The Moorish Wanderer

For a few banking bucks

Posted in Dismal Economics, Moroccan Politics & Economics, Moroccanology, The Wanderer by Zouhair ABH on September 25, 2010

Put it in another way: how is the Moroccan financial capitalism performing? not too bad as the data shows, though it comes to the expense -no pun intended- of the consumers. It is their plight to submit to the high fees and expenses their banks charge them, while service quality and innovation are clearly not worth it. And it is not like one can benefit from competition: banking market behaves more like a cooperative oligopoly, and each bank treasures a much lucrative rent, each one prefers to keep living on it, rather than go on the market for the kill to get some market shares. So there you are: an oligopolistic market and little benefits for the consumer. Or does it? One might think that these high fees are just a sort of a levy, a way to channel the money to fund and some productive investments. Not necessarily public-oriented, but investments that could create jobs and drive the economy forward. Again, nothing is further from the facts. Let there be no misunderstanding: the Moroccan banking system has accomplished wonders, whether in updating its laws and regulations system, as well as its extension, even beyond domestic market, in less than a decade. This progress however, did not benefit to the many, only to the few, contrary to what was expected.
Consumers do pay high fees, but that does not get to the bottom of our issue: are our banks really fat cats? do they enjoy high margins, do they deliver high earnings? Do they deliver them to a small and inward-looking group of shareholders? I tried to gather some figures, and the results are quite puzzling. Some were expected, others less so. Let us go through the whole thing step by step.
The Banking market in Morocco is, in terms of number of players, clearly an oligopolistic market: according to the Casablanca Stock Exchange website, there are 6 banks on the secondary market, with about 30% direct market capitalization of the overall listed shares:
Attijari Wafabank,
Crédit du Maroc (CDM),
Crédit Hôtellier et Industriel (CIH),
Banque Marocaine du Commerce Extérieur (BMCE)
Banque Marocaine du Commerce et d’Industrie (BMCI)
Banque Centrale Populaire (BCP),

To these 6 banks, there must be added the state-owned Crédit Agricole (CAM) and the Moroccan subsidy of the French bank Société Générale (SGMB). according to their financial statements for 2009, these banks (save perhaps the CIH, due to its past financial difficulties) have delivered quite satisfactory results, as indeed the table on the right-hand side clearly show. Being a bank shareholder surely is quite lucrative. In 2009, the main CSE index, the MASI (Moroccan All Shares Index), delivered on average a rate of return of about 5%. Following the data I got from their respective financial statements, only two banks (CAM and CIH) delivered a lower rate of return compared to the average index return. One of them, CIH, has the handicap of past shady business deals, the other is a Public Bank, and is not constrained by the same required rate of return in a financial market.This is only a first sketch of results. Indeed, the idea is to compare the pattern of behaviour of the banks’ stocks to the rest of the market. This is just to have an idea of how correlated their value is to the other non-banking stocks. This is achieved by plotting the day-to-day bank stock performances vs the MASI index, through a customized composite bank index (a very basic indicator that is computed with respect to each bank’s share weight and their performance) January 2009 is considered base day. In other words, the Composite Banks Index (CBI) is computed as follows:

The result on the graph is a bit messy, so we shall keep only the CBI vs MASI, and the graphic result is quite odd. Odd because the overall Bank share of the CSE amounts, as computed before, to less than 30% (according to the MASI weightings, the banking sector accounts for 29.51% of the overall index capitalization, while IAM alone accounts for 20%). The interpretation of it is that the day-to-day valuation of bank shares does not differ significantly from the other stocks, while on average, these deliver higher dividends, ceteris paribus.

the evidence shows strong correlation between the banks' index and the MASI.

The index has however a setback, for it fails to compute the daily fluctuations of both SGMB and CAM, though it would be safe to presume that the first one will most probably behave in a comparable manner, and the second does not fit to any financial comparison. On the whole, the index comparison results hold. The routine tests one could run on the data set do confirm a very close correlation between both series (to name only one, the correlation coefficient is .95, regression R-square .91). The level of dividends is however quite different. Although there is no immediate available data, the preliminary results show that the banks deliver dividends at a higher rate and more often than comparable companies in size and profits. While it is perfectly understandable that Moroccan banks have to create value for their shareholders, they seem to achieve this objective not through investing and lending money to businesses, but quite often by levying high fees on their customers, which induces less risk and immediate profit for them. On the long run, such strategy destroys actual value.

It is therefore agreed that the banks deliver high dividends. But do they? By computing both time series, on can get an overall β of 1.0818 for the banking sector. The βeta measures the sensitivity to market returns, and the computed Beta confirms the close relation admitted earlier on. Let us now take a look at the following formula: where r(b) is the required rate of return for banks, β the banking sector beta, r(f) the risk-free return(which amounts to the the real interest the Treasury bonds service, around 1.4% on domestic markets, much less abroad) and E(Rm) is the expected market return, which, in our case, amounts to the MASI return (5% in 2009).

