The Moorish Wanderer

Breaking (Old) News: More Details on the IMF-Morocco PLL Deal

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 8, 2012

Here’s some exclusive information for the readers. I should say first I am amazed by how the IMF took the trouble to answer my emails (and calls) about the Precautionary Liquidity Line (PLL) deal Morocco has benefited from; I mean, they usually deal with professional journalists. Still and all, it is humbling when the IMF takes the time to lay things out.

The exclusive information isn’t quite so: you can find all the details on the IMF’s website, but as far as I can tell, the Moroccan press corps did not report on the main talking points discussed during that press call conference.

“The program for Morocco is a 24-month PLL as we call it, a precautionary and liquidity line, in the amount of SDR 4,117 million, which is just over $6 billion; $6.2 billion to be precise.  This is a financing buffer, or a sort of insurance against potential external shocks.”

The consensus within the IMF seems to be clear as far as Morocco is concerned: strong macroeconomic fundamentals, low inflation and sound banking system. Our weakness, after all, is exogeneous: Morocco’s main trading partner, the European Union, is experiencing serious economic problems, and these reflect badly on Morocco’s trade balance. As for the PLL scheme itself, this is not some PAS-like conditioned loan/help: it is admittedly the IMF’s first use of that policy tool, and obviously, the conditons attached to it are not necessarily ‘standard issue’ deregulation programs the institution is known for. If anything, Morocco and Jordan are de facto guinea pigs for a new mindset within the IMF; they were at pains to stress its novelty, and in Morocco’s case, it is supposed to act as an insurance. Anyone with an insurance policy knows that whatever the outcome, the insured agent pays its fee and a premium computed on the basis of a risk profile. Is 3% low enough a premium for a country with a proven record of sound macroeconomic policy? I don’t know. Our government seems to think so, and so does the IMF. The expected rebound in 2013 will tell if both have been right or wrong.

Weak correlation in Forex reserves and M3 aggregate. The steady drain since early 2011 of an overall 48Bn dirhams did not affect growth of M3, though it has slowed down a bit.

the institution’s experts believe Morocco does not face a particular dire problem in its balance of payments. The graph shows the sustained drain in BKAM’s foreign reserves did not actually harm the monetary base, and if anything, we are back to levels observed in 2005.

There is only a subtle hint the Moroccan government has pledged some fiscal consolidation (read: austerity measures) and the IMF believes it has proven its bona fide in that respect by increasing the price of gasoline to the pump. Brace yourselves taxpayers and others, there are several measures to be expected in terms of revenue enhancement (tax increases) and spending cuts. It seems MM. Baraka and Azami’s pledge to bring back government budget deficit back below 3% of GDP by 2016 has some credibility, though from my own back-of-the-envelope computations, this is likely to entail as much as 30Bn dirhams in either sides of the balance sheet and/or a mixture of those.

The final point touched upon was the Subsidy Fund. As they see it , the IMF believes it is high time the Moroccan government got rid of it in favour of a more targeted (shall we say discriminate in a positive sense) to those who really need it. Unfortunately for both our government and the institution, there is an unrealistic expectation that a broad consensus is needed to reform the fund. The government pledges to engage with civil society and other economic partners, but really, when a business benefits from a rent-like dominant position, why trade valuable profits for hazardous competition?

This sums it up actually: the PLL is not conditioned on explicit terms. In fact, the IMF wants to promote it as a helping hand to good economies with sound policy-making. But there are, as we shall put it mildly, expectations the Benkirane government has to meet: fiscal consolidation (which we really need at this point)  and a far-reaching reform of subsidies in Morocco. No word however on the likelihood of Morocco’s problem worsening or transforming into a real balance of payment crisis. I guess someone in Washington is really optimistic about our economy.

(the complete transcript of the press conference call is available on this weblink)

The Dirham’s Secret Value

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 29, 2012

A short post on Morocco’s most coveted economic secret: what is the currency board breakdown used by Bank Al Maghrib to determine our Dirham currency value?

Over the last 13 years or so, Euro-based commercial partners have accounted for a little less than 70% of physical goods. (Dollar in light blue and other currencies in Red)

Speculations place the Euro well ahead between 60% and 80%. And that has a lot to do with the flow of goods and capital circulating between us and the other side of the Gibraltar detroit. Dollar should follow closely as well, with our main exports (Phosphate) and strategic imports (Oil and derivatives) labelled in Dollar.

And yet we should have a close idea of how the Dirham value is determined; it is after all a matter of transparency as well as credibility: the Dirham value tends to condition -up to a point- a significant part of the overall monetary policy, and many businesses are interacting daily with the decisions of Bank Al Maghrib.

The assumption behind this is simple and a bit restrictive: I assume the only determinant (or indeed the most significant) for the Dirham value is the amount of traded goods in  a year, which is an overly simplistic assumption, but one that makes sense, because discrepancies can be then established on the basis of capital flows, and only then residual differences can be attributed to policy arrangements (the so-called activist policy) furthermore, the initial assumption only establishes itself because the price of a currency is mainly function of the relative price of goods traded between one country and many others. This is all very classical (or neo-classical) but for a small, outward-oriented country that is Morocco, the theory applies, since the trade integration index went up from .38 in 1993, to .58 in 2010: (Exports + Imports)/GDP.

Even without a perfect hindsight of the currency portfolio behind it, the Dirham is firmly pegged against the Euro: the correlation in its exchange rate with the Dollar, and that between the latter and the Euro reaches staggering high levels (.97) either points to a fixed currency board -meaning, with no substantial changes in portfolio weightings, or with a semi-constant weighting for the Euro, and a random process determining the pegging against the Dollar and other major currencies to fill in the remaining slots. If such theory were to be vindicated, then any random generating process for, say the remaining 20% will not change that much the trend observed in the second graph.

Firmly pegged to the Euro. the Dirham mimics very closely the Euro/USD rate at its own level.

Suppose now that the Dirham value is computed as the weighted sum of monthly variation in respective Euro and Dollar exchange rates, and consider these weightings do not change during the year (an unnecessary assumption since monthly breakdown per commercial partner are available, this is a convenient way to spare myself additional computations) if indeed the initial assumption holds, then we should not observe large discrepancies between the policy rate, and the pure currency board-based result.

These computations yield mixed results: overall, a synthetic Dirham based on monthly data from 2000 to 2012, solely based on yearly weightings draws about the same trend, but misses out mainly in terms of historical volatility, about three times as volatile as the empirical Euro/MAD exchange rate, an oddity observed during the first months of 2011.

So the currency board, in the narrow definition provided earlier on, does relatively well in describing the trend; if anything, I would say Euro makes up about 62% to 68%, Dollar 10.8% and 11.2%, and the remaining currencies at most 26%. But there are obviously other elements the simple setting fails to account for, chiefly the capital flows and the level of foreign reserves. Bank Al Maghrib tends to intervene on the Exchange Markets to sustain the currency value of Dirham by buying or selling it so as to remaining within a pre-determined Euro-peg. Since 2000, they have tried to keep these variations within a target of .11% a month. These restrictions are looser when it comes to the Dollar, however.

It may come as a surprise, but the managing policy tends to have a soothing effect on the sudden changes in times of market uncertainty, in that sense, it is safe to say if there ever was an activist policy, its aim was to manage volatility and bring it to an acceptable level. But, as P. Krugman has pointed out, fixed exchange rate cannot be maintained indefinitely. Morocco’s policy has been successfully tested during last year, but that resilience does not mean it can go on indefinitely should a global crisis arise from a possible Euro breakup.

2011 was a rough year on the currency board.

The Price Of Debt

The times of thrift and fiscal prudence are long gone. In its effort to defuse social discontentment, the government spent billions of Dirhams either by subsidizing further strategic commodities, or by increasing dramatically wages in the public sector.

The result of these unexpected expenses led to further borrowings, and the time might come very soon when the unfortunate government of the day will be compelled to implement austerity plan measures, to slash some -if not all- of these subsidies, or to privatize more assets to pay up for interest on this unexpected debt, all of which would have been the result of unsound economic policies no one will be ultimately responsible for. Parallel to these public spending cuts, the social cost in terms of purchasing power losses and unemployment will exacerbate further existing social tensions.

Morocco has come a long way: the IMF-led painful structural adjustments plan the country submitted to in 1983 because of its abysmal deficit and debt record left economic decision-makers from then on very adverse to any debt-financing scheme, or at least to be adverse to any foreign borrowings; There were even times when relatively high domestic public debt was a sound economic policy that prevented inflationary pressures from getting out of control, and thus preventing ‘hot money’ foreign currency flowing in, with all its subsequent disastrous implications witnessed during the Singapore ’97 crisis for instance. That explains a successful policy in bringing down the size of public debt, but at the expense of any real economic growth, as the World Bank itself recognized:

“Toward the end of the 1980s, the Bank was excessively bullish it its assessments of Morocco’s economic future. Progress in public enterprise and financial sector reforms was considered excellent. […] The Bank’s overoptimism continued through 1993, despite the fact that there had been hardly any economic growth since 1990. Growth slowed from almost 5 percent a year in the second half of the 1980s to 2 percent in the early 1990s”.

And though great efforts have been made in upgrading the Moroccan economic structure, a potential austerity plan applied to the economy is most likely to finish off these sectors that have not been entirely reformed, namely private investment, rural areas, health and education. Furthermore, the economic growth -our official panacea for all structural economic growth hardships- has been too low to sustain real wealth creation. The consensus around Morocco’s economic growth potential is estimated around 5-6%. The 2011 Budget estimate for nominal growth is 5% with a 2% inflation, that is about 3% real growth. A poor showing indeed, considering how other comparable emerging countries manage to score higher growth figures. An austerity plan will most likely bring us into depression, an economic outcome too gloomy to contemplate, and yet very likely if the government continues in their folly trying to buy off loyalties and peace of mind.

Is the austerity plan likely in Morocco? Haven’t we managed to borrow the whooping sum of € 1 Billion a year ago? Aren’t the financial markets confident in our sound economic policies? not quite.

In 2010, total public debt increased by 5%, topped by an 11% increase in foreign debt, while the latter was going down at an annual average of 10% over the last decade

Consider the level of public debt in Morocco: According to the Finance Ministry’s debt figures, total public debt represents 49.3% of GDP (late 2010) much less than the 80.5% level recorded two decades ago. The foreign-held public debt -our subject of interest- accounts for about half of it i.e. 22.4% of GDP, an 8% increase compared to the 2009 period, an increase in total contradiction with the decade-long average trend of a 9% annual decrease. Now, these figures are nothing like those recorded in the early 1980s (when foreign-held debt was 110.9% of GDP in 1983) and the potential danger is certainly not that of a debt crisis where the Moroccan government would be unable to honour its debt. The danger looms domestically, because of the constraint national foreign currency holdings represent, economic authorities will be obliged to halve many public spendings; and because much of the budget is about non-productive expenses, the axe will primarily fall on the subsidies.

One of the reasons why Morocco’s rating is not Investment-Grade across all rating agencies is due to its weakness on foreign currency. The latest Bank Al Maghrib figures on that matter testify on our economy’s inability to field enough foreign currency to sustain economic resilience. Foreign holdings as of June 2011 are about MAD 182.8 Bn, a 6% dent compared to the MAD 194 Bn reserves held on December 2010. Already the effect of these policies can be felt on these reserves; the pressure on the foreign reserves can be linked to the public debt: indeed, as the graph shows, Morocco resorts more and more often to foreign debt, and so since 2005: even though domestic debt remains the preferred debt vehicle for government spendings, foreign-held debt stock have increased 33% over the last 5 years, compared to the 12% for domestic stock over the same period.

This, of course, is due to the gluttonous borrowings the Finance Ministry has engaged in to pay for many expenses: the new military acquisitions, the various “Grand Design” workshops, the subsidies, etc. have taken the annual domestic public borrowings from MAD 42 Bn in 2005 to MAD 54.2 Bn in 2011 an average of 4.34% annual increase, a commensurate variation to nominal GDP growth’s, about 4.84%. On the other hand, the budget circa 2005 records an additional MAD 7 Bn of foreign borrowings, compared to the MAD 18.05 Bn in 2011, a far larger annual increase of 17.1% a year. This is evidence that government spending resorts more and more to foreign borrowing, thus building on an increasing stock of foreign debt.

Interest relative to principle jumped from 24% to 50% from 2007 to 2011

The debt is also getting more expensive to pay back: even though the ‘super-borrowing’ of June-September carried only a 4.57% coupon interest, the overall foreign debt paid since 2007 has steadily gone up with an increasing interest/principal ratio, while the economy does not grow fast enough to create enough exports and attract foreign investments, in order to match the required payments.

The debt problem has also another feature, perhaps more concerning: the short-term debt (exclusively domestic) increases at inflationary proportions. The same Finance Ministry figures attest to that: early 2007, overall short-term debt amounted to MAD 15.3 Bn. Projections for debt service mid 2011 are MAD 18.22 Bn. This is due to the fallacy of low interest paid on short-term debt: 3-months treasury bonds pay a coupon of 3.44% while 5 years bond yield 3.94%. Though it is cheaper for the government to pay for short money, it also compels it to continue to borrow short in order to meet its most urgent expenses, and these have been quite numerous these last days.

Debt on itself is not such a bad thing: it can help public authorities benefit from leverage effect when important investments such as infrastructure upgrade or education and research facilities spendings are involved; They can provide value by expanding potential growth. But when subsidies equate the amount spent on public investment (about MAD 53.85 Bn for investment, about MAD 45 Bn for subsidies) the only outcome is future austerity plan and economic depression. Of course, these can be avoided, provided a deep-range fiscal reform, including an end on amnesty over agricultural taxes (who benefit to those owning more than 10,000 ha) and the tax breaks that benefit annually up to MAD 7 Bn, exclusively to the 10-20% richest individuals and households in Morocco.