The Moorish Wanderer

La Dette, Un Mécanisme Infernal

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 23, 2012

ou qui risque de l’être si on en ignore le développement.

D’une manière générale, un gouvernement finance son budget en levant des taxes diverses, et en empruntant auprès des banques et des particuliers; la Trésorerie Générale du Royaume, le guichetier du gouvernement pour ainsi dire, n’est pas une exception à la règle.

Au delà du côté religieux délicat de l’emprunt et du prix de son loyer, l’intérêt, la dette publique est une sorte d’emprunt sur le futur; en fait, elle peut même être assimilée à un impôt: il est encaissé sur des revenus futurs, et sera ensuite restitué lorsque le terme de cette dette arrive à échéance. Et plus cette période est allongée sur le temps, c’est-à-dire, plus la maturité des Obligations du Trésor est longue, plus l’Etat est confortable dans sa gestion de la dette.

Source: Bulletin mensuel de statistiques des finances publiques – Juillet 2012

Lorsqu’on examine les dernières données disponibles sur l’état des finances publiques, on note que 95% de la dette publique contractée auprès d’agents domestiques (donc dette intérieure) a une maturité supérieure à 2 ans. Observons par exemple, que les dettes à très court terme -celles de 39 à 44 jours- sont remboursées durant l’année.

Ce genre d’emprunt relève plus de la gestion du besoin de financement, et les montants impliqués sont généralement peu élevés; un indice utile pour jauger la solidité des finances publiques et d’observer le volume de ces emprunts à court terme, en absolu (comparés au total des souscriptions) ou progression temporelle. Par exemple, le Bulletin mensuel de Juillet 2005 démontre que, pour un stock initial de dette à court terme, la cadence de remboursement imposait une réduction du stock de la dette. En 2005 donc, la Trésorerie notait un désendettement des finances publiques, en tout cas pour le financement immédiat. De plus, ces maturités représentaient près de 9% du stock de la dette publique domestique.

En comparant les données actuelles à celles d’il y a 7 ans, on observe que si la part du financement immédiat a été réduite de moitié, la cadence de souscription et de remboursement a augmenté sensiblement, ce qui traduit une certaine tension sur la gestion quotidienne, et que les euphémismes employés dans le bulletin cachent peu. Alarmiste? non. Préoccupé? Toujours.

Préoccupé car l’identité comptable qui conditionne les équilibres budgétaires est potentiellement mise à mal dans ses trois termes. Faisant l’économie (huhu) d’une explication abstraite, la progression de la dette vient en complément de la différence obtenue entre les recettes fiscales et les dépenses, ces dernières englobant le service de la dette et les autres dépenses (investissements, traitement des fonctionnaires, dépenses de matériel, et le déficit aussi) avec:

D_{t+1} = (1+r_{t,D})D_t + G_t - F_t

D_{t+1} est le stock futur de la dette (dans notre case t+1 sera 2013) D_t est le stock actuel (2012), et F, G respectivement les recettes fiscales (Taxes) et les dépenses autre que le service de la dette (Gouvernement). le terme d’apparence complexe, r_{t,D} est le taux d’intérêt, qui est fonction du temps et surtout du stock de dette actuelle.

Considérez l’analogie suivante: vous êtes client chez une banque, et vous avez déjà contracté des crédits pour de l’électroménager, une voiture, et un crédit immobilier. Vous souhaitez contracter un nouveau crédit pour une résidence secondaire. L’intérêt que la banque vous demandera pour ce nouveau crédit (si octroyé) prendre en considération votre stock de dette chez l’établissement en question. De même, la durée de remboursement de ce prêt aura un impact distinct sur le taux du crédit envisagé.

D’apparence simple, cette égalité est cependant très utile à comprendre les contraintes de la politique budgétaire: un gouvernement peut facilement céder à la tentation d’augmenter ses dépenses, et pour s’affranchir de la décision souvent impopulaire de financer (intégralement ou partiellement) ces dépenses par de nouveaux impôts, préfère recourir à l’emprunt. Est-ce une mauvaise chose que d’emprunter? Pas toujours. Et pour le Maroc, cela n’avait pas beaucoup d’incidence dans les années avant 2008.

Lorsqu’une économie est en expansion, la liquidité disponible chez les banques et les particuliers tend à s’accroître. C’était le cas du Maroc entre le début de 2002 et 2009, et dans ce cas de figure, l’endettement domestique était une solution pertinente pour absorber une partie de cette liquidité, et une politique convenable pour éviter ainsi des hausses d’impôt. Depuis 2008 cependant, l’accroissement de l’agrégat M3 -la mesure large de cette liquidité- commença à marquer le pas. Le Trésor se trouvait ainsi en concurrence directe avec des entreprises privées pour financer leurs activités respectives. Ce cas de figure, où la dette publique confisque une liquidité rare à son profit, est généralement appelé l’effet d’éviction.

Jusqu’à présent, l’évolution du stock de dette ne semble pas avoir d’incidence sur le taux d’intérêt exigé par les agents disposant de liquidités qu’ils souhaitent placer dans des obligations publiques. Les données publiées chez Bank Al Maghrib permettent de calculer une augmentation modérée de moins d’un pourcentage de point entre 2011 et 2012, et nous sommes loin, très loin des taux observés durant les années 1990.

‘C’est grave Docteur?’ non. Mais ce sont les effets de faiblesses structurelles qui menacent la stabilité budgétaire, et partant, celles de l’économie en entier. Example: à marée haute, les rochers ne représentent pas de danger pour les navires cabotant sur les côtes. Lorsque le niveau de mer baisse, ces rochers, soudainement très réels et visibles, deviennent de véritables écueils dangereux pour la navigation. Ces dangers, pour le Budget et le Trésor sont nombreux: pour n’en citer qu’un seul, le système fiscal actuel est compliqué (pour un pays émergent supposé attirer les flux d’investissements) mû par une logique administrative (je dirais même, bureaucratique) qui ne récompense pas l’activité économique productive. De plus, l’adage traditionnel de ‘baisser les taux, élargir l’assiette’ est allègrement ignoré. Le prochain post listera quelques chiffres sur qui paie quoi dans ce pays.

5 Questions To Nizar Baraka

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on January 10, 2012

As a returning minister with a bigger portfolio, it is only right these questions need to be asked to our new Finances Minister. Beforehand, some congratulations are in order, this is a huge promotion indeed.

From the presentation document to the now defunct 2012 Budget Bill:

[…] L’Etat poursuit ses efforts de soutien des prix intérieurs des produits de base, en l’occurrence la farine nationale de blé tendre, le sucre et les produits pétroliers et ce, par le biais des mécanismes de la compensation qui représente pour le Budget Général une charge de plus en plus lourde.

En effet, les dépenses de l’Etat au titre de la compensation se sont élevées à près de 90 milliards de dirhams sur la période 2007- 2010. En 2011, la charge de compensation pourrait atteindre un montant de 45 milliards de dirhams en raison notamment du renchérissement des cours des produits pétroliers et du sucre brut sur le marché international. (Presentation Document, p.27)

Minister Baraka was the liaison minister to the Prime Minister for economic affairs; his portfolio included the Compensation Fund, and I can distinctly remember him on TV, September 2008, at Mustapha Alaoui’s “Hiwar” political show, boasting about his resolve to reform the fund. three years later, the 2011 Budget accounts for half of all compensation expenditure under El Fassi’s government. Way to go, minister, and there goes my first question:

Question 1: What will the minister do about the Compensation Fund?

How the Compensation Fund measures up to Budget figures

MAD 46 Bn, that’s about 6% of GDP, 15% of total Budget receipts and about 2/3 of all direct tax receipts.

