The Moorish Wanderer

Budget Bill 2013: Beyond the Figures

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

The #twittoma is having fun with the Royal Palace’s and Parliament’s respective budgets. Strange indeed, given the fact that the cumulative variation in the budget of all three (genuine) branches of government in Morocco (Palace, HoG and Parliament) has actually been a cut of 582,000 dirhams. Besides, the cumulative weight of these institutions amounts to less than 1% of the total Budget expense projected for 2013. Way to go on the sense of priorities, comrades. Better worry about the future burden of over-borrowing.

Compiled from the 2012 and 2013 Budget bills

Same goes for the journalists (Nadia Salah wrote the most awful editorial about the deficit, wrapped into bizarre comparison of poverty levels in France and Morocco[pdf]) with the recurring themes: yes, nothing has been done about the various loopholes special interest and lobbies – a total of projected tax exemptions of 36Bn (up 4Bn from 2012) and yet no word about the truly terrifying prospect facing the Moroccan economy 5 years down the road: a glaring failure to address the deficit, and the mounting public debt. A quick look at the balance sheet shows the weak policy decision to levy some additional revenues from a so-called ‘Solidarity Contribution’ (an idea in principle and projected revenues already put into motion by the El Fassi government) has nothing to do with any willingness to deal with the deficit, but rather to cater to the PJD populist streak; the government needs to look as if they are doing something, raising taxes with no sizeable impact is something, therefore we should do it. as Sir Humphrey Appleby so elegantly put it, this is akin to say “all dogs have four legs, my cat has four legs, therefore my cat is a dog“.

A comprehensive deficit-reduction plan in Morocco needs to both cut expenditure and raise revenues; and if anything, there is a whole range of sectors that benefit (hello big wealthy farmers) from exemption that amount to 10% of all Budget expenditure, and there are at least 21Bn worth of food and goods’ subsidies that go to the wrong people. These are the amounts that should be put forward, not some 2-3Bn fiscal revenues that do not make up even for the tax cuts circa 2007-2008. Under this government’s watch, domestic public debt increased 11% in less than one year – in real terms, this means 8,860 dirhams per taxpayer household of taxes to be paid later, on top of existing ones. And the amount of money set for 2013 will keep up the trend. The mainstream media (or the social media, to that matter) did not seem to care for the abnormally low figure for Budget deficit.

November-December 2012 could register levels of domestic debt as high as 360Bn dirhams

Why so? The government is expecting a massive appropriation for public service borrowings, up 20Bn from last year. In fact, the latest September figure from the Treasury’s monthly survey point out to a total borrowed amount of 85Bn. This is what we should be focused on.

Look at the graph on borrowing requirements – these borrowings need to be paid for later – and most of these have maturities between 1 and 5 years, so no that far away from 2016. Strangely enough, the government’s deficit-reduction plan seems to be based on the overly optimistic assumption expenditure will grow at somewhat constant rates – including debt service. Let us not forget this government as a whole (the political coalition as well as the unelected officials) have laid out a plan in our name before the IMF. It hinges on a strong recovery starting from 2013, and going all the way to 2016, allowing them to solve Morocco’s structural weakness on subsidies and trade balance, alongside minimal fiscal consolidation.

One last word perhaps on the preserved fiscal status quo: the Confédération Générale des Entreprises du Maroc (CGEM) has focused on the tax revenues side as though taxes buried businesses, and advocates some sort of supply-side economics.

I would argue a genuine supply-side economics needs to care more about the crowding out effect – that’s dozen of billions of liquidities SMEs will be denied, think about that, Mrs Bensalah.

The Roof is On Fire, Keep Calm and Carry On

The season of Budget Bill is upon us. and from what I can surmise, the planning staff at the Finances ministry is dead set on using the 5.5% growth for 2012-2016, and the target for reducing budget deficit to 3% of GDP by 2016 is maintained nonetheless.

I posted a short blog on how unreallistic these figures are, in the face of gloomy global, conjecture (even more gloomy as the IMF cut its global growth projection last week) pressure on Morocco’s foreign exchange reserves and the urge to cut the subsidies.

year|   Deficit  | Deficit| Deficit 
    |(Bn dirhams)| % GDP  |Reduction
----+------------+--------+---------
2012|   -49,6    |  -6,1% |  +4.9
2013|   -45,1    |  -5,3% |  +4.7
2014|   -40,7    |  -4,5% |  +4.2
2015|   -35,8    |  -3,7% |  +5.1
2016|   -29,9    |  -2,9% |  +5.8

The short communiqué on the MINEFI website points out projected growth for 2012 is 4.5% (close to IMF’s 4.3% prediction 3 months ago) and 4.8% deficit. There is a small difference between that figure and the 5.3% budget deficit for 2013 mentioned in the IMF report – which means there is margin for the government in its intent to implement this dramatic deficit reduction plan; It is dramatic, because a deficit-cutting plan from 6.1% to 4.8% means there are 11.03Bn net cuts in the budget – which in turns means larger revenues and/or expenses adjustments.

And here is the clincher: There are going to be 24,000 new openings in public service payroll – and since most of these are going into relatively high-paying jobs – in fact, they are most likely to be centered around the median entry public service salary (about 7,000 a month) 2Bn in additional expenses.

So there it is: a tax increase is unavoidable -in fact, desirable, provided discretionary loopholes are closed, though it is not certain Mr Benkirane has the guts to take on the special interests benefitting from the status-quo, and so are the cuts to subsidies.

PS: IMF seems to have considerably upgraded Morocco’s outlook on GDP growth to… 5.5% (up from the previous 4.3%) strange.

 

Standard and Poor’s, Hatchet Man?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on October 13, 2012

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.

 

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 yield could have stabilized itself below the 4.5% if it was not for the high level of uncertainty during the first half of 2011

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

Stimulus v. Austerity in Morocco

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

@Capdema is set on releasing a ‘white-paper’ of sorts, a Budget proposal for the next decade if you will. This project, with which I was closely associated, provides the blueprints for fiscal consolidation, as well as a set of bold policy proposals on both sides of the balance sheet.

An acquaintance reviewed the document, and one of the many observations they have made caught my attention: the Budget proposal basically takes the side of fiscal consolidation (austerity, if you will) as a sort of ‘There is No Alternative’ policy decision. Maybe it is; Perhaps some mechanisms embedded in the proposal seemed too harsh and too controversial for an otherwise consensus-seeking mindset in Morocco, prevalent among policy-makers and pundits alike.

But then again, this is the beauty of policy-making: choices are made depending on ideologies, or perhaps, according to each one’s Weltschauung. A traditional left-winger in Morocco (including the vast majority of my own PSU) though it makes sense to get value for money from government expenditure, would find it hard to support policies designed to contain the size and cost of the civil service payroll. They would cheer the introduction of a de facto wealth tax on the rich, yet express scepticism to the idea of tax cuts to corporations. Strangely enough, the voices of pro-fiscal consolidation in Morocco are very far and between, and I mean, voices that advocate specifics in terms of deficit and debt reduction for instance.

I would like to discuss two aspects of that fiscal consolidation government and pundits alike want to see happening, yet fail to make it happen in terms of government policies: Subsidies and Tax exemptions.

Ceteris Paribus, the Compensation Fund accounted for less than a third of the Budget Deficit in 1979-2007, but then since 2008, it has been on par.

The Compensation Fund has long been a pain in the neck: it is inefficient, it showers the richest households and big corporations with government subsidies, and a small fraction of these actually reach the targeted populations (let us put these at the conservative estimate of the bottom 20% income households) But for the past 30 years (say between 1980 and 2007) the aggregate crowding-out effect of this fund has been relatively low compared to GDP – less than 1.61% of GDP, yet for the past 4 years, the system has proven to be unsustainable; the current narrative about the ‘Compensation Problem’ shifts the blame to international markets and the upward pressure on commodities’ prices. Actually, the increased reliance on domestic consumption to sustain growth over the past 5 years means richer households would consume more of these subsidized goods, hence putting pressure on the compensation fund to require more funding from the Budget.

Tax exemptions in themselves cost about as much as the Budget deficit – about 33 Bn in 2012, but they stir government policies in the targeted sectors for different tax credits, exemptions and moratoriums. But, it is quite difficult to argue a reasonable case for some of these, unless political calculations are considered as well. The agricultural sector is pampered beyond reason (there are tax exemptions as well as direct subsidies) with official talking points arguing the very existence of the generous moratorium is of social value. It is as though the 120-odd Bn dirhams are evenly distributed among Moroccan farmers, when it really is not, and the figure speak for it.

But I digress. The central question remains: do we go for Stimulus or Fiscal Consolidation? As a matter of fact, the two options are not mutually exclusive: a fiscal reform can be nested in an ambitious spending program, but for policy evaluation purposes the picture is blurred a bit. Yet let us consider the Stimulus option as fairly as possible. The bottom line is simple enough to make it government policy: push output growth as close as possible to 6.5% for a short period of time. But that’s about it: it is the very nature of a stimulus package to be short-lived – or perhaps the lefty punditocracy is referring to the Welfare State?

How would one go for a Stimulus in Morocco? We are already spending good money in public investments (Budget and State-managed companies put in 188Bn in investments for 2012) so perhaps we might consider some scheme to boost consumption; the Compensation Fund is already taking care of it, but not as efficiently as one might have hoped it to be, so a reform has to be included into the stimulus. The tricky part is to get other policy measures alongside the Compensation Reform, