S&P is Moody, Fitch is grading the rate
There’s little to be discussed seriously on the home front. Perhaps the Amar/Gazhaoui matter; No, too banal I am afraid, and we are in the process in making it so indeed.
There was something I wanted to discuss a couple of months ago but I lacked time but then again, and with the benefit of hindsight, the issue would be clearer and therefore easier to deal with.
For those of you with interest in economics and finance, you heard about the grading improvement on the Moroccan sovereign debt. In a nutshell, according to the grading agencies (like Standard’s and Poors, Moody’s, or Fitch), Morocco is now safer to invest in (the assets bear less risk and are more liquid than before). Presumably, this is good news for the economy, especially with regard to the tightening global economic conditions. The business cycles likely trends are still on the downward slope (with little glimpses of recovery here and there, but not enough to reverse the tendency), so actual money is tight, therefore making credit opportunities rarer.
Indeed, goods news because from now on, Morocco is ‘Investment-Grade’ approved. Namely, bonds with grades ranging from AAA (the strongest and highest rate) to BBB. And we are now in a chance: since March 23th, 2010, the main grading agencies changed their ratings favourably on the various levels of debts the Moroccan government services to foreign holders.
The fact Moroccan sovereign debt went Investment-Grade allows for a new batch of investors to put their money in our economy. Indeed, the UCTIS III regulations provide for a particular kind of financial instruments all related to Money market. A new surge of money with which the government can put into practise the policies that would enable growth and wealth for the Moroccan economy. A fresh influx of money could also mean a renewal of our debt structure, a specific aspect that shouldn’t be overlooked.
I believe this piece of ‘good news’ is not really one. Yes indeed, the economic outlook seems stable, but on the other hand, Morocco is gasping for fresh foreign currency. It may seem a surprise, but the foreign exchange terms are absolutely not in our favour, as indeed the commercial balance deficit is worsening, and we desperately need, one way or the other, to finance it. Either by engaging the reserve currency or by calling up money on the international markets (the latter is now even more possible with the rating improvement)
The reserve currency has always been a nightmare for the Moroccan economists (and to the economic journalists as well); they were already alarmed in 2009 about it then, and have every reason to be alarmed now (as you may notice, the announcement effect takes time to be felt…)
Let us first list some facts and figures on our economic resilience in terms of currency holdings;
According to the quarterly statistics digest (N°123, March 2010), the Central Bank claims 187.392billion MAD on currency holdings. The holdings are mainly convertibles (96%), a liquid holding that enables BKAM to intervene whenever needed to in order to balance the books, i.e. hold he dirham value or finance indirectly imports.
The 2008 Annual report rightly points out that this level enables for 7 months worth of imports, compared to 9 months the year before. It mainly goes back to the terms of trade; basically, our exports in terms of value do not match our imports. Though it is more of a structural nature, the exports did worse with respect to the past years. Without too much detail, the exports in the late 1990’s used to match ¾ of the imports, but since 2005, only half of it was met (between 48 and 50% worth) which means a drain in reserve holdings. A current account deficit can be addressed in the course of the following actions:
* improve our exports’ monetary value is the most straightforward yet difficult policy
* ‘choke’ the imports is virtually impossible (where one can get the oil and hardware from?)
* find the money to finance the deficit with foreign direct investment (FDI) which is now more possible with the ratings change.
Like many countries that when through the painful process of structural adjustment in the 1980’s, Morocco learned its lessons on foreign debt. In facts, it looks as though the top brass are trying to do anything but to borrow some money on international markets. Now the grading changed, they might go for it, which would not be a good idea now (yield curve 10+ indices).
The feat then-finance minister F. Oulalaou accomplished –namely, halving foreign debt by half in 7 years– came to the price of local debt.
