# The Moorish Wanderer

## The Big Picture – Part 5

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 16, 2012

evidence shown on my last piece points out to foreign trade as a major factor in output cycles and its growth. The initial proposed model has therefore to be readjusted accordingly, through the TFP process, and the relation it bears with the Balance of Payments; and so:

$\log z_t = \rho z_{t-1} + \tau bp_{t-1} + \epsilon_{t-1}$

$\log bp_t = \rho bp_{t-1} + \tau z_{t-1} + \upsilon_{t-1}$

where $\rho$ is the persistence parameters, and $\tau$ the cross-persistence parameter that captures transmission shocks between TFP and balance of payment; both processes displays the following properties:

$E(z_t) = \rho E(z_{t-1}) + \tau E(bp_{t-1}) + E(\epsilon_{t-1}) = 0$

and that is so because the empirical data shows it: the long-run shows both the Balance of payments and the Solow Residuals converge to a zero.

$var(z_t) = \rho^2 var(z_{t-1})+\tau^2 var(bp_{t-1})+ var(\epsilon_{t-1})+ 2 cov(z_{t-1},bp_{t-1})$

equivalently,

$E(bp_t) = \rho E(bp_{t-1}) + \tau E(z_{t-1}) + E(\upsilon_{t-1}) = 0$

and

$var(bp_t) = \rho^2 var(bp_{t-1})+\tau^2 var(z_{t-1})+ var(\upsilon_{t-1})+ 2 cov(z_{t-1},bp_{t-1})$

Both parameters $\rho$ and $\tau$ are then estimated by computing the TFP residuals on HP-filtered data. Recall:

$\log y_t = \alpha \log k_t + (1- \alpha) \log n_t + z_t$

we also have: $cov(z_{t-1},bp_{t-1}) = corr(z_{t-1},bp_{t-1})\sigma_{z}\sigma_{bp}$

Balance of Payments and the Exchange Rate exhibit a strong positive correlation, starting from the mid 1970s.

The graph makes the case for the constructed balance of payments to capture the effects of international trade – starting from the mid 1970s, the discrepancies between Investment and Savings captured by the Balance of Payments, and the exchange rate with the Dollar have locked up in a strong positive co-movement; the exchange rate isn’t set arbitrarily: it has real impact on input cost, on growth projections and consumption across the board. We have now a good insight on how foreign trade impacts growth performance. (The data still does not incorporate government expenditure)

Computations on parameters $\left( \rho .\ \tau .\ \sigma_{z} .\ \sigma_{bp} \right)$ yield:

we get:

$\tau = .4324$

$\rho = .2723$

we observe the condition for $\left| \rho+\tau \right| < 1$ is acquired, and the results might, at this point, explain the discrepancies pointed out earlier: the persistence parameter is significantly weaker as the Balance of Payment shocks are incorporated into the structural process before they get into the economy; we observe the variance-covariance matrix displays the following values:

Variables       e         u
e            0.004600  0.006510
u            0.006510  0.009214

It makes sense, since these in turns carry part of the unobservable shocks in a closed-economy, and because foreign inflows of capital are critical to the national investment, and thus to output growth, the cross-persistence parameter is more significant; yet another piece of evidence that any sensible public policy to boost growth is NOT to shut down foreign trade (a gentle wink to the protectionist left-wingers out there). We do notice that Capital accumulation in Morocco relies heavily on foreign inflows, and by implication, output growth as well. Structural shocks, to that effect, are a kind of a buffer between exogeneous, unexpected shocks, and the economy: transitory shocks are captured by structural shocks rather than those attached to the

the results are very much in line with prediction on standard RBC, only this time numbers fit a lot better, as they show below. There are still some problems on the Labour side, and public finances’ effects on cycles are yet to be estimated; but so far, the picture looks great 🙂

   Data   |σ       |σj/σy  |Corr(y,j)|
----------+--------+-------+----------
Y_GDP     |0,08030 |1       |1       |
----------+--------+-------+---------+
Con       |0,07013 |0,87339|0,82150  |
----------+--------+-------+---------+
Capital   |0,09167 |1,14159|0,4448   |
----------+--------+-------+---------+
Investment|0,24127 |3,00463|0,83690  |
----------+--------+-------+---------+
Labour    |0,09806 |0,81888|-0.8670  |
----------+--------+-------+---------+
Government|0,22035 |2,74415|0,49970  |
--------------------------------------
RBC     |σ      |σj/σy |Corr(y,j)|
------------+-------+------+----------
Y_GDP       |0,06596|   1  |    1    |
------------+-------+------+----------
Consumption |0,04715|0,7148|  0,5092 |
------------+-------+------+----------
Investment  |0,20460|3,1018|  0,8766 |
------------+-------+------+----------
Government  |         No Data        |
------------+-------+------+----------
Labour      |0,00002|0,0003|  0,0238 |
--------------------------------------
New RBC   |σ      |σj/σy |Corr(y,j)|
------------+-------+------+----------
Y_GDP       |0,0631 |   1  |    1    |
------------+-------+------+----------
Consumption |0,0455 |0,721 |  0,9515 |
------------+-------+------+----------
Capital     |0,1268 |2,009 |  0,7060 |
------------+-------+------+----------
Government  |         No Data        |
------------+-------+------+----------
Labour      |0,0126 |0,199 |  0,7183 |
--------------------------------------

