The Moorish Wanderer

The Price Of Debt

The times of thrift and fiscal prudence are long gone. In its effort to defuse social discontentment, the government spent billions of Dirhams either by subsidizing further strategic commodities, or by increasing dramatically wages in the public sector.

The result of these unexpected expenses led to further borrowings, and the time might come very soon when the unfortunate government of the day will be compelled to implement austerity plan measures, to slash some -if not all- of these subsidies, or to privatize more assets to pay up for interest on this unexpected debt, all of which would have been the result of unsound economic policies no one will be ultimately responsible for. Parallel to these public spending cuts, the social cost in terms of purchasing power losses and unemployment will exacerbate further existing social tensions.

Morocco has come a long way: the IMF-led painful structural adjustments plan the country submitted to in 1983 because of its abysmal deficit and debt record left economic decision-makers from then on very adverse to any debt-financing scheme, or at least to be adverse to any foreign borrowings; There were even times when relatively high domestic public debt was a sound economic policy that prevented inflationary pressures from getting out of control, and thus preventing ‘hot money’ foreign currency flowing in, with all its subsequent disastrous implications witnessed during the Singapore ’97 crisis for instance. That explains a successful policy in bringing down the size of public debt, but at the expense of any real economic growth, as the World Bank itself recognized:

“Toward the end of the 1980s, the Bank was excessively bullish it its assessments of Morocco’s economic future. Progress in public enterprise and financial sector reforms was considered excellent. […] The Bank’s overoptimism continued through 1993, despite the fact that there had been hardly any economic growth since 1990. Growth slowed from almost 5 percent a year in the second half of the 1980s to 2 percent in the early 1990s”.

And though great efforts have been made in upgrading the Moroccan economic structure, a potential austerity plan applied to the economy is most likely to finish off these sectors that have not been entirely reformed, namely private investment, rural areas, health and education. Furthermore, the economic growth -our official panacea for all structural economic growth hardships- has been too low to sustain real wealth creation. The consensus around Morocco’s economic growth potential is estimated around 5-6%. The 2011 Budget estimate for nominal growth is 5% with a 2% inflation, that is about 3% real growth. A poor showing indeed, considering how other comparable emerging countries manage to score higher growth figures. An austerity plan will most likely bring us into depression, an economic outcome too gloomy to contemplate, and yet very likely if the government continues in their folly trying to buy off loyalties and peace of mind.

Is the austerity plan likely in Morocco? Haven’t we managed to borrow the whooping sum of € 1 Billion a year ago? Aren’t the financial markets confident in our sound economic policies? not quite.

In 2010, total public debt increased by 5%, topped by an 11% increase in foreign debt, while the latter was going down at an annual average of 10% over the last decade

Consider the level of public debt in Morocco: According to the Finance Ministry’s debt figures, total public debt represents 49.3% of GDP (late 2010) much less than the 80.5% level recorded two decades ago. The foreign-held public debt -our subject of interest- accounts for about half of it i.e. 22.4% of GDP, an 8% increase compared to the 2009 period, an increase in total contradiction with the decade-long average trend of a 9% annual decrease. Now, these figures are nothing like those recorded in the early 1980s (when foreign-held debt was 110.9% of GDP in 1983) and the potential danger is certainly not that of a debt crisis where the Moroccan government would be unable to honour its debt. The danger looms domestically, because of the constraint national foreign currency holdings represent, economic authorities will be obliged to halve many public spendings; and because much of the budget is about non-productive expenses, the axe will primarily fall on the subsidies.

One of the reasons why Morocco’s rating is not Investment-Grade across all rating agencies is due to its weakness on foreign currency. The latest Bank Al Maghrib figures on that matter testify on our economy’s inability to field enough foreign currency to sustain economic resilience. Foreign holdings as of June 2011 are about MAD 182.8 Bn, a 6% dent compared to the MAD 194 Bn reserves held on December 2010. Already the effect of these policies can be felt on these reserves; the pressure on the foreign reserves can be linked to the public debt: indeed, as the graph shows, Morocco resorts more and more often to foreign debt, and so since 2005: even though domestic debt remains the preferred debt vehicle for government spendings, foreign-held debt stock have increased 33% over the last 5 years, compared to the 12% for domestic stock over the same period.

