The Moorish Wanderer


Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 19, 2012

Last day of the fasting month. Can’t find anything spiritual about it, other than a sharp increase of overt religious behaviour. Incidentally:

عيد فطر سعيد للجميع

I was browsing through the New Statesman twitter feed (great newspaper by the way) when I stumbled upon a great article on Ramadan and its impact on productivity, GDP and other macroeconomic aggregates.

You see, one of the big ideas about Islam as a major monotheist religion, is its supposedly ready-made “الإسلام دين الفطرة، صالح لكل زمان ومكان” its fitness is timeless, omniscient and ubiquitous ; in economics, in particular, Islamic banking, with the big money it raises annually, seems to point to a revival of some Islamic Capitalism. I remain however much more sceptical, because the basic model (for academics anyway) in Arrow & Debreu provides a general setting for risk sharing and market completeness, which means all the trouble Hallal financial products go through to avoid paying interest end up useless: in technical terms, the stochastic discounting factor is still there. Enf of story. As for the supposedly eminent benefits of Ramadan, it seems our Moroccan society, through its behaviour during daylight and after sunset, points to an unhealthy cross-over between mass consumption keynesianism and an over-indulging economy. Hardly the stuff of austere Muslims.

Back to The New Statesman story, I wonder how Ramadan affects the national economy, not just market volatility. The trouble is, monthly – or even quarterly- GDP data is usually hard, if not impossible to find. We have to find a device to generate it; but for the time being, let us just focus on the immediately available daily data, the stock market, and then work our way up the economy to assess the ‘Ramadan effect’. Let us before just list some (obvious ?) assumptions about it:

– Sharp increase in household and public sector consumption and low productivity: variations in household consumption are understandable, the public sector on the other hand, has a different set of dynamics to it, since public servants are paid the same for fewer worked hours; finally, lower productivity can be observed everywhere.

– Contrary to the article on the Egyptian Stock Market, I posit market volatility decreases, simply because volume and price turnouts are low.

– Balance deficit is higher than usual: we would tend to import a lot more than usual during or before Ramadan.

MASI Stock Index tends to perform little growth during the Ramadan Month: annual growth is .03%, while it grows .05% in normal days.

Let us start with the stock market from the early 1990s (available data from the Casablanca Stock Exchange trace it as far back as 1992) with 5,140 days, including about 599 Ramadan days. We first observe daily trades tend to generate a modest profit in non-Radman days, up to .11%. On the other hand, Ramadan days observe either quasi-stable index value, or more often than not, small index decreases, as high as .03% in absolute value.

Overall, the differences in daily growth between Ramadan and Non Ramadan trades is statistically significant, and because of the sample size, it would be safe to validate the earlier assumption. On the other hand, we should state that respective standard deviations are not statistically different from one and another, which further buttress the claim not only the stock exchange does not do as well as normal day as during Ramadan, but more importantly, volatility does not increase – contrary to the findings of the New Statesman article on the Egyptian stock exchange. as far as the MASI goes, Ramadan is just a set of 30-odd slow days, with less money to make, and thus higher risk to run into losses.

What about the real economy? Though daily or monthly data is unavailable, we can use quarterly data to proceed with similar analysis: if the assumption holds, we should expect quarters including Ramadan to be significantly different from the remaining 3 others: differences need to be accounted for in GDP, Consumption and Government Expenditure (Inflation could be included as well).

(Note: Statistical results are either t-tested or sample-based variance comparison tests, and these can be found further down the post)

We consider hard data from 1989:I to 2011:IV to check these assumptions: because of the 11-days rule-of-thumb to match Christian and Islamic calendars, we assume Ramadan belongs to the quarter were most of its days are located; alternatively, we could also look at two quarters instead of one, but that would dilute an already blurry picture (it might also explain why the second graph does not provide equal distances between quarter)

Two observations can made:

1/ Inflation increases during or shortly after Ramadan:over the observed 92 quarters, Ramadan-linked inflation tends to be significantly higher than either aggregate or non-Ramadan-linked quarters. Quarterly inflation during Ramadan tends to increase 2.5 times that of normal days, and about twice as much as the aggregate CPI; furthermore, because Ramadan and Non-Ramadan inflation exhibit essentially the same levels of volatility, the Ramadan effect on CPI is undeniable: it contributes on average .77 percentage point to regular inflation. This is robust evidence for price increases during Ramadan. The second point deals with the source of this CPI-related inflation, in this case household and public sector consumption.