The banks, on average, have outperformed their sector/own required rate of return, and managed to deliver high value to their shareholders

The average required return for the banking sector in Morocco was, in 2009, of 5.49%, a required return easily beaten by all but two banks (Not Applicable to the Crédit Agricole and s for CIH the share value took a beating and lost 20% over 2009 YoY). Even when computed with each bank’s own required rate (the SGMB‘s was computed with the sector Beta), the main result remained unchanged, the banks are very profitable enterprise in Morocco indeed.

Next question is, where does the money come from? the graph shows high margin commission rates; intuitively, that could be interpreted as a very profitable fee structure, that makes up for about a tenth of the net banking income. It is definitely lucrative for the banks to levy high fees and charge their customers for their miscellaneous operations, arguably something the banks should not be very keen on, since it is quite difficult to justify the present level of banking fees with respect to the quality of service. On the other hand, the banks spend relatively little money on investment instruments. The consolidated financial statements provide good evidence on the matter: While the total banking gross revenue was around MAD 40 Bn, the aggregate margin on commissions reached MAD 5.1 Bn, a ratio rate of 12%.

On the upper side of the balance sheets, the total customers’ deposits amounted to MAD 655 Bn opposite to a total lending of MAD 400 Bn (the total national lendings amount to MAD 597 billion). The lending makes up for 82% of the total M3 aggregate (MAD 792.87 Bn, Q4 2009). These lendings are weight-biased towards specific types: Housing mortgage (MAD 103 Bn) Equipment lendings (MAD 119 Bn) Overdraft facilities (MAD 139 Bn). Arguably, it is understandable to charge high fees for overdraft (no need to fuel monetary inflation) but it seems contradictory that housing mortgage (which makes up for a third of the overall economic debt) should be positively discriminate in the high fees policy, especially when the central banks lowers the monetary rate to keep the money flowing in: although it is quite difficult to get to fine details (or rather, I am getting a bit tired going through columns and columns of balance sheets), it is reasonable to suggest that the levy on mortgage is quite important, a policy which contradicts, as mentioned before, the official public policy. So there you go: the banks are unambiguously benefiting from high profits, which do not come from financial operations. The permanently available financial instruments (for sale) account for MAD 50 Bn, 20% more than the annual gross revenue, which gives a fair idea of how comparatively important the day-to-day -thus fee lucrative- operations are for the banks. Last but not least, most of the banks are under-capitalized (total market cap of MAD 30 Bn) that might be good for business, but it just gives them an unfair leveraged advantage which might turn against the customers in the event of a stronger negative shock.

One last thing: the shareholders of these banks, those who benefit from flowing cash (the net after dividend total available cash for 2009 was around MAD 20 Bn) are not individuals with small stakes on the markets, nor pension or mutual funds: large companies, with powerful political and economic connections control these banks, and certainly not to the benefit of the consumer, and therefore, the common citizen. Are the bankers Fat Cats? yes they are. domestic entities such as SNI-ONA or, and foreign (mostly French) companies such as Groupe Crédit Agricole, or Société Générale are the one that are making good use of deposited money – and making people paying dearly for it.

Put it in another form: how is Moroccan financial capitalism performing? It is a plight for Moroccan consumers to submit to the high fees and expenses their banks charge them, while service quality and innovation are clearly not worth it. And it is not like one can benefit from competition: banking market behaves more like a cooperative oligipoly, and each bank treasures a much lucrative rent, prefers to keep living on it, rather than go on the market for the kill to get some market shares. So there you are: an oligopolistic market and little benefit for the consumer. Or does it?Consumers do pay high fees, but that does not get to the bottom of our issue: are our banks really fat cats? do they enjoy high margins, do they deliver high earnings? I tried to gather some figures, and the results are quite puzzling. Let us go through the whole thing step by step.The Banking market in Morocco is, in terms of number of players, clearly an oligopolistic market: according to the Casablanca Stock Exchange (, the

Blitzkrieg in the Desert

Posted in Moroccan ‘Current’ News, Moroccanology, Read & Heard, The Wanderer by Zouhair ABH on September 18, 2010

Reading “Achtung Panzer” is intellectually very refreshing. Guderian as staff officer, as well as field commander in the trenches, made very good use of all the accounts made of the various -and strangely enough not as rare as one might think- mobile operations in the Western front during the Great War. The result was this book, the very one that provided the theoretical framework for the development of Panzer Divisionen (Armoured Divisions), those that wreaked havoc in Western Europe, Russia and North Africa during World War II. For those with little or no knowledge of Blitzkrieg tactics, or Generaloberst Heinz Guderian, let me go through some preliminary work here. Not so much on the man himself, more of the general framework he set for the Panzers.

General Heinz Guderian, 1888-1954

Guderian has a very unique background. As a cadet, he was assigned to a Jäger Bataillon (10th), Jäger roughly translates to light infantry (like the French Chasseurs, or British Green Jackets), an army corps that bears traditions of stealth, speedy actions and high marksmanship skills, and enjoyed moreover a respectable reputation among the Imperial German Army (The napoleonic Befreiungskrieg of 1813 founded this noble tradition). He then joined the communications troops, both experiences during which he learnt how crucial a condition reliable communications can represent when an armed force is preparing for an organized operation, let alone a decisive offensive. He was not the only one to provided detailed thoughts on mobile warfare at the time: both C. De Gaulle, as well as B. Liddell-Hart also discussed the matter in equally technical terms in the early 1930’s. Anyway, in his book, he describes how a Panzer unit should function: “The characteristics of armoured vehicles ought to correspond to the way we intend to employ them. We will categorize and describe them accordingly:
a) By far the greater number of armoured vehicles should be destined for combat […] We call these machines Panzerkampfwagen (tanks)[…] They are categorized […] more usefully by their primary armament as machine-gun, light, medium or heavy-gun tanks
b) Armoured reconnaissance vehicles (Panzerspähwagen) are used for scouting and they need accordingly have a higher turn of speed than tanks […]
c) Special tasks require appropriately specialized vehicles. This has given rise to amphibious tanks for swimming across water, radio tanks or command vehicles for signals and transmission of orders, bridge laying and mine-plough tanks for engineers” (p.136-137).  This can indeed be found in the pre-1942 standard Panzerdivision. The unit fielded a quite comprehensive aggregate of units:
– 1 Panzer regiment with 3 Armoured squadrons (2 medium Panzer III to each heavy Panzer IV)
– 1 Artillery regiment with three battalions (Regimental Anti-tank weapons, Anti-aircraft and Support artillery)
– 1 Motorized Infantry Brigade made up of 4 Regiments (Panzer Schützen) and a small Motorcycle squad (Kradschützen)
– 1 Assault Engineer battalion
– 1 Division Anti-tank Artillery battalion
– 1 Reconnaissance regiment (Aufklärung)
– 1 Field Hospital Unit
– 1 Replacement Unit

The concentrated attack on a specific (usually weak) point on the enemy front maximizes the likelihood of a breakthrough.

As it were, the Blitzkrieg was well carried out (and WW2 American generals, like the famous G.S. Patton put it well to practise against the Germans prior and after D-Day). Indeed, with a concentrated fire-power, the tanks, with heavy and close air support, could breakthrough the enemy lines, followed closely by the infantry to exploit and secure the push further, all the way to enemy headquarters were communications have already been disrupted and the battle won with minimum cost. The Blitzkrieg also called upon the secrecy of Commando units in order to confuse even more the opposite side and secure strategic points such as bridges or field depots. Units like the Brandburgen battalion were notoriously famous for their behind-enemy lines missions.

After 1945, Desert warfare and contemporary military strategists did apply Blitzkrieg: Indeed, the 1941-1943 Africa front provided the Blitzkrieg with the most “clean” battlefield ever, as well as the harshest logistic problems ever, though it had been carefully recorded for future use. And there it was: the Cold War, beside its nuclear-deterrent aspect, was likely to have a prelude of huge-scale tank battles (Ironically, Germany was to be the battleground): according to declassified US Congress papers, both NATO and Warsaw pact armies maintained large units of mechanized and armoured troops: mid-1970s, the Soviets lined up 168 divisions, 45 of which were armoured, and 115 motorized infantry with 27 battle-ready units stationed in East Germany and Hungary. All in all, the Soviets had at least 70 battle-line divisions on the borders, broadly allocated to the Fulda Gap) NATO also fielded comparable outfits (around 38 Armoured divisions). In the immediate conventional engagements preceding Nuclear War, the units involved would have involved large numbers of tanks, a reciprocate Blitzkrieg as it were. Things changed however, mainly because of the Arab-Israeli wars. Arab armies, supplied with Soviet hardware and heavily influenced by their tactics, built up large stocks of armoured units, but failed to put them to battle, mainly because of the dominant Israeli air force superiority. Even in 1973, when Egyptian tanks moved forward out of AA missiles “umbrella” that protected them so effectively, tank superiority did nothing to prevent Sharon’s task force to infiltrate the Egyptian front, thus trapping their 3rd Army in Sinai. The 1991 Gulf War also proved that large tank units were quite ineffective against an enemy with absolute air superiority. Actually, this was already the case in WW2: during Bocage operations that followed the Normandy landings, and even though German tanks were far superior in quality and fire power to British and American tanks, the Panzers failed to complete their objectives because of the huge damages Allied ground-attack planes inflicted upon them. Tanks however remain a crucial battle component, current strategists tend to confirm their role as spearhead units, but confined to small outfits and to precise objectives, With all the drawbacks and advantages all modern armies could benefit from (including the Forces Armées Royales – FAR). The present wars and military operations are conducted with Cold-War era hardware (the French army, in particular, sees little overseas use for its 50-tons AMX Leclerc) which is not always fit for the new asymmetric warfare. I would also like to venture some thoughts on the present situation in the Sahara, and on the future military capabilities and strategies our Armed Forces might forecast.

As the late King Hassan II said: “[…] sur le plan de la guerre du désert […] l’armée marocaine est actuellement, sinon la meilleure, du moins la seule vraiment opérationnelle” (Jeune Afrique Interview, 1985) the Moroccan Army has a proven record of experience in Desert warfare. Whether with the MLA Sahara raids in 1955-1958, or with the FAR against the Algerian-Polisario units in 1976-1991. For the latter, the Moroccan army suffered painful experiences before it reached the solution of erecting successive defensive walls to prevent Polisario raids, and thus benefiting from the advantages of static warfare. One can always use a bit of historical background on these matters.