The fact that the budget swelled from  46Bn is a sign of failure on behalf of Salaheddine Mezouar, Nizar Baraka and Abbas El Fassi, first because the 3% GDP limit every Budget bill constraints itself with holds no credibility, and second because the justification behind the discretionary increase was not about the fund’s official mission of stabilizing standards of living, it was a matter of “National Importance” all of a sudden.

Minister Baraka has made the Tayssir program his main theme as a junior minister. The 2012 Budget bill was supposed to provide funding for about 360,000 households (that is the bottom 10% income) will he extend that program to other income deciles as well, or is he planning to scrap the Compensation Fund altogether? It is worth pointing out that the Tayssir program has yielded no particular report, and no prerequisite targets have been set to assess its efficiency. We have yet to see some government figures on that.

Question 2: Will the minister make debt reduction a priority over spending commitments?

With an approximate 420Bn public debt as of last 2011, government resources will have to be directed to paying back the debt. I am not the one saying it, Bank Al Maghrib, the IMF and the minister’s own economic manifesto, all point out to debt reduction as a priority to be dealt with before any further increases in spendings are committed for the next legislature.

To that respect, the finance ministry can either reduce its expenditure and/or expand its fiscal receipts. Either ways, it is crucial to bring debt-to-GDP ratio from a likely 54% to BKAM’s 50% target. that 4% real cut -or MAD 30Bn or so will have to be financed somehow.

Perhaps more concerning for the minister is the credibility attached to Morocco’s foreign debt. True, it represents only 23% of total GDP -or 182Bn; so far, it matches up almost perfectly with Bank Al Maghrib’s net foreign reserves – but only just.

Question 3: Which average growth rate will the minister forecast for the next 5 years: 5% or 7%?

The senior partner in this government has pledged to insure an average 7% GDP growth throughout 2016. It seems they are bulking from it now, but that matters very little since Istiqlal party is firmly in charge of the finance ministry; by contrast, their manifesto pledged a modest but more realistic 5%. Given the fact that a 5% projection of growth for 2011 is now pretty much a reality, what will be the ministry’s prediction?

Question 4: Will the minister eliminate rent activities, end the moratorium on agricultural taxes and look through some 33Bn worth of tax loopholes, deductions and exemptions?

Rent-seeking activities are the blight of Morocco’s economy; unfortunately, institutional incentives are there to provide motive for economic agents: “grimas” are distributed on discretionary basis over closed sectors that would benefit to consumers and fiscal receipts alike if opened: transport, sand careers, high-seas fishery, these are billions of economic activities that not only fail to fall within fiscal scrutiny, but the private monopolies and oligopolies that constituted themselves have done so thanks to an over-regulatory legislation that protects them rather than consumers or enforce health and safety standards.

PJD officials claim that up to 1.5 basis points of growth are lost due to institutional corruption (on the basis of some reports). Is the minister going to lead the way and do the Head Of Government’s bidding on that respect?

Question 5: Any news about the 2Bn ‘Solidarity Fund’?

(No Comment)

Thank you.

Market Algorithms Got It Wrong

Posted in Dismal Economics, Flash News, Read & Heard by Zouhair ABH on October 6, 2010

Read in Le Monde newspaper (yes I know, nobody’s perfect), the SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission) published a couple of days ago their final report on what happened on May 6, 2010.

I was in front of the Bloomberg screen, what I saw was the stuff of legend: In a nutshell, the products I was supposed to check on do not usually observe high levels of volatility in a trading day, so that was quite disturbing to see the S&P 500 volatility index (VIX index) leap up and down (while the S&P and Dow Jones went down for an hour or so).

VIX Index YtD. The surge early May 2010 was due to Algorithm "bug"

There was a 15mins delay, but it was quite impressive. In facts the SEC report describes it in precise terms: ” May 6 started as an unusually turbulent day for the markets. […] At about 1 p.m., the Euro began a sharp decline against both the U.S Dollar and Japanese Yen.

Around 1:00 p.m., broadly negative market sentiment was already affecting an increase in the price volatility of some individual securities. […] Equities listed and traded […] began to substantially increase above average levels. By 2:30 p.m., the S&P 500 volatility index (“VIX”) was up 22.5 percent from the opening level […] the E-Mini S&P 500 futures contracts (the “E-Mini”), as well as the S&P 500 SPDR exchange traded fund […] had fallen from the early-morning level of nearly $6 billion dollars to $2.65 billion (representing a 55% decline) […] against this backdrop of unusually high volatility and thinning liquidity, a large fundamental5 trader (a mutual fund complex) initiated a sell program […] as a hedge to an existing equity position.This trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to […]target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.

However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes“.

So there we go, nobody’s fault, the Algorithm just went berserk and that’s it. No, things are more complicated and even more bothering than it was made to look. It apparently just went by unnoticed. I mean journalists got us used to the fact that everyday is doomsday, that if it was not financial apocalypse, it is World War III or Judgement day. On that particular instance, the Financial Times did not feature a particularly concerned tone. In facts, they dismissed “quote-stuffing” as the main reason for the brief but high volatility on the markets. In broad terms, quote-stuffing is operated through a trading program (a routine macro) that ensures to get every arbitrage opportunity out of tiny price differential and in a very brief amount of time (no more than a dozen seconds).

There was however a very sensible article in the Financial Times that provides just the kind of balanced insight on the matter; The idea is than when financial markets are unstable, very volatile, an algorithm program that prices routinely securities tend to amplify the trend; a time-out would be of some benefit, but again, the article shies away from the issue: how are these algorithm computed, and could regulatory bodies such as the SEC in the US capable of monitoring future anomalous trades before in order to avert further damages? To the first question, that should be up to the users (the traders) and the quant people that design them. It must be pointed out that the models are so complex that at times, one could believe they are able to stick closely to actual figures and real numbers. But because they are mathematical, there are bits of informations that are lost in the process, and the more derivative these securities are, the less information available is, not to mention the underlying assumptions behind even the most basic model, that are not always -if never- verified in actual world. It is true the past financial meltdown prompted some financial players to review their models, but when one gets use to an alluring mathematical model, and when everyone gets back “business as usual” there is little incentive to change. The regulators, on the other hand, have long since lost any real power to stop or monitor abnormal trades.

IT has taken over and regulators can do little about it. It is quite strange that financial markets, that are considered to be the most pure form of perfect and efficient market structure act at times (and increasingly so) completely free of regulation or institutional framework. It is as though the basic rules of the game were enough, and because players have in some ways internalize other institutional rules, SEC and others cannot act in pre-emptive manner, nor swiftly enough to limit the damage. And that’s how a sub-optimal equilibrium in Game Theory is reached with perfectly rational players; Algorithms are very useful indeed, but are they so without human supervision?

PS: FT registration is free but compulsory to read the articles.

For a few banking bucks

Posted in Dismal Economics, Moroccan Politics & Economics, Moroccanology, The Wanderer by Zouhair ABH on September 25, 2010

Put it in another way: how is the Moroccan financial capitalism performing? not too bad as the data shows, though it comes to the expense -no pun intended- of the consumers. It is their plight to submit to the high fees and expenses their banks charge them, while service quality and innovation are clearly not worth it. And it is not like one can benefit from competition: banking market behaves more like a cooperative oligopoly, and each bank treasures a much lucrative rent, each one prefers to keep living on it, rather than go on the market for the kill to get some market shares. So there you are: an oligopolistic market and little benefits for the consumer. Or does it? One might think that these high fees are just a sort of a levy, a way to channel the money to fund and some productive investments. Not necessarily public-oriented, but investments that could create jobs and drive the economy forward. Again, nothing is further from the facts. Let there be no misunderstanding: the Moroccan banking system has accomplished wonders, whether in updating its laws and regulations system, as well as its extension, even beyond domestic market, in less than a decade. This progress however, did not benefit to the many, only to the few, contrary to what was expected.
Consumers do pay high fees, but that does not get to the bottom of our issue: are our banks really fat cats? do they enjoy high margins, do they deliver high earnings? Do they deliver them to a small and inward-looking group of shareholders? I tried to gather some figures, and the results are quite puzzling. Some were expected, others less so. Let us go through the whole thing step by step.
The Banking market in Morocco is, in terms of number of players, clearly an oligopolistic market: according to the Casablanca Stock Exchange website, there are 6 banks on the secondary market, with about 30% direct market capitalization of the overall listed shares:
Attijari Wafabank,
Crédit du Maroc (CDM),
Crédit Hôtellier et Industriel (CIH),
Banque Marocaine du Commerce Extérieur (BMCE)
Banque Marocaine du Commerce et d’Industrie (BMCI)
Banque Centrale Populaire (BCP),

