Morocco Country Summary

DOMESTIC POLITICS: The political scene will remain broadly stable in 2010-11, under the rule of the king, Mohammed VI, but there will be widespread disaffection with the formal political process and parliamentary politics in particular. The monarch and his coterie of advisers will maintain their dominance over policymaking and are unlikely to take significant steps towards further democratisation. Parliament and the political parties within it are therefore expected to remain relatively weak. Morocco’s particular version of proportional representation tends to result in a fragmented elected chamber, and at present the 325 seats in the House of Representatives are divided between 21 parties, none of which has a strong power base. The king is believed to be relatively well liked, but tight restrictions will remain on public criticism of the monarchy. Moreover, widespread poverty and high urban unemployment could lead to protests, calling for increased government support and wage rises. These developments will prompt further state investment in housing and infrastructure.

INTERNATIONAL RELATIONS: Morocco’s relations with neighbouring Algeria will remain tense, largely because of the dispute over Western Sahara, a territory that Morocco claims sovereignty over and has controlled since Spain left it in 1975, but that Algeria would like to see become independent. Morocco is committed to its plan for limited autonomy for the territory, whereas the Sahrawi national liberation movement, the Polisario Front, which is backed by Algeria, is demanding a referendum on self-determination. UN-mediated talks, led by the special envoy for the territory, Christopher Ross, in February made no impact on resolving the conflict as neither side could agree on a starting set of principles for negotiation. Tensions between the two countries will hold back attempts to boost intra-Maghreb co-operation, including regional trade, through the Arab Maghreb Union.

POLICY TRENDS: The government is aware that its popular support will largely depend on its success in dealing with social and economic exclusion and will maintain high social spending on slum clearance, rural infrastructure, education and health. However, given limited resources, an inefficient bureaucracy and widespread nepotism and corruption, addressing the shortcomings of the country’s infrastructure will prove difficult.

INTERNATIONAL ASSUMPTIONS: The Economist Intelligence Unit expects the EU economy to grow slowly in 2010-11, at an average of 1% a year, having contracted by 4.2% in 2009. The weak outlook for European growth poses significant risks to Morocco’s economy, since the euro zone is its main export market and provides employment for some 2.5m Moroccan expatriates. Inward investment will be sluggish because of the European slowdown, although Morocco could see some benefits if European firms relocate to Morocco to cut costs. We expect world GDP (measured using purchasing power parity exchange rates) to expand by 3.7% a year in 2010-11. Policy interest rates have been cut sharply and are unlikely to be raised until late 2010 in most major economies, but heightened uncertainty in world financial markets makes it likely that the spreads of money market interest rates over government bond yields will remain elevated in 2010-11, although they will not reach the levels seen in early 2009. Although average oil prices will be higher in 2010-11 than they were in 2009, they will still be lower than in 2008; weaker world commodity prices will help to contain Morocco’s subsidy bill.

ECONOMIC GROWTH: The Moroccan economy grew by 7.8% year on year in the final quarter of 2009, with the agricultural sector expanding strongly and industry also growing, albeit after contracting in the first half of the year. Nevertheless, given the recessions in Morocco’s key export markets, real GDP growth for the whole year was 5.2% (according to supply-side data), and we forecast that it will stabilise at around 4.1% in 2010-11 as the impact of a modest recovery in global demand for goods and services is offset by weaker agricultural performance. Morocco will continue to face risks associated with its dependence on rain-fed agriculture, which typically accounts for some 15% of GDP but employs 42% of the workforce, with the result that changes in agricultural output can have a significant effect on private consumption. Agriculture’s contribution to GDP will stagnate or fall in 2010-11 after a record year in 2009, and over the longer term the non-agricultural sector’s role will gradually increase as manufacturing develops and construction expands on the back of government housing and infrastructure projects, partly offsetting contraction in private-sector tourism developments.

INFLATION: As world and local food prices have fallen, consumer price inflation has also declined in Morocco; we estimate that it averaged just 1.2% in 2009. Inflation has been generally low in recent years, largely because of extensive government subsidies and the managed exchange rate, but also because of deficiencies in the way inflation is recorded; reforms to the latter may lead to a temporary spike in official inflation. The real cost of living may have increased more rapidly in recent years than government data suggest. Nonetheless, the risk of a wage-price spiral is limited given that the subsidy system will remain in place, commodity import prices will rise only modestly and the Moroccan dirham will be fairly strong against the US dollar. Harvest results (and global prices) will determine food prices in 2010-11, with inflation increasing if wheat production is low and the country is required to import grain, but we expect inflation to average 2.5% over the two-year period.

EXCHANGE RATES: The current exchange-rate regime is a tightly managed float against a euro-dominated basket of currencies. Despite opposition from exporters, Bank al-Maghrib (the central bank) argues that this system has been useful in anchoring the economy and keeping inflation low. The authorities aim to introduce a fully floating currency at an unspecified date, probably beyond the forecast period. In 2010-11, however, the dirham will move roughly in line with the euro, and will strengthen from the lows of early 2009, although it will be vulnerable to further pressure should global financial sentiment weaken. From an average of Dh8.06:US$1 in 2009, it will appreciate to Dh7.91:US$1 in 2010, before weakening to Dh8.04:US$1 in 2011. Morocco will also try to maintain competitiveness within the euro area.

EXTERNAL SECTOR: We expect Morocco’s current account to remain in deficit throughout the forecast period, although the deficits will be lower than in 2008, when global food and fuel prices surged. The trade deficit is expected to widen in 2010-11, to an average of US$18.2bn, but again this will be lower than in 2008 as both export earnings and, to a lesser extent, import costs recover slowly. The trade and income deficits will be largely offset by surpluses on the services and current transfers accounts–which will both widen in 2010-11, having shrunk in 2009 owing to weakening tourism demand and lower workers’ remittances from Moroccan workers in Europe. The current-account deficit is forecast to widen to 4.8% of GDP in 2010, before narrowing to 3.4% of GDP the following year, reflecting stronger services and current transfers surpluses.

SOURCE: Country Outlook