Green March and ensuing military actions

After the Green March, General Ahmed Dlimi started moving in FAR units, and the first military clashes with Polisario guerilla occurred as early as February 1976 (meaning just after the Spanish authority over the Western Sahara was De Facto abolished). The FAR were not ready for that sort of warfare, because of many reasons. Their embryonic structure did not allow for large scale operations Indeed the putsch attempts of 1971-1972 led to a severe purge among high-ranking (and usually quite competent) officers that left the Army with virtually no General Staff, and could not, on its own, hold a virtual battlefield of about 170.000 km² (Rio De Oro was controlled by Mauritania until 1979) with a total number of 90.000 soldiers and officers of all branches (1976 figures, IISS). Even when concentrating on vital centres (coastal cities and the phosphate mines in Boukrâa or Guerguarat, the famous “Useful Triangle”), the FAR could not prevent the Polisario from undertaking successful raids, even in non-disputed Moroccan sectors: Tan Tan was reportedly occupied for several hours in January 1979. If anything, the Moroccan army suffered from a costly war (about $1million was daily spent on military operations), even though it was superior in manpower, equipment and training compared to the Polisario, or to the 55.000-strong Algerian Army. Small-scale tank and artillery duels took place -twice in Amgala- between the Moroccan and Algerian forces (Mauritanian forces were involved as well, but Southwards and they quickly pulled out). However, many countries, not only Algeria, supported the Polisario: Libya supplied money and weapons, Cuba and some Warsaw pact countries provided training and hardware as well.

Landrover Mk-1965. One of the main vehicles belligerents used over the war period

However, and until 1983, desert warfare was highly mobile, though not entirely of Blitzkrieg nature. The Polisario, during the early stages of the war, was not organized into a modern-shaped army. It had more common aspects with the late MLA, i.e with Camel-borne infantry, light armament and very few professional military personnel. The Spanish withdrawal provided them with a batch of former Tropas Nomadas NCOs and soldiers, who deserted with modern weapons and considerable field knowledge. The raids were therefore carried out on Jeeps and battle trucks, increasing further their range, autonomy and the inflicted damages on Moroccan strongholds. As a matter of facts, both Morocco and Mauritania hold on to small urban centres, while the Polisario virtually  roamed carefree the desert. The war was therefore fought on the tiny supply lines convoys followed to deliver the much needed hardware and supplies as well as on the bridgeheads both countries were seeking to defend.

In 1979, the FAR sought to capture the initiative, after Mauritania’s withdrawal. A 12.000 men strong Taskforce, Uhud Brigade, was put together. the brigade was heavily mechanized, consisting of MBTs such as M-60s,  T-72, light recce tanks (AMX-13) and Armoured transport (Ratel, M113). This unit, while considerably mobile and well supplied, did not much to prevent any further raids. the Moroccan-style blitzkrieg, because it confined itself to the Mauritanian and Algerian borders, did not achieve satisfactory results because of a number of reasons, among which the imperative of holding the “ground”. Because Morocco has territorial claims, it was politically compelling for them to occupy the whole territory, as a symbol of asserted sovereignty. That meant large numbers of stationed personnel, with all the logistical structure that follows. the Polisario, on the other hand, considered itself to be a liberation movement, and in this case, led an attrition war, the objective of which is to force the FAR to withdraw (like the Mauritanian army in the Rio De Oro mid-1979); Meanwhile, it didnot not need to occupy front-line territory. Things started to change a bit in 1982. Indeed, the first of 6 defensive walls was built, and successive walls brought the war to a static fashion until the ceasefire in 1991. Meanwhile, the Polisario also changed their tactics following the supplies they got: the raids were more like cavalry charges, with T-55 and T-62 tanks that increased further raid ranges, but increased also dependence on oil and fuel (especially with the Algerians and Libyans). Static war, with fixed and continuous fortified positions prevented further raids, and vast minefields left a no man’s land strip in which Polisario troops could no longer threaten FAR positions.

Sucessive Defense Walls, 1982-1987

In a static war, the side with the most numerous troops and the closest to supply lines and depots wins it all, which was the case for Morocco. By 1991, the ceasefire was a de facto field victory for Morocco, though it still continues to pay heavy price in terms of immobilized personnel and monetary cost.