## Bonds, Yield and Morocco’s Future

Posted in Dismal Economics, Moroccan Politics & Economics, Moroccanology, The Wanderer by Zouhair ABH on October 3, 2010

Morocco succeeded in levying some fresh money on the international capital markets at good conditions. So that’s € 1.Bn at 4.563% interest to be paid over 10 years at our disposal; Let us just hope it would be put to good use. It is, in all fairness, a good deal. the fixed income market is still quite volatile due to lagging credit crunch effects, especially on the long-term rates. It is a good deal, provided the money is wisely used to create stream of currency cash flows as well as wealth and output expansion at once. Otherwise, it will be difficult for Morocco to meet the payments ahead.

April 2010, the Moroccan finance ministry mandated three international banks -HSBC, Barclays Capital & Natixis- to prospect for funds on the international capital markets. The ministry targeted a \$ 500Mn levy, but retracted forthwith two months later, arguing that the “present mood in the international markets does not allow for favourable terms for a loan”. (at that time, the Greek and Spanish crisis was banging hard, and eventually the required risk premium was too high) Late September 2010 however, and due to a high demand for low-risk investment grade emerging markets debt, Morocco secured a good deal, the total offer was twice more than the initial target levy, at a low premium discount. The bond is Euro-dominated, with about 57% European holding and 19% of Middle-east and North Africa origin. Now this should, in my opinion, be good news (time and again), in the sense that the Finance Ministry managed to secured large sums of money at low price. The question remains, how is it going to be spent? If, as La Vie Eco suggested late May 2010, the government plans to use the money and reimburse an outstanding total debt of MAD 36 Bn (Finance Ministry Figures, Q1 2010) then where would the money come from to pay the coupons, and ultimately, the principal in 10 years’ time? Over the last 3 years, the average annual foreign middle and long-term service debt was about MAD 2.621 Bn, that is 52% of the effective coupon Morocco has to service with the new borrowing. It would be foolish to contemplate such policy that reminds us of earlier times, when Morocco was desperately borrowing money to pay back previous contracted debts. It is foolish because of our reliance on foreign currencies. Let us suppose for the sake of argument that there will be benefits in halving our foreign deficit. It would mean that (a) Morocco can borrow some more for other purposes, and (b) the economy is prepared to divert an annual amount of MAD 513Mn in Foreign Currencies and pay back its debt in 10 years time, whatever the economic conjecture impact on Morocco (by means of comparison, the coupon represents about 10-15% of the average annual interest paid on medium and long term debt).

The graph measures changes in investors risk appetite for FX emerging markets (Investment-Grade only) Source: Fixed-Income Strategy Monthly survey October 2010, Amundi Asset Management

While the first assumption can be translated into seemingly sensible policy of substituting debt, the second one shades great doubts on its soundness, and ultimately exposes its main contradictions. Indeed, the terms upon which the bond emission was agreed are not likely the be met in the present course of time. You will notice the graph on the opposite side that volatility (and thus, required risk premium) has risen sharply since the end of September. If the Ministry goes out on the market in the next months, and bearing in mind the present trend, it will be difficult to reiterate the feat of levying such amount at such low price. The bottom line is, the Bond cannot be used to reduce the level of debt. I had the funny assumption that the government could use the money and invest it in turns in the market for a higher return and capture some profit in the process. I could develop some more later, but it just makes turn around and go back to square one. The last strategy we are left with is therefore to actually spend the money i.e. inject some liquidity in the economic circuit. The way the money is pumped up in the economy will certainly determine its course for the next decade. Let us start off with some figures to understand how a billion Euro is not only too large a sum of money to be trifled with, but it might be a blessing in disguise to renovate some of our public economic policies as well.

The recent upgrade in Morocco’s sovereign debt rating in March 2010 finally came into concrete result, in the sense that the present market pricing of our debt gives a quantitative aspect to the rating upgrade. It also means the international capital markets, on which Morocco did not issue debt since 2007, reacted favourably to a new investment-grade debt that is deemed to be yielding enough to attract high demand, but on the same time with low risk with respect to other top-tier “junk” bonds.

Foreign Debt. while the outstanding amount declined rapidly from 1998 to 2006, and steadily since then. Paid interest however is relatively volatile across time period

The starting point is of course the considerable effort the Finance Ministry consented in order to reduce public deficit and public debt. And indeed the efforts have been must successful. It must be pointed out however, outstanding and interest debt did not fall in the same fashion; In fact, paid interest are comparatively more volatile to the remaining debt, due to a heterogeneous debt structure (an aggregate of common yet distinct maturities as well as an undeniable currency effect) but the fact remains it is quite difficult to forecast how likely the service debt would impact the economy. Please bear in mind the graph did not take into account the present bond emission, which when accrued, drives the paid interest to a two-fold increase for Q4 2010 and onward.