To these 6 banks, there must be added the state-owned Crédit Agricole (CAM) and the Moroccan subsidy of the French bank Société Générale (SGMB). according to their financial statements for 2009, these banks (save perhaps the CIH, due to its past financial difficulties) have delivered quite satisfactory results, as indeed the table on the right-hand side clearly show. Being a bank shareholder surely is quite lucrative. In 2009, the main CSE index, the MASI (Moroccan All Shares Index), delivered on average a rate of return of about 5%. Following the data I got from their respective financial statements, only two banks (CAM and CIH) delivered a lower rate of return compared to the average index return. One of them, CIH, has the handicap of past shady business deals, the other is a Public Bank, and is not constrained by the same required rate of return in a financial market.This is only a first sketch of results. Indeed, the idea is to compare the pattern of behaviour of the banks’ stocks to the rest of the market. This is just to have an idea of how correlated their value is to the other non-banking stocks. This is achieved by plotting the day-to-day bank stock performances vs the MASI index, through a customized composite bank index (a very basic indicator that is computed with respect to each bank’s share weight and their performance) January 2009 is considered base day. In other words, the Composite Banks Index (CBI) is computed as follows:

The result on the graph is a bit messy, so we shall keep only the CBI vs MASI, and the graphic result is quite odd. Odd because the overall Bank share of the CSE amounts, as computed before, to less than 30% (according to the MASI weightings, the banking sector accounts for 29.51% of the overall index capitalization, while IAM alone accounts for 20%). The interpretation of it is that the day-to-day valuation of bank shares does not differ significantly from the other stocks, while on average, these deliver higher dividends, ceteris paribus.

the evidence shows strong correlation between the banks' index and the MASI.

The index has however a setback, for it fails to compute the daily fluctuations of both SGMB and CAM, though it would be safe to presume that the first one will most probably behave in a comparable manner, and the second does not fit to any financial comparison. On the whole, the index comparison results hold. The routine tests one could run on the data set do confirm a very close correlation between both series (to name only one, the correlation coefficient is .95, regression R-square .91). The level of dividends is however quite different. Although there is no immediate available data, the preliminary results show that the banks deliver dividends at a higher rate and more often than comparable companies in size and profits. While it is perfectly understandable that Moroccan banks have to create value for their shareholders, they seem to achieve this objective not through investing and lending money to businesses, but quite often by levying high fees on their customers, which induces less risk and immediate profit for them. On the long run, such strategy destroys actual value.

It is therefore agreed that the banks deliver high dividends. But do they? By computing both time series, on can get an overall β of 1.0818 for the banking sector. The βeta measures the sensitivity to market returns, and the computed Beta confirms the close relation admitted earlier on. Let us now take a look at the following formula: where r(b) is the required rate of return for banks, β the banking sector beta, r(f) the risk-free return(which amounts to the the real interest the Treasury bonds service, around 1.4% on domestic markets, much less abroad) and E(Rm) is the expected market return, which, in our case, amounts to the MASI return (5% in 2009).

The banks, on average, have outperformed their sector/own required rate of return, and managed to deliver high value to their shareholders

The average required return for the banking sector in Morocco was, in 2009, of 5.49%, a required return easily beaten by all but two banks (Not Applicable to the Crédit Agricole and s for CIH the share value took a beating and lost 20% over 2009 YoY). Even when computed with each bank’s own required rate (the SGMB‘s was computed with the sector Beta), the main result remained unchanged, the banks are very profitable enterprise in Morocco indeed.

Next question is, where does the money come from? the graph shows high margin commission rates; intuitively, that could be interpreted as a very profitable fee structure, that makes up for about a tenth of the net banking income. It is definitely lucrative for the banks to levy high fees and charge their customers for their miscellaneous operations, arguably something the banks should not be very keen on, since it is quite difficult to justify the present level of banking fees with respect to the quality of service. On the other hand, the banks spend relatively little money on investment instruments. The consolidated financial statements provide good evidence on the matter: While the total banking gross revenue was around MAD 40 Bn, the aggregate margin on commissions reached MAD 5.1 Bn, a ratio rate of 12%.

On the upper side of the balance sheets, the total customers’ deposits amounted to MAD 655 Bn opposite to a total lending of MAD 400 Bn (the total national lendings amount to MAD 597 billion). The lending makes up for 82% of the total M3 aggregate (MAD 792.87 Bn, Q4 2009). These lendings are weight-biased towards specific types: Housing mortgage (MAD 103 Bn) Equipment lendings (MAD 119 Bn) Overdraft facilities (MAD 139 Bn). Arguably, it is understandable to charge high fees for overdraft (no need to fuel monetary inflation) but it seems contradictory that housing mortgage (which makes up for a third of the overall economic debt) should be positively discriminate in the high fees policy, especially when the central banks lowers the monetary rate to keep the money flowing in: although it is quite difficult to get to fine details (or rather, I am getting a bit tired going through columns and columns of balance sheets), it is reasonable to suggest that the levy on mortgage is quite important, a policy which contradicts, as mentioned before, the official public policy. So there you go: the banks are unambiguously benefiting from high profits, which do not come from financial operations. The permanently available financial instruments (for sale) account for MAD 50 Bn, 20% more than the annual gross revenue, which gives a fair idea of how comparatively important the day-to-day -thus fee lucrative- operations are for the banks. Last but not least, most of the banks are under-capitalized (total market cap of MAD 30 Bn) that might be good for business, but it just gives them an unfair leveraged advantage which might turn against the customers in the event of a stronger negative shock.

One last thing: the shareholders of these banks, those who benefit from flowing cash (the net after dividend total available cash for 2009 was around MAD 20 Bn) are not individuals with small stakes on the markets, nor pension or mutual funds: large companies, with powerful political and economic connections control these banks, and certainly not to the benefit of the consumer, and therefore, the common citizen. Are the bankers Fat Cats? yes they are. domestic entities such as SNI-ONA or Finance.com, and foreign (mostly French) companies such as Groupe Crédit Agricole, or Société Générale are the one that are making good use of deposited money – and making people paying dearly for it.

Put it in another form: how is Moroccan financial capitalism performing? It is a plight for Moroccan consumers to submit to the high fees and expenses their banks charge them, while service quality and innovation are clearly not worth it. And it is not like one can benefit from competition: banking market behaves more like a cooperative oligipoly, and each bank treasures a much lucrative rent, prefers to keep living on it, rather than go on the market for the kill to get some market shares. So there you are: an oligopolistic market and little benefit for the consumer. Or does it?Consumers do pay high fees, but that does not get to the bottom of our issue: are our banks really fat cats? do they enjoy high margins, do they deliver high earnings? I tried to gather some figures, and the results are quite puzzling. Let us go through the whole thing step by step.The Banking market in Morocco is, in terms of number of players, clearly an oligopolistic market: according to the Casablanca Stock Exchange (http://www.casablanca-bourse.com/bourseweb/Liste-Societe.aspx?IdLink=20&Cat=7), the