What about now? Is the Moroccan army ready to deliver in a world where all military paradigms have been completely ? Beforehand, let us have a look to their present strength. Before I go on, I must point out that the present data is public; The International Institute for Strategic Studies publishes an “annual report of assessment of the military capabilities and defence economics of 170 countries world-wide. It is an essential resource for those involved in security policy-making, analysis and research”. the 2010 figures shows the following:
* Forces Armées Royales (ground forces): 175.000
1 Security Light Brigade
12 Independent Armoured Battalions
8 Regiments + 3 Mechanized Brigades
35 Standard Infantry Independent Battalions
1 Mountain Troops Independent Battalions
4 Commandos Independent Units
2 Paratrooper Brigades
11 Artillery Independent Battalions
7 Engineer Independent Battalions
2 Airborne Independent Battalions
1 Air Defence Independent Battalion
1 Battalion + 1 Cavalry squadron Royal Guard
* Marine Royale: 7.800
* Forces Royales Aériennes: 13.000
There are also 20.000 Gendarmerie Royale, and 30.000 Forces Auxiliaires (under the Interior Ministry’s supervision)
a) The ground forces material consists of the following:
Main Battle Tanks (MBT): 40 T-72, 220 M-60A1, 120 M-60A3, around 200 M-48A5 (in store)
Light Tanks: 5 AMX-13, 111 SK-105 Kuerassier
Recon Vehicles: 38 AML-60-7, 190 AML-90, 80 AMX-10RC, 40 EBR-75, 16 Eland, 20 M1114 HMMWV (Humvees)
Armoured Infantry Fighting Vehicles: 10 AMX-10P, 30 MK III-20 Ratel-20, 30 MK III-90 Ratel
Armoured Personnel Carriers: 400 M-113A1/A2, 45 VAB VCI and 320 VAB VTT
Selp-Proppelled Guns: 5 105mm Mk 61, 217 155mm, 84 M-109A1/M109A1B, 43 M-109A2, 90 (AMX) Mk F3,  60 203mm M-110
Unmanned Aerial Vehicle (Drone): R4E-50 Skyeye.

The ground troops, as shown, are relatively well equipped, save perhaps for the Main Battle Tanks, as both M60 and M48 tanks, that make up for 2/3 of the overall tank force, are obsolete tanks, even when retro-fitted. Unless the tanks were needed for home defence, investment spendings should indeed go somewhere else. As a member of the United Nations, Moroccan troops are often required to intervene overseas, such interventions require high levels of training, as well as suitable hardware and individual gears: planes and ships for troops transport, adaptable and standardized sets of weapons and gears for theatres of operations. In 2010, Morocco committed troops in the following locations:
KFOR (Kosovo): 222-strong infantry detachment
MONUC (Democratic Congo): 836-strong Mechanized infantry battalion + Field hospital unit.
UNOCI (Côte D’ivoire): 726-strong Infantry battalion

Overall, Morocco committed the equivalent of a regiment. Official pictures often portray Moroccan soldiers and officers either in Leopard camouflage or standard drab-green outfit, both of which are quite obsolete and battle-ineffective. There is little information on how military allowances are spent, although the report caught a glimpse of some deals: In 2008, Morocco ordered ships and planes from Italy, France, Netherlands and the US.

Moroccan Orders: Transport & Fighter/Ground attack Planes, Fast Frigates & Frigate Helicopter

The recent upgrades the Moroccan army undertook the few past years do not consider ground forces as a priority; indeed, significant investments were made to modernize the sea and air fleets, which only reflects the immediate requirements of Morocco’s security: as a close neighbour of the European Union, Morocco, alongside other North-African countries, are the vanguard border of Schengen community. The fleet needs new type of vessels, those that can operate quickly along the coasts in order to intercept illegal immigrant as well as drug smugglers. the Navy moves therefore from a defensive and purely military paradigm, to that of policing and border-guarding role. Things are a bit tricky for the air force. It seems the recent purchase of F-16  might be construed as an attempt to further air supremacy, a doctrine that proves to be useful when battle is engaged on the ground. I am not a military strategist, but it seems that Morocco has a fair chance against, say Algeria when it comes to air warfare; The Algerian Air Force has 196 operational aircrafts, 134 of them are Ground-attack planes. Morocco, on the other hand, has 89 aircrafts, many of which are quite capable of intercepting the ground attack planes, but surely not enough to provide air cover in case of a major military showdown. The direction in which military investment moves, it seems, is for air supremacy. Air Defence too should be upgraded towards a substantial missile arsenal, rather than AA guns (for reference, Air Defence fields the following equipment:  (119 SAM, 12 Tunguska 2K22M SPAAGM, 37 M-48 Chaparral, 70 portable SA-7 Grail, 60 M-163 Vulcan and radar network).

It is worthy to note that military hardware usually denotes of a preference in strategic thinking. These purchases do reflect that as well. The lack of upgrade in other pieces of equipment, is almost as hinting as the earlier. the Army, by adopting autonomous brigade organization, has the means to move to a more flexible approach in terms of units and inter-arms cooperation. Indeed, one can take a look to the way foreign outfits such as the US Marine Corps, organize arms interoperability. The British Chief of Staff also circulated a paper earlier this year, calling for a radical re-thinking of defence policy, and therefore units’ organization within the Strategic Defence Review. This comes as an echo to an earlier paper circulated in 2003, whereby number of troops should be reduced, but more importantly, the ability to provide “tailored” outfits for specific operations, incorporation of infantry battalions into multi-arms regiments and a switch from armoured to reconnaissance criterion. These of course are not applicable to Morocco, for we still need a comparatively large garrison in the South, but there is also a need for autonomous self-sufficient units that can operate in long range and constant air support. And finally, we need smaller yet more effective units that can be deployed everywhere in the world as part of UN or non-UN peacekeeping missions. That effectively means equipment scrap, and more efficient use of money on defence in fewer but newer and more effective equipment.

Morocco: Economic Outlook 2009-2010

The holidays are up. My academic obligations will start off shortly, and I will be off for a couple of weeks. I will do my best to come back with some interesting pieces when time allows for it.

a week ago, the BAM’s governor, Abedellatif Jouahri presented His Majesty the King with the Bank’s Annual Report for 2009.