As shown on the graph, Treasury rate of return outperformed stock exchange volume and cap (which has an effect on required return) It is quite unique in finance theory of course, but the Casablanca stock exchange is known for its over-capitalization, as well as the relative non-liquidity due to a high concentration of assets (the ONA-SNI theory holds firm even after the merger)
There was indeed a liquidity excess on the markets that enabled the government to issue T-bonds and T-bills at low premium (and thus, at low cost) and achieve a two-fold policy: keep inflation low (by taking away the liquidity instead of letting it flow through) as well as get their hands on cheap and harmless borrowings to carry out their policies.
Nonetheless, this state of grace ended with the flow of liquidities. The effect of structural balance deficit was emboldened by the decrease in expatriates (MRE) transfers. The Q1 2008 saw therefore a noticeable tightening in liquidity, which prompted the central bank to lower their main rates in order to get the show on the road.
On the other hand, public debt no longer was attractive (the stock exchange returns exceeded the public debt returns), and now that some of the middle and long-term arrived at maturity, a small yet distinguishable dip in the ratio domestic debt/GDP. This, combined with the worsening of commercial balance, put a heavy strain on the government to call up some fresh, foreign money.
They have to. Let us take a look at this simple but always true equation:
GDP = C+In+G+(X-Im)
Where GDP is the gross domestic product C consumption, In investment, X exports and Im imports.
On the other hand, Investment and total income are tied. In facts, the following equation depicts the relation between savings (the non-consumed income) and investment (earmarked to replace or expand means of productions):
CA = S-I
(Where CA is the current account, S savings and I the domestic investments)
The late equation can be computed into the first one, and thus:
GDP = C+G+(X-Im)+(S-CA)
Government spending is assumed to be exogenous to foreign trade. Consumption, on the other hand, can be function of imports (we do after all consume Turkish, US or Egyptian goods, don’t we?) Furthermore, we can assume now the savings are indiscriminate between domestic or foreign;
GDP = C(Im)+G+(X-Im)+( S-CA)
(for anyone interesting in a more detailed and rigorous approach, this San Francisco Fed reserve working paper is a real bliss)
Now, (X-Im) and (TS-CA) need to be balanced: the first term needs to be financed by means of the second. It so happens that the commercial balance worsened the last few years, which means a negative value for (X-Im). In order to finance the deficit, we need to increase by the same proportions (or higher) the deficit itself, namely, by calling up foreign savings (i.e., FDI). Why foreign? Why can’t we use the domestic savings? Two main reasons: either because we don’t have much or it does not satisfy itself with the present returns.
For a fact, we know that R=C+S (where R is the total income) we also know that imports are a parameter in consumption behaviour, so R = C(Im)+S. However, we do know imports have risen quite substantially over the last 3 years, much more than the total income, indeed, ∆R < ∆C(Im), which makes Savings smaller in relative terms.
Bottom line is, sooner or later (and I believe it would be sooner rather than later) we will have to turn to the international markets.
Because of the present situation, the bonds issued are going to be expensive for Morocco (i.e with high premium rates, in order to attract investors) and that’s were the danger lies.
Short or Long money do not cost the same, and its own use will affect its efficiency as well. Let us assume the brass goes for short money because it’s cheaper, short-term rates the US Fed, or the ECB or Bank Of England took up are at their historical lowest; Morocco needs to put the money into high-return short positions; They cannot sanely put the money into a long-term public investment, of course. In facts, it’s just a temporary patch-up plan with little help on the whole situation. Long-term borrowings are just too expensive, and the required rate of return is too high for the initial borrowing to be of interest. [Edit: they did, as my predictions turned wrong]
What’s to do then? The decision to borrow a larger amount of foreign money is inevitable, and in itself, is not that harmful.
The core question is two-fold: what kind of money do we need to borrow, and what sort of expenditure should we pay for? The first term is directly linked to the second. But because we have no idea what is the public policy on that matter, we can only speculate. And this is typical of an opaque governmental institution. When politicians are not pressed for electoral results, when they are not accountable to their constituents, and indeed, when the pursued policies are not in the interest of the many but to that of the few, the decisions usually lead to under-optima solutions.
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