privatisation of state assets.”
“Stronger real GDP growth, which we forecast at 3.3% in 2019 and 2020 compared to 2.9% in 2018, coupled with a number of tax reforms should help drive continued robust revenue growth in the quarters ahead.”
The government adopted several tax reforms for 2019, such as the 2.5 percent social “solidarity contribution” for companies with annual profits exceeding MAD 40 million and increasing taxes on tobacco consumption. The government believes it will generate MAD 2 billion in 2019-2020 from the 2.5 percent corporate income tax and an estimated MAD 1.2 billion in 2019 from taxes on tobacco consumption.
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However, the government needs to rely on making at least MAD 5 billion from privatizing public companies to achieve its revenue targets, “through the sale of its 30.0% stake in Maroc Telecom.”
In October last year, the Moroccan Minister of Economy Mohamed Benchaaboun declared that Morocco would privatize some public companies to help reduce the budget deficit to 3.3 percent of GDP in 2019.
The decision, according to Benchaaboun, would improve the governance of public companies and increase state resources. The move is expected to generate MAD 8-10 billion.
Government Spokesperson Mustapha El Khalfi announced in November 2018 that the government approved Draft Law 39-89 permitting the privatization of public institutions and had decided to sell La Mamounia Hotel in Marrakech.
Morocco planned to sell a 51-percent stake in the hotel this year, according to Bloomberg. La Mamounia’s value is expected to be more than MAD 3 billion.
“In the absence of the expected privatisation proceeds, and without proportional spending restraint, we would see … the fiscal deficit rise to 3.9% of GDP in 2019,” reads Fitch Solutions’s report.
Debt to GDP to modestly decrease, ‘remain largely domestically funded’
When it comes to the debt to GDP ratio, the report said it will slowly decrease “at least over the long term” despite a planned Eurobond issuance in 2019.
“We expect a drop from 67.5% of GDP in 2018 to 66.3% in 2019, and further to 55.8% by the end of our long-term forecast period in 2028.”
Morocco’s external debt, according to Fitch Solutions, remains “extremely low” because “four-fifths of debt is denominated in local currency.”
“Repayments are also sufficiently spread out to avoid sudden pressures on liquidity.”
Since the country has access to the IMF’s $2.97 billion Precautionary and Liquidity Line over two years, approved in December last year, it will contribute to external stability.
Despite the North African country’s plans to issue a new bond in 2019 of around €1 billion, the report expects the issuance “is unlikely to materially affect the external debt load.”
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Morocco started issuing bonds in the international financial market in 2007 when it received a €500 million loan, then €1 billion euros in 2010, $1.5 billion in 2012, $750 million in 2013, and €1 billion in 2014.
However, Fitch Solutions warns that “control over broader public external debt (twice the size of the treasury’s) remains an issue that will complicate the government’s efforts to reduce its overall liabilities over the coming years.”
At the end of 2017, Morocco had MAD 900 billion in public debt and MAD 149 billion in debt service, according to the Association for the Taxation of Transactions and Aid to Citizens in Morocco (ATTAC Maroc).