A. Jouhari, The Central Banker

I guess the team in charge of this piece had to work some extra hours, because the report came in a little late (late July instead of late August), but it was overall first class as usual. My aim here is not only to provide you with a digest, but also bring its figures together with those other facts and figures the HCP uploaded recently too.The two would ultimately give us an insight of how the Moroccan economy is likely to perform for this year.

First, the Bank’s report has a different “flavour”, if I may say so, from the other reports. 2009 was indeed a year of recession and economic difficulties, but I couldn’t help but feel a bit of ambivalence when I read the following lines about the national economy’s performance: “Cette évolution reflète la forte contraction de la demande extérieure, notamment de la zone euro, adressée à certaines branches industrielles, ainsi que le ralentissement dans le secteur du tourisme et du transport”. The evolution here is that of non-Agricultural GDP (a near-zero growth of 1.4% over the year) Then, there was this: “la nécessité d’accompagner un atterrissage en douceur de notre économie en 2009 […]” This seemingly harmless sentence hides some pretty tough economic conjecture and even thougher future policies for the months to come. A soft landing is usually an euphemism for a recession, or, in our case, a very low economic growth, something we cannot afford in the present circumstances, I shall explain why.

That was the first impression on the preface. The dominant mood suggests that our economy is already unable to sustain the present global economic downturn, and the indicators show that we are quite vulnerable in terms of economic resilience. However, before we go any further, it must be pointed out that our overall growth for 2009 stood at a good level (BAM estimates are 6.9%, something about 5% of real growth) and inflation is in the process of being maintained to low and stable levels over a certain period of time. These are good news of course, but as shown later on, no one can claim credit for them.

Let us now take a closer look to the figures laid in the documents. The consensus is that the Moroccan economy, though it has somewhat successfully dealt with the global economic recession, remains quite weak in case another exogenous negative shock comes along. And even though the public authorities invested large sums of money to support and consolidate the economy, there remains structural hardships that are yet to be addressed. Why would one talk of economic weaknesses? Well, for instance, the report points out -and this is strictly about national economics- that financial markets are far too over-valued: “[des] fortes hausses, en décalage par rapport aux fondementaux, qu’ont connus certains compartiments du marché des actifs et de celui du crédit”. It is understandable why foreign investors were a bit averse to put their money in the Casablanca Stock Exchange (CSE), mainly because the financial assets were over-valued. It spared us the painful effect of a financial meltdown (because of the toxic assets), but the speed foreign in which investments dropped down surely led to a climate of indecision and ultimately, doubts over the real values of bonds and shares on Casablanca stock exchange.

The essential thing to focus on was that it prevented the financial sector from being drown up by toxic assets, thus proving the Moroccan banks’ resilience: “Concernant le secteur bancaire, qui a fait preuve d’une grande résilience, il a vu ses indicateurs poursuivre leur orientation à la hausse en 2009. Le retour graduel de la progression du crédit à un rythme compatible avec la croissance économique n’a pas impacté la rentabilité des banques.” But it certainly has put a strain on the available liquidities: “Les évolutions monétaires et financières se sont caractérisées, dans un contexte de fonctionnement normal des différents marchés, par le ralentissement de la progression de la monnaie et du crédit“, something that prompted the Central Bank to lower the main rates and loosen a bit the required reserves: “S’agissant de la gestion de la liquidité, le Conseil a réduit le taux de la réserve monétaire à trois reprises, le ramenant à 8%, permettant ainsi aux banques de continuer à assurer un financement approprié de l’économie. Bank Al-Maghrib a, par ailleurs, mis à la disposition des banques sur le marché monétaire toutes les ressources requises et a mobilisé tous les instruments de politique monétaire disponibles, pour leur assurer un refinancement adéquat.

I. The Economic Growth for 2009. The bank admits it in its own words: the economy remained stable and relatively strong because of a remarkable harvest. And many, if not all foreign exchange-oriented sectors suffered severe repercussions from the economic difficulties our foreign markets had to deal with. The total 2009 economic growth breakdown looked as following in the graph proves the eminent role Agricultural GDP played.

GDP contribution. Agriculture saved the day for 2009

There is no need to point out that the agricultural output is subject to none of the devised policies, as it is mainly function of the current climate. Therefore one can assert that no government body whatsoever can claim credit for those 5% growth. It is however quite alarming that the industry sector should suffer so much from a contraction in foreign demand. As indeed it was pointed out, export-oriented industries suffered from the present conjecture, such as chemical and para-chemical industry (-1,4% YoY) and electric/electronic industry (-0.8% YoY) and leather (-4.3% YoY).

