The Moorish Wanderer

Towards a New “Corporate Morocco”

The thing one needs to know about Corporate Morocco is that there are good companies and bad companies; at first sight, there is little difference between them: all of them create output and wealth, most of them create jobs -or at least provide facilities for jobs- but ultimately, the “moral” judgement -or in a agnostic setting, “social judgement”- lies in the distribution of profit (or in accountancy terms, EBITA) the post is not going to be about the evils of crony monopolies, but rather a general description of what companies in Morocco are up to, if they can indeed perform in similar proportions in a strict environment of rule of law and impartial regulatory bodies (in contrast with the very predatory, very concentrated and quite corrupt present state of affairs)

I suspect many left-leaning people in Morocco still view corporations as the source of all evil. In fairness, the prejudice held against corporations is not entirely unjustified – history taught us that much; But then again comes back the paradox many liberals and radicals in Morocco are wading through when it comes to the whole paradigm of government action vs individual/collective rights. It seems even the most vanguard thinker does not imagine improving the lives of fellow Moroccan citizens without the constant nudge of governmental intervention, even though the record on state intervention’s part is not that glorious (and USFP people sure illustrated the case in 1997).

What, Makhzen is going to disappear when progressive people are going to be in charge? Empowering individuals and communities surely contributes to bring it down; A heavily activist state, even when pushing for left-leaning project, could be just as bad as the old one. But coming back to corporate issues: though regulations are not precisely anti-business, it is the general framework within which laws are enacted, plus large businesses have always enjoyed close relationship with the equally high circles of power. In most countries, this is true indeed; But in democratic countries with a genuinely independent judiciary and impartial executive bodies, it is inconceivable that such an incredible leverage would be at the disposal of both a financial and executive power.Breaking down the Makhzen is equally a matter of weakening central government as well as big business. My claim here is that promoting small business and growth-potential companies is actually the smart thing to move, and that our pale imitation of Korea and its Cheabol model is, so far, a failure, and benefits only a few nucleus of influential people.

Also, it is high time the fight against big business was clarified so as not to give the impression liberals and radicals are anti-business, and that the way to expand the economy, create jobs and improve standards of living is though smaller, more innovative and more engaged in involving its employees in the productive activity and creating output.

The graph compares some indexes on Moroccan businesses. Since 2008, the national economy took a hit following the shock wave of the credit crunch. Though the broad macroeconomic variables held forth, the economic resilience, as it turned out, was not that strong in face of negative shocks. The pick up trend recorded early 2009 does not make up for the losses, and it has proven to be very volatile for most large-cap indexes. By contrast, the small-cap index did better and made up 92% of an all-times high in 5 years. A shrewd investor entering early 2009 would have made, so far, a gross 37.5% profit over small cap Moroccan companies (or a net profit of at least 35%).

They would have broken even at best (or make an average loss of 14%) with other indexes encompassing larger companies (supposedly with stronger fundamentals) The index analysis provides plenty of insights on the limitations of Moroccan capitalism: here are large companies whose share value is going down for the last three years, and yet manage to squeeze out enough cash and distribute it to its wealthy shareholders. The policy of accumulating earnings and invest them in tangible assets to expand companies’ capacities so as to accelerate recovery, it seems, is not the order of business of (big) Corporate Morocco.

In addition to the  small caps out-performing the larger ones, it is worth mentioning the robust growth they have been enjoying, especially when compared to the bumpy ups-and-downs of other indexes; But let us start off with an overview of what goes up and what goes down;

Even though dividends recorded a daily average of 8.9% decrease, the 3-years net period yielded a robust 5% (BVC)

The standard indexes to gauge how well companies are doing in the Moroccan economy are those used for the Casablanca Stock Exchange BVC. The MASI (Moroccan All Shares Index) and MADEX (Moroccan Most Active Shares Index) provide a usually comprehensive picture of the whole thing. Since early September 2008, the MASI has been losing so far 18% of its value, a daily average decrease of 2%, as of late August 2011. The volatility did not help, too: a 7% relative dispersion over the last 3 years only complicates further BVC’s poor showing and compromises hopes of recovery. These observations equally apply to the MADEX as well.

