The Moorish Wanderer

Liquidity Drain, Public Debt and Stock Exchange Annus Horribilis

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on January 12, 2012

– 13%: almost MAD 60Bn value wiped off the books over 2011 in the Casablanca Stock Exchange. In the same time, Bank Al Maghrib had to deliver liquidities up to 130Bn over the same period of time, when the finance ministry looked for liquidity up to 73Bn. (but I am told the glamour of public finances has been overtaken by the recent news of freed Rapper Moad L7a9ed. It takes all sorts, I suppose)

significant correlation between BKAMs's Open Market (at 7-days) and MASI's daily changes: -.88

I argue that the distended domestic debt has already harmed the economy, first by distorting liquidity needs, and second by affecting the stock exchange in a negative way. To be sure, the levels of liquidity captured by the domestic debt are not overwhelming resources on liquidity markets (we are talking about almost 870Bn in M3 aggregate, 12 times the total annual borrowings) but they do exercise a negative effect on available liquidity, and thus on induced growth.

From then on, there is recursive effect: fewer liquidity resources drive stock exchange markets down, their yield go down accordingly, but since public domestic debt delivers a fixed interest on its bills, investors gradually shift their liquidity allocation, pushing yields on the stock exchange further down.An effect similar to what economists call a crowding out effect; it seems the level of domestic public debt, that is, the amount of liquidities captured by the treasury to finance expenses and the deficit are such that they have contributed significantly to MASI’s bad performance.

Assuming MASI’s represents a significant private sector valuation, it only right to ask: was domestic public debt important enough to afford a -13% nose-dive in the stock exchange?

First off, let us consider how much the treasury managed to levy last year. This is important because the main indicator of investors’ preferences, the required yield on treasury bills and short-term bonds, has changed to some extent over the year: comparing 2010 to 2011. Why is it important? Because once the weighted-average interest rate on public debt reaches a certain level, Bank Al Maghrib is bound to intervene by ‘punishing’ the treasury with higher policy interest rates: to be sure, liquidity will shrink even more -perhaps with a mini-depression in interest rates-sensitive sectors- but that would also push debt yields higher, and thus compelling the budget to deleverage.

This is only a pre-emptive threat: Bank Al Maghrib nor the Finance Ministry would go to such lengths, and that is why some (credible) reduction in domestic public debt is needed to inject back liquidities in private markets.

This is how the story goes: The budget needs to be financed, and tax revenues can sometimes fall short, either because businesses and private individuals did not pay them in time, enjoyed exemptions or decided to go before the court. But government payroll needs to be maintained, bills have to be paid, and to do so implies money needs to be borrowed. And that’s what the treasury does: last year, there was a weekly auction for T-bills of different maturities (usually less than 2 years) at an average amount of 1.8Bn, a total of 73.6Bn. It is worth to point out that the 2011 budget provided for only 33.6Bn, and that means some 40Bn have been over-borrowed. It even tops projected borrowings for the shadow 2012 Budget bill by 12Bn What does it tell about how the budget was managed last year? If it was regular working individuals, that would have meant an additional MAD 3.390 borrowing per worker, or 6.500 per household. I doubt commercial banks can allow so easily for such an overdraft, especially when the average interest rate is around 3.5%.

This is a free ride behaviour no particular expenses can justify: the money was primarily used to pay the exponential increase in Compensation Fund resources, a White Elephant that profits mainly to the wealthiest households, by the ministry’s own admission:

[…] Ceci dit, le système de compensation en vigueur fournit un soutien uniforme pour le maintien des prix abstraction faite du revenu des consommateurs. Il en résulte que les subventions versées bénéficient davantage aux riches qu’aux pauvres. (Presentation Note, 2012 Budget Bill, page.62)

The steady increase in public debt is matched very closely by CSE market capitalization

The excessive borrowings on domestic debt markets have had their effect on available liquidities: in 2011, available M3 aggregate broke a decade-long trend: a contraction of 250Bn. The reason behind the decrease is multifarious, but the magnitude of such a contraction compels to ask to what extent does the 40Bn excess borrowings account for it?

But let us now look at the maturities; surely a good point can be made about these borrowings, as a convenient way to finance investment and other expenses that have a good -if not immediate- impact on the economy. It seems that most of the maturities range from 3 weeks to one year, hardly a suitable maturity for investment for growth.

One last point perhaps, one that would conclude the various points raised early, and could be a matter of concern: projected paybacks for 2011 reached about the same amount of borrowings, i.e. 73Bn. But among those are 3 Billion of interest; the composite interest paid on the domestic debt for 2011 was about 4.1%. It is almost one basis point above the nominal yield for all short-term bills issued last year. The crowding-out effect has already taken place, and Bank Al Maghrib might not have to push interest rates higher: the cost of borrowing alone will compel the government to slow down, then reverse its borrowings policy.

4 Responses

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  1. The Sebsi said, on January 14, 2012 at 12:32

    Je suis devenu un lecteur assidu de ton blog, mais je ne suis pas toujours à l’aise avec ton usage de corrélations à tout va. ça ne convient ni aux initiés ni aux novices qui sont plusieurs à lire ton blog.
    Pour prouver les effets d’éviction, il faut beaucoup plus que l’interprétation de des graphiques comme celui “The steady increase in public debt is matched very closely by CSE market capitalization -https://moorishwanderer.files.wordpress.com/2012/01/borr_cse.png”…D’autres mesures comme le crédit au secteur privé, taux d’intérêt des corporate bonds…avec à la clé un bon graphique type IS-LM

    (Petite remarque, peut-être sujette à caution: le taux d’utilisation des ressources (à la fois K et L) au Maroc est plutôt bas, d’ailleurs c’est l’une des raison derrière nos bas taux d’inflation

    • The Sebsi said, on January 14, 2012 at 12:34

      (suite de la remarque: normalement les effects d’éviction se réduisent en cas de bas taux d’utilisation. N’est-ce pas le cas du Maroc?)

    • Zouhair Baghough said, on January 14, 2012 at 14:13

      Salut Mohamed,

      Abuserais-je des corrélations sans justifier l’usage? Certainement pas. Je teste en général les corrélations que je propose, et celles-ci sont constamment à 95% au moins (d’intervalle de confiance) – lorsque je suis sur Stata, j’utilise la commande pwcorr à 95% d’intervalle de confiance pour tester sa validité.

      Je précise dans le même poste que l’ensemble des contreparties au M3 ont décliné de 250 Milliards en 2011, mais le chiffre n’étant disponible qu’en données mensuelles (merci Bank Al Maghrib!) il était inexploitable sur le graphe – J’aurai voulu faire mieux, mais voilà, je n’ai pas toujours accès à l’information telle que je le souhaiterais.

      Je crois que l’effet d’éviction dont il est question ici ne peut pas être capturé par un graphe IS-LM, pour des raisons de modélisation surtout (ça reste au fond un modèle très statique) l’idée des taux de corporate bonds est excellente, j’avais récupéré quelques données dessus pour un prochain post🙂

      Enfin, concernant le taux d’utilisation de K et L, je reste assez sceptique quand à l’utilisation des agrégats disponibles: pour L, le taux de chômage est une mesure imparfaite -j’aurais préféré le nombre d’heures travaillées- et pour le Capital, la différentiation entre Investissement FBCF par agent résident n’est pas toujours disponible:-/

      Un grand merci pour tes questions/observations. Je n’en reçois pas toujours, et ça fait plaisir!

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