Standard and Poor’s, Hatchet Man?
So it it true then. In itself, the outlook switch to ‘Negative’ is not such a bad piece of news, although it gives reason to worry about the future. If anything, I would have expected S&P to be a bit more Johnny on the Spot.
— Standard & Poor’s (@standardpoors) October 12, 2012
Let us first read the actual words S&P used to explain its outlook update (because it is only an outlook update, not a downgrade, mind you)
– We are affirming our investment-grade long- and short-term foreign and local currency sovereign credit ratings on Morocco at ‘BBB-/A-3’ and ‘BBB/A-2’, respectively. – We expect economic reforms, and particularly petroleum subsidy cuts, to diminish Morocco’s external and fiscal deficits. – We are revising the outlook to negative from stable. This reflects our view that the Moroccan authorities are finding it more challenging to reduce the vulnerabilities created by the twin deficits in the context of a difficult external environment, while maintaining Morocco’s traditional political and social stability. – The negative outlook reflects our view that we could lower the ratings if the fiscal and current account deficits do not narrow significantly, if social pressures escalate and impair reform progress, or if economic performance is materially harmed by a weakening external economic environment.
S&P worries are just as justified as those of, the IMF when the PLL was extended to Morocco: the current account and budget deficit have significantly deteriorated during year, and as a result fiscal consolidation is to be expected.
The report is quite interesting in fact: beyond the inevitable media tension over the outlook update (and all the ensuing misunderstandings) S&P’s assessment is fascinating as to how the current government can or will deal with these issues. First off, they seem to challenge the Moroccan position as to the promises made before the IMF:
The total subsidy bill was equivalent to a substantial 6% of GDP in 2011. The government began to reduce untargeted fuel subsidies in mid-2012, but will need to take more steps to restore Morocco’s traditional fiscal stability. While the government has expressed its intent to press ahead with further subsidy reform, we believe this will be politically contentious and could undermine social cohesion, leading to further delays. We also note that, to date, no concrete timetable for reforms has been laid out.
Does it mean we should kiss goodbye to the 2016 target of less than 3% deficit to GDP? The report does not say. It is painfully clear however the efforts on behalf of our government to trim the Compensation Fund do not look credible, precisely because they refused to communicate any precise timetable as to how the subsidies will be cut. It seems IMF has been for once overly optimistic as to Morocco’s future economic performance.
Much more concerning is S&P’s pessimistic analysis of future growth: while it is expected exports would benefit from a structural boost (provided by FDIs flowing into Morocco during the past decade) growth is also expected to be weak, with all ensuing political risks. In fact, the report lays out quite explicitly the doomsday scenario:
We expect the progress of political and economic reforms, and the authorities’ ongoing efforts to contain consumer price inflation, to limit popular unrest to sporadic outbursts. However, if unemployment remains stubbornly high, living costs spike, or political reforms disappoint popular expectations, there is a risk of sustained and large-scale unrest that could also lead to a downgrade.
This outlook update will most certainly have a negative impact on the expected new dollar-denominated bond issue. Remember the good news on March 2010, when the Moroccan sovereign debt got its Investment-Grade label, a testimony to a decade-long period of fiscal conservatism and discipline. The yields on the 2017 Eurobond have decreased 110bps in less than one month, and spreads to benchmark yields contracted 50bps. If it was not for the global uncertainty triggered by the Arab Spring, the yields would have stayed below 4.5% – is was the coupon attached to the 2010 issue; on the other hand, Moroccan sovereign spreads during the first 6 months in 2011 rose moderately, which means the yield increase is of a systemic nature.
The impact of this piece of news can be verified in the next couple of days on the other Eurobond; If its price goes below 99.3 in less than a week, it would not only confirm the sensitiveness of the 2020 Eurobond to country-specific market news, but would also allow to make some predictions as to the expected coupon for the next bond issue, and these point to a figure close to 5.4% than it is to the 4.53% embedded in the Bond issue two years ago.
News can go both ways: there has been indeed a positive impact on Morocco’s foreign debt when it was upgraded to Investment Grade in 2010- and subsequently allowed for a second bond issue at a relatively low 4.53% coupon. Nonetheless, given the pressure on public finances, the government has little choice but to go to international markets for a third bond issue, handicapped with this S&P new assessment.
Note: the S&P report can be read below
FRANKFURT (Standard & Poor’s) Oct. 11, 2012–Standard & Poor’s Ratings Services today affirmed its long- and short-term foreign currency sovereign credit ratings on the Kingdom of Morocco at ‘BBB-/A-3’ and its long- and short-term local currency ratings at ‘BBB/A-2’. The transfer and convertibility assessment for Morocco remains ‘BBB+’. At the same time, we revised our outlook on Morocco to negative from stable.
The ratings on Morocco are supported by its macroeconomic management approach, which has traditionally focused on achieving stability. This has contributed to strong economic growth relative to peers, low consumer price inflation, relatively low external leverage, and moderate government debt levels. The ratings are constrained by comparatively low prosperity (relative to similarly rated peers) and by social pressures, which we believe have increased since the Arab Spring, but remain much lower than in neighboring countries.
The general government balance had been broadly balanced during the past decade. However, deficits rose to over 4% of GDP in 2011 and this year as spending, especially on fuel subsidies, has increased and driven the primary balance deeper into deficit. We expect that cuts in subsidies will see a primary surplus return in 2013 and the net general government debt peak at an estimated 41% of GDP in 2012.
The total subsidy bill was equivalent to a substantial 6% of GDP in 2011. The government began to reduce untargeted fuel subsidies in mid-2012, but will need to take more steps to restore Morocco’s traditional fiscal stability.
While the government has expressed its intent to press ahead with further subsidy reform, we believe this will be politically contentious and could undermine social cohesion, leading to further delays. We also note that, to date, no concrete timetable for reforms has been laid out. Higher global oil prices–while currently not expected by Standard & Poor’s–could also impair progress, as could weak economic performance in European export markets and sources of trade, investment, remittances, and tourists.
Morocco’s external financing needs used to be contained due to low external debt and a current account close to balance or in surplus. Since the onset of the global financial crisis, however, the current account deficit has risen fast, reaching by our estimate an average of over 7.5% of GDP during 2011-2013, partly fuelled by rising oil prices and a poor harvest in 2012.
Morocco’s narrow net external debt ratio has therefore quickly deteriorated. As recently as the middle of last decade the Moroccan economy was a net creditor, by that measure, of more than 20% of current account receipts (CARs). By contrast, we forecast a net debtor position of 28% in 2012.
Although official foreign exchange reserves have fallen sharply from their peak, we estimate immediate gross external financing needs at a still-moderate 93% of CARs plus usable reserves (in 2012) and expect them to stabilize at around 100% by the middle of the decade (from less than 70% before 2007). Immediate refinancing risks are further mitigated by an IMF precautionary liquidity line equivalent to $6.2 billion.
We also recognize that past FDI (averaging about 2% of GDP during the last decade) will likely improve export performance. Nevertheless, we believe that economic rebalancing over the medium term will remain difficult and may lead to lower GDP growth, which could heighten risks to political and social