Keynesian month indeed: CPI inflation and Consumer-led growth are stronger during Ramadan (dark Blue for GDP, light blue 1989 base year CPI)

2/ Consumption-based GDP components do a lot better than overall output: Government expenditure tends to be a lot more volatile than (and grows at higher pace) GDP. Contrary to other aggregates, there is a pitfall to be aware of; government expenditure tends to increase at the end of the year (departmental budgets need to be fully used to get the next annual budget) but even with that bias, we observed government expenditure increases during the Ramadan month, although at a steadier pace, when compared to aggregate and non-Ramadan quarters.

As for Household Consumption, results are similar to those of GDP, with an additional effect: Consumption typically increases a couple of months before the Ramadan quarter, and is a lot more significant when both compared to aggregate and non-Ramadan household consumption. Though there is need to provide an adequate framework model to link them, we can at least assert Ramadan inflation is tightly linked to a higher than usual levels of consumption for both public and private agents.

I quipped early Ramadan it was a Keynesian month, turns out I was right on the Consumption and Price Level:

So there goes the statistical evidence Ramadan in Morocco is no spiritual month: productivity is low in the economy as a whole, consumption is high (aren’t we supposed to fast out of sympathy for the hungry?) and if anything, we are losing anything between 3.1% and 3.2% in annual productivity per effective worker. In the aggregate economy, Ramadan means productivity takes a (roughly) 28% to 40% dive. Well, the figure seems a little far-fetched, and computed on quarterly basis, but it would be fair if we posit the overly optimistic assumption of productivity as a linear combination of worked hours. Either way, the Moroccan economy is brought to a productivity near stand-still every quarter.

The last assumption has to do with the trade balance: over the past decade (2005-2010) in theory, monthly imports are supposed to be more or less uniformly distributed, i.e. Morocco receives about 8.3% of its annual import each month. We observe however this is not the case; in fact, we tend to import less than monthly average on Ramadan, but more than make up for it in the month before, up to 20% of annual imports are concentrated on two months (Ramadan and the month before).

Variance ratio test MASI
Variable |     Obs        Mean    Std. Err.   Std. Dev.   [95% Conf. Interval]
g_rama~n |     437    .0003361    .0003469     .007251   -.0003456    .0010179
 g_non_r |    4702    .0004557    .0000995      .00682    .0002608    .0006507
combined |    5139    .0004456    .0000957     .006857     .000258    .0006331
    ratio = sd(g_ramadan) / sd(g_non_r)                           f =   1.1304
Ho: ratio = 1                                   degrees of freedom = 436, 4701
    Ha: ratio < 1               Ha: ratio != 1                 Ha: ratio > 1
  Pr(F < f) = 0.9625         2*Pr(F > f) = 0.0751           Pr(F > f) = 0.0375

Variance ratio test IPC/CPI
Variable |     Obs        Mean    Std. Err.   Std. Dev.   [95% Conf. Interval]
icv_nonr |      69    .0052085    .0012316    .0102307    .0027508    .0076661
icv_Ra~n |      23    .0129398    .0021269    .0102004    .0085289    .0173508
combined |      92    .0071413    .0011166    .0107097    .0049234    .0093592
    ratio = sd(icv_nonr) / sd(icv_Ramadan)                        f =   1.0060
Ho: ratio = 1                                    degrees of freedom =   68, 22
    Ha: ratio < 1               Ha: ratio != 1                 Ha: ratio > 1
  Pr(F < f) = 0.4831         2*Pr(F < f) = 0.9662           Pr(F > f) = 0.5169

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.

IMF Report Could Prove To Be Useful

Lots of bad news are coming with IMF consultations between August and November 2011. But as Jim Hacker in “Yes Prime Minister” quipped about hardships: “every problem is also an opportunity”. A blessing in disguise, but one that is going to take a lot of political courage out of otherwise not very plucky politicians.