This, of course, is due to the gluttonous borrowings the Finance Ministry has engaged in to pay for many expenses: the new military acquisitions, the various “Grand Design” workshops, the subsidies, etc. have taken the annual domestic public borrowings from MAD 42 Bn in 2005 to MAD 54.2 Bn in 2011 an average of 4.34% annual increase, a commensurate variation to nominal GDP growth’s, about 4.84%. On the other hand, the budget circa 2005 records an additional MAD 7 Bn of foreign borrowings, compared to the MAD 18.05 Bn in 2011, a far larger annual increase of 17.1% a year. This is evidence that government spending resorts more and more to foreign borrowing, thus building on an increasing stock of foreign debt.

Interest relative to principle jumped from 24% to 50% from 2007 to 2011

The debt is also getting more expensive to pay back: even though the ‘super-borrowing’ of June-September carried only a 4.57% coupon interest, the overall foreign debt paid since 2007 has steadily gone up with an increasing interest/principal ratio, while the economy does not grow fast enough to create enough exports and attract foreign investments, in order to match the required payments.

The debt problem has also another feature, perhaps more concerning: the short-term debt (exclusively domestic) increases at inflationary proportions. The same Finance Ministry figures attest to that: early 2007, overall short-term debt amounted to MAD 15.3 Bn. Projections for debt service mid 2011 are MAD 18.22 Bn. This is due to the fallacy of low interest paid on short-term debt: 3-months treasury bonds pay a coupon of 3.44% while 5 years bond yield 3.94%. Though it is cheaper for the government to pay for short money, it also compels it to continue to borrow short in order to meet its most urgent expenses, and these have been quite numerous these last days.

Debt on itself is not such a bad thing: it can help public authorities benefit from leverage effect when important investments such as infrastructure upgrade or education and research facilities spendings are involved; They can provide value by expanding potential growth. But when subsidies equate the amount spent on public investment (about MAD 53.85 Bn for investment, about MAD 45 Bn for subsidies) the only outcome is future austerity plan and economic depression. Of course, these can be avoided, provided a deep-range fiscal reform, including an end on amnesty over agricultural taxes (who benefit to those owning more than 10,000 ha) and the tax breaks that benefit annually up to MAD 7 Bn, exclusively to the 10-20% richest individuals and households in Morocco.

5 Responses

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  1. MoMo said, on June 26, 2011 at 01:36

    Hi Moorish,

    Thanks for this great article. I have a question that you might know the answer. Is there an optimal level of debt for a country as there is for corporations in capital budgeting? Thanks and keep these posts coming.

    • Zouhair Baghough said, on June 27, 2011 at 11:49

      Hello,
      Contrary to corporate finance, there is no public finance equivalent to Modigliani-Miller. However, there can be some ‘rule-of-thumb’ kind of measurement to the maximum (and not optimal) level of debt for a country. Assuming it is not the US (because of its status as the emitting country of the world’s first currency) 60% is a realistic benchmark.
      This is the maximum level; optimal is more tricky: it all depends on what you do with that debt really. If debt is accumulated because of infrastructure and growth-promoting spendings, then it is ok. By that I mean any debt that expands the potential growth of the economy is a good thing. Spending money on subsidies and wages is not.

      thanks for stopping by!

  2. Anass Zakaria said, on June 27, 2011 at 09:56

    There is one wrong information on this post : Morocco is investment grade since march 2010 : http://lmgtfy.com/?q=morocco+investment+grade
    While I’m against subsidies and cost-cutting for some unnecessary investments, I do not believe that taxing agriculture is the suitable response when we know that the sector is the main employer of the country.

    • Zouhair Baghough said, on June 27, 2011 at 11:55

      How are you doing Anass?
      Read the quote:

      One of the reasons why Morocco’s rating is not Investment-Grade across all rating agencies

      This means some agencies rate Morocco IG, others don’t: Moody‘s rates Morocco at Ba1, which is NOT investment grade. S&P upgraded Morocco in March 2010 (and I reported on that on an earlier post) sorry!
      taxing agriculture is the decent thing to do for these employees. The 10.000ha + farms are mechanized (meaning consume less labour), export-oriented, manage to score phenomenal margins and their proprietors are in their large majority Urban dwellers. Budget can levy a MAD 20Bn+ (equivalent of VAT or IT receipts) by inducing a 10% tax on the large farms. And it wouldn’t hurt employment there. Think about it.

      Great to hear from you!

  3. […] evil: it is a given that government debt is too large, and its foreign-held, short-term maturity weighs a great deal on the dwindling foreign reserves. Cutting expenses -as well as raising receipts- is the way to go. But instead of targeting blindly […]


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