And yet, distributed dividends perform extraordinarily well; When considering the MASI Gross and Net returns differential, the distributed dividends on the considered period increased 5%. 2008 was a grim year for both BVC and the distributed dividends index-although MASI did worse- but dividends recovered next year with a respectable 8.65% per annum increase, and then 33.82% in 2010 (which resulted in a total of effective distributed dividend of approximately MAD 20.63Bn from potential MAD 30Bn reserves)

Big companies prefer, even under stringent economic conjecture, distribute their dividends, even when the price of their shares are down and have difficulty picking up. The dividend strategy could very well be a gesture of appeasement towards its shareholders, but it does not, on the longer term, benefit them, nor does it benefit the domestic economy.

Other indexes tell the same story: the FTSE Morocco index, considered a more comprehensive an index (compared to MASI/MADEX) provides very similar results on how well corporations are doing;  As a matter of fact, the FTSE index is even more pessimistic starting from July 2009, as it lost a third of its value over the period September 2008 – August 2011. That discrepancy between MASI and FTSE can be explained by the more stringent set of criterion applied by the company.

FTSE Morocco lost 31.44% of its value over three years, MASI 18% (Bloomberg)

To be included in the Index, a stock must pass free float and liquidity criteria.
5.1 Free Float
        a) A security that has a free float of less than or equal to 5% will be ineligible for the Index.
        b) A security that has a free float greater than 5% but less than or equal to 15% will be eligible for the Index providing the security’s full market capitalisation (before the application of any investability weight) is greater than or equal to 1% of the full market capitalisation of universe at periodic review.
The actual free float will be rounded up to the next highest whole percentage number.” (page 7)

And this reflect the ‘desirability’ of company shares. As a matter of fact, it now safe to argue that the dividend policy is subject to no other objective but to distribute the highest possible levels of dividends, a complete contradiction with the so-called “national champions’ strategy.

What if an alternative strategy was considered instead? There is no systematic evidence large companies provide an emerging economy with the leverage needed to promote exports or bring hard currency to the domestic economic circuit; Couldn’t smaller companies do Morocco’s bidding just as well? When compared to regular indexes, the small cap index not only beats them on recovery and returns over the last three years, but it has a robust growth compared to large and mid-capitalizations: over the last three years, gross returns recorded levels varying between 22% and 29% and starting from April 2010, growth as been consistent, in contrast with the large-cap indexes.

Growth-Small caps index systematically beat down mainstream,large cap-focused indexes over short and medium term. (Bloomberg)

The point is, and contrary to the theory that smaller companies cannot stand global competition, growth industry in Morocco provided good returns, further emboldened by the flexible structure of its capital. It could be indeed just a phase, and it could well be expected that these companies would eventually slow down their growth; but over a longer period of time (the longest available being 5 years) the small caps index still beats down with a 12.25% 5-years return, while MASI performs a -4.3% returns.

A reasonable case can be raised on whether the index analogy holds: after all, the index composition tends to fluctuate, and it has its shortcomings. After all, MASI and other indexes do not represent the overall showing of the domestic economy; But this goes beyond it, or rather, goes into the specifics of private sector contribution to growth. With no excessive generalization, the ingredient of good and stable growth for Morocco are investment (both public and private) and now as it turn out large corporations actually harm growth, smaller, more innovative and high growth-led industries.The political implications for shifting away from big corporation is that the financial war chest of Makhzen will dry up, and with it, its power and hold over all aspects of political, economic and social life will fade away in favour of a more open, democratic and equitable society.

If these can be cooperatives as well, My crypto-communism would be achieved. In the mean-time, let’s buy us some MSCI Morocco Small Caps, it earns good money.

6 Responses

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  1. hmida said, on September 1, 2011 at 08:21

    Encore une fois tu prives une partie de ton lectorat de ta science infuse en écrivant en anglais : j’aurais tant voulu en savoir d’avantage sur les “good ” et les “bad” entreprises dans ce pays ! Le sujet semble passionnant mais il n’est pas fait pour les citoyens lambda comme moi mais pour les anglophones avertis! Que lastima, comme dirait mon voisin espagnol!

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