Perhaps running on the theme of raising taxes is not a winner in elections time. Those parties who released their manifestos did not seem to price, or cap or indeed provide any measurable indicator of their future fiscal policy. But the overall impression I get is that the net effect of their proposals is a tax cut; not a smart policy, considering the very generous, almost spendthrift commitments to raise expenditure. But nonetheless, we shall roll with it. The IMF conclusions encompass one crucial sentence that goes unnoticed in an otherwise little-publicized document by the mainstream media; the reports warns that:

Although in 2011 the Moroccan government implemented short-term policies to address these constraints, in 2012 the government is expected to consider reorienting public expenditure and achieving a fiscal sustainability while fostering inclusive and sustainable growth in the medium term.

“Inclusive”. If I were a party strategist, I’d suggest the manifesto be geared toward that. PJD tried to focus on it, but they lacked metrics precise enough to impress and sway urban, middle-class voters to vote for them. A8 Alliance does not care about it that much, since their focus is to strengthen corporate Morocco first, bringing deficit to a 3% threshold and revive exports. So fiscal sustainability in Morocco basically means taking a serious look a the 32Bn boondoggle of tax incentives, tax deductions, tax exemptions and tax credits that do not seem to benefit those who need it the most. This includes high tax breaks for real-estate developers, a fiat moratorium on Agricultural taxes and the disastrous policy of scrapping the 42% marginal income tax rate.

To my best recollection, none of the three parties with publicly available manifestos (PPS, PJD and the RNI-led Alliance) have made commitments one way or the other on these tax handouts. No one dares to challenge the moratorium on Agriculture exemption even though a simple article introduced in the 2012 Bill can do it: abrogate Art.45 Alinea II on the 2009 Budget bill right away and not wait until December 2013. The mainstream political personnel would not dare do it because the King decided to extend the moratorium in 2008.

Hurrying the agricultural tax may prove to be a double blessing: first it increases budget receipts (which is always better than keeping on borrowing) and second, tax policy will influence estate property structure, as too much agricultural soil is under-used because of archaic regimes going on for too long, and no political power has an interest in reforming them; PJD won’t touch it, first because their core constituency doesn’t live there, and the other parties hope for a strong showing to beat PJD candidates in rural districts, so nothing will be done to even compromise their relationship with the farmers. And yet, we cannot afford to go on any longer with Habous, Guich, Joumou3 status, because productivity is at stakes, while other larger, well-funded and well-managed properties export products and yield good profits. Because of the ongoing soil status mess, the tax exemption goes on as a buffer to prepare for a reform that has yet to come.

Casablanca Stock Exchange created good value of its shareholders. Especially those investing in Real Estate. (Source: CSE)

Ending the 5.5Bn tax deductions in favour of RE developers as these go right into their pockets: the levels of profits the sector generates to its (few) shareholders are further fuelled by tax incentives. In the mean time, a pittance is given to households to buy a decent home they are longing for. RE companies listed on Casablanca Stock Exchange consistently beat the overall index, which means more dividends, more profits and an additional 5.5Bn gift from the state – by comparison, total dividends paid for by MASI was about 30Bn, that gives an idea of how much the tax break actually benefits real estate tycoons.

Scrapping the exemption on households subject of the defunct 42% marginal tax rate is also another meaningful policy that would alleviate the burden on the median classes households, as well as embody the principle of fiscal fairness: those fortunate enough should pay commensurately more. The great news is that our tycoons and wealthy 1% will not leave for a tax exile, nor would it hurt the economy; quite the contrary, imports of new luxury cars would decrease, at least. For the moment, the median class pays the highest effective rate across the board; those tax loopholes included in the tax code should be closed so as to bridge the gap in effective tax rates and thus both expand budget and households revenues, as well as insure that every category is paying at least commensurate to its income.

Scrapping special funds and wasteful programs in the Budget bill: though this is an ideologically-motivated policy, many autonomous funds need to be scrapped or privatized, simply because these are blatant examples of how special interests and lobbies get away with the taxpayers’ money; the 2012 Budget Bill provides funding for a motley of bizarre bureaucratic projects:

– Insurance companies get MAD 932Mln,

– Fez city gets a special fund, the only Imperial city to benefit from what could well be the hallmark of patronage, or worse, nepotism.

– A special SEGMA unit attached to the Finance Ministry top “supervise” privatization endowed with a 8Mln budget.

– 45Mln to the Alcohol centre at the Industry & Commerce Ministry (supposedly to spend it on drinks)

– The entire Habous Ministry swallows a 2Bn budget and it is almost impossible to check whether they are doing a good job – just have faith they do.

– Dar Es-Salam Golf Resort spends 18Mln out of the taxpayer’s money -who cannot afford to play golf- to subsidise the über-wealthy hosts and their posh hobby.

– Special Fund for Sports. Since the Sports Minister boasts about the excellent job he is doing, perhaps he does not mind taking 800Mln off his budget? After all, Moncef Belkhayat can find a way to deliver the same result with less money.

– Dar Al Nakhil Prints is endowed with a 2.3Mln budget even though the government has an official print at its disposal (with a budget of 13Mln)

(And these alone save up to 4Bn in taxpayer’s money, that is 18% of total budget deficit)

Do not take my word for it, just have a look at the late 1970s budget bills: on paper, everything seem to be alright. But in practise, careless management of public finances at the time got Morocco into a debt crisis and a 2 decades-long recession we are still paying the price for. This is a new case of mismanaged public finances through ideologically-biased fiscal policy with no immediate or tangible results on growth or even budget receipts.

I understand my railings about this hidden piece of news go unnoticed because I write in English. And because as long as mainstream media and other politicians do not get hold of this, those in charge of Morocco’s economy and its public finances will go on piling on the debt, serving generous tax cuts to those who do not need them and still get away with. there is a disaster in the making because no one seem to care about it;

Of the One, by the One… for the 1%

Protests in the United States against the plutocracy (the “99% movement”) are truly an unprecedented thing to observe. #OccupyWallStreet, as Dailykos contributor @Unaspencer (whom I had the opportunity to meet during the Netroots Nation at Minneapolis) explained it has to do with more than just unfair taxation, and I assumed she was referring to a demand for fairer society with more social justice. Given the quasi-impunity many bankers enjoyed after the ’08 credit crunch, the swift downgrade of US debt credit rating could be seen as double standards -although the same document pointed out that the blame was to be laid on the Republicans congress for their stalwart refusal to “continue to resist any measure that would raise revenues”.

In Morocco, we do not have these problems; after all, stock markets do not contribute a lot to GDP, and banks remain a lot more regulated under domestic regulations; furthermore, it is a well-known fact Moroccan assets are over-valued, and so remain unattractive to foreign investors. And yet, we have a small minority of wealthy households, with an average income well above MAD 200,000 per annum (and I have restricted myself to the top 10% only).

+32% over the year. And a full recovery since the early 2009 dip.

Those incomes earned on Casablanca Stock Exchange are even heftier, and benefit to an handful of privileged few.

We consider the MASI (Moroccan All Shares Index) Gross and Net returns: as late as December 2010, the Market valuation for MASI dividends increased 32% over the year, and considering the MASI’s valuation at the same time (MAD 129,25 Bn) the dividend value for late 2010 was MAD 31Bn for all MASI shareholders. This figure is very close to the effective paid dividends for at the same period, thus vindicating the computation of a “MASI Dividend index” and the claim of a very favourable tax deductions system applied to financial assets.

31 Bn is not such a big deal, after all: that’s about 5.1% of total GNI. The figure in itself is ambiguous, in the sense that it translates the relatively weak penetration of financial assets in gross income formation, as well as the relatively stable requirement of required capital returns from an economy like Morocco’s. Alternatively, it is only too much to be shared by a small group of wealthy individuals who, basically, concentrate as much income as 20% of the population. The question remains: how many of these über-rich own it? Also, it is safe to assume the vast majority of shareholders are not small ones; by all means, as a matter of fact, two individuals and three companies alone own 83% of all shares listed on Casablanca Stock Exchange. That’s a lot.

Large companies in Morocco also have a certain habit to display concentrated shareholding (usually other companies and holdings, a bit like SNI, who controls between 44% and 57% of total market capitalization) which makes it both easier and more difficult to get a precise overview of how concentrated wealth is among the top 10%; it is easier because these companies are ultimately owned by a handful of individuals, and more difficult because one exhausts very quickly the information yielded in publicly available documents.

And so, even among the 10% wealthiest, concentration is insanely high; and that’s not even the “We are the 1%”, it actually goes down to a lot less than that, and they can get away with it, not least because of the generous fiscal regulations.

Fatcats: they make more than the Markets.