The other sector that suffered from recession was construction. While domestic demand remained quite strong, it did not though sustain the drain on liquidities 2009 saw, therefore bringing to an end a constant growth for the past years (construction credit growth went down from 45.6% YoY to 12.8%). I am quite appreciative that our economy did quite good in terms of resilience and growth, but the intrinsic factors that made it so were unfortunately not the result of any policy, but rather the lucky coincidence of good harvest. In terms of consumption, growth was mainly of domestic nature, something our whole economic structure does not admit as such. As the reader might know, our economy is mainly, if not entirely export-oriented: we need foreign currencies for the huge projects the policy-makers are undertaking, for our imports and to fuel up our growth with larger exports, not to mention its role as a security pillow as it were, in case of unexpected changes in commodities’ prices. But now that foreign markets had shrunk to concerning proportions, domestic demand successfully got behind the national economy. That’s how it contributed in terms of GDP growth points:

GDP Growth Contribution In Terms Of Consumption 2006-2009

II. The endogenous variables: workforce and productivity. It is true unemployment decreased a bit in 2009. But surely the present growth does not contribute in abating unemployment a bit, something that should be obvious yet does not compute in Moroccan reality. There is something else that bothers me about our own productivity. Before I go on about it, productivity is, as far as I am concerned, productivity remains one of the best indicators of how an economy is doing in terms of competitiveness and innovation. Plus it allows for scale economies, thus enabling wage rises with virtually no inflation. Morocco has quite bizzare characteristics in terms of productivity. the average relative labour cost has risen over the year. That’s a statistics that is akin to measure marginal labour productivity, something that the Bank did, and it turned out that in the last quarters of 2009, labour cost has risen beyond apparent labour productivity. That effectively means real destruction of wealth, but oddly enough did not contribute to inflation. Do let me explain: demand-driven inflation is fuelled up whenever a general or substantially located rise of wages is effective, without any form of increased productivity.

Labour Cost vs Productivity Growth. Moroccan competitivity outranged by that of countries like Poland and Bulgaria

The figures here do not show any specific growth in terms of output per capita (something below 1% in 2009 YoY) but they do suggest that labour cost has risen (about 4%). However, it does not seem to have a sizeable impact on inflation (as shown later on). It does however show that we are losing ground to much more competitive countries in terms of labour productivity.

In other terms, we are dangerously losing the ground to international competition much more productive and less costly than our own labour force. It might have something to do with unions’ wage claims, but that remains to be proven. The report does not point it out, so the real source of the trouble is somewhere else. In any case, any wage rise in nominal terms is quickly blended and its effects swiftly abated. In facts, every time the minimum wage (SMIG) has been updated, real wage increased, but gradually declined until the next pay rise comes in. And remarkably enough, real minimum wage stood at a near-stationary level, as the graph suggests.

Real Minimum Wage increases by Lump intervals, but gradually decreases to its original level if not below

This proves that, even though labour cost handicapped our foreign exchange, minimum wage, the classic target of laissez-faire partisans, had had nothing to do with. Out of contradiction though, the Bank points: “[…]Parallèlement, les coûts salariaux ont connu un accroissement, suite notamment à la deuxième revalorisation du SMIG[…]“.

III. Inflation and Unemployment: I already mentioned in an earlier post that Morocco dealt successfully with inflation (although only the core one is maintained to low levels) but that has come to the expenses of unemployment. the 2009 YtD inflation has even been made into a deflation, with CPI going as far as -5%, for an overall annual inflation rate of 1%. This has to do with the fact that commodity prices dramatically fell during the year (or in other terms, future prices went down, thus allowing Morocco to buy strategic commodities at a lower-than-expected price) and of course the positive impact agricultural output has on CPI. “Le ralentissement de l’inflation est également attribuable, dans une moindre mesure, aux prix des carburants et lubrifiants. En effet, leurs tarifs ont connu une première baisse mensuelle de 5% en février 2009, en raison de la révision des prix de certains carburants, puis une deuxième de 1,4% en avril suite à l’alignement du prix du gasoil 50 ppm sur celui du gasoil ordinaire auquel il s’est substitué.” As for unemployement, I was a bit disappointed with the way they presented it. Basically, the graph shows a trend pointing to a possible negative correlation between unemployement and economic growth. ze3ma all we need is to increase output, and somehow unemployment will decrease. It is true there is a negative correlation between non-Agricultural GDP and unemployement (F-Test shows a probability of 11% both variances would be independent. Chi-2 test shows a 98% likelihood of statistical relation between both variables) but surely a linear regression cannot capture the exact relation between both variables. The regression’s R-Square is only 10.08%, i.e about only 1 out of 10 statistical couples (xi,yi) has been taken into account. In any case, the Bank admits implicitely a weak link between unemployement and economic growth: “Malgré le recul de la croissance non agricole, le taux de chômage urbain s’est replié de 0,9 point de pourcentage pour se situer à 13,8%. Parallèlement, l’essor de l’activité agricole n’a pas entraîné de baisse du taux de chômage rural, lequel a stagné à 4%. La baisse du taux de chômage a concerné essentiellement la tranche d’âge 25-34 ans et les diplômés, dont le taux a fléchi respectivement de 1 et de 1,4 point de pourcentage. Toutefois, le taux de chômage de ces catégories de la population demeure relativement élevé, se situant autour de 20%.” On a different but related subject, I read something interesting in a digest the HCP published on poverty (I can’t recall the weblink, but you can find it here): “En effet, si un point de croissance économique s’accompagnait, entre 1985 et 2001, d’une augmentation des inégalités de 0,13% et donnait lieu à une réduction de la pauvreté qui ne dépassait pas 1,7%, entre 2001 et 2007, une croissance économique équivalente (de 1 point) n’affectait que marginalement les inégalités (moins de 0,01%), et réduisait, de ce fait, la pauvreté de 2,7% […]Il convient cependant de noter que cette dynamique de l’ensemble ‘Croissance, inégalité et pauvreté’ ne s’est pas opérée, dans les mêmes proportions, au niveau local, voire régional, provincial ou communal“. The good news are, we have less and less people living below or on the threshold of poverty, and the figures are encouraging indeed, but it has a drawback too: economic growth brings inequality too, and following these figures, every GDP growth point increases income inequality by more than just 0.01%. The HCP itself shows the figures: the 10% well-off get about 40% of the national income. This kind of income inequality does not allow for everyone to get a fair share of GDP growth, surely.

IV. Foreign Exchange:

a picture speaks more than a thousand words, doesn't it?

2009 was quite bad in for our terms of exchange: Not only did we notice a worsening deficit commercial balance, but there was a drain on liquidities too, for the deficit took its tool from our balance of payment. Indeed, “Les sorties nettes au titre des revenus des capitaux se sont établies à 7,4 milliards de dirhams, contre 4,1 milliards de dirhams en 2008. En effet, le solde négatif des revenus privés, passé de 6,7 milliards de dirhams à 9,4 milliards de dirhams, s’est alourdi de 40,6%, en raison de la hausse de 33,4% des sorties au titre de la rémunération d’investissements étrangers au Maroc“. That was the price to pay. Abdellatif Jouhari might have pointed out that our economy was resilient, however in times like these our foreign investors had to cash in their investments, and we need every hard currency dime we have. Why so? In 2009, our total national investments amounted to 265 billion MAD. ([…]“Compte tenu d’une variation positive des stocks de 38,8 milliards de dirhams, l’investissement global s’est chiffré à 264,8 milliards de dirhams, en quasi stagnation en termes nominaux, après une augmentation de 31,2% un an auparavant. Sa contribution à la croissance est revenue de 4,1 points de pourcentage en 2008 à 2,6 points en 2009 et le taux d’investissement brut s’est établi à 30,7%”.) Our national savings amounted to 228 billion MAD. It is clear that about 37 billion MAD need to be found in order to finance the huge investments our country is undertaking. That means 5% of our GDP, while the payment deficit amount to 20% of GDP. In other terms, Morocco needs to levy 195 billion MAD to a. finance its deficit, and b. to finance its investment. Perhaps the recent upgrade in Morocco’s sovereign debt could allow for new sources of finance, but again, in a time like this, and especially for the sort of investments we have, rates are going to be a bit steep I am afraid.

Now, I hope the picture made things clearer for 2009, so we can now move to the 2010 HCP figures.

Recovery signs for non-Agricultural GDP

These show signs of recovery, as it were: “La sortie de l’économie marocaine de sa phase de ralentissement conjoncturel se confirme de plus en plus en ce début d’année. Le redressement des activités non-agricoles s’est poursuivi au premier trimestre 2010, avec une croissance de 5,6%, en variation annuelle, après 5,4%, réalisée un trimestre auparavant. Cette performance a été confortée, en grande partie, par l’amélioration du secteur minier et, dans une moindre mesure, par celle de l’industrie et des branches annexes.” In other terms. the non-agricultural activities are recovering from the previous year. Domestic demand seems to be behind the green shoots: it grew about 4.7% Q1 2010, a bit low compared to Q1 2009, but nonetheless an important contributor to the expected GDP growth (3.6% for Q1 2010 so far). Things are on average going well.

There are however a few things that should be taken seriously: the present state in which public finances are is quite difficult, which might allow for cuts and austerity programs. Indeed, public income has fallen by 4.3% while expenditures rose by 13.4%. Public deficit is now 4% of GDP. Nothing urgently serious, but the forecast is that things will get rougher: because domestic demand is driving growth, there is an expectation of high levels of imports, an increase exports cannot match entirely. That means a further drain in our currency reserves as well as a worsening balance of commerce deficit. Finally, it seems the monetary market suffers from that as well: “Le marché monétaire est resté déficitaire au cours de la première moitié de l’année 2010. Les interventions instantanées de Bank Al-Maghrib ont pu atténuer, quelque peu, l’écart entre le taux d’intérêt interbancaire (3,31%) et le taux directeur de Bank Al- Maghrib (3,25%). Le marché bancaire subit les conséquences de plusieurs facteurs restrictifs de liquidité, en l’occurrence l’importance du déficit de la balance commerciale et la baisse des recettes des investissements directs étrangers.”

Foreign Investors are pulling fast, causing a drain on currency reserves

To sum up, the Moroccan economy did well in these troubled times, and those of its sectors that suffered from the global crisis are on their way to recovery. However, most of the good results are not the effects of policies, and the present structural hardships, while being addressed with various policies, remain hindering every efforts to get our economy off the valley of the shadows and into the sun. There can be no worthy growth while the present unemployement rate is 9%, nor with income inequality Gini index of 0.46. In short, the present growth still benefits to the few, and not to the many. More radical policies, that’s what we need.

Take care and enjoy what’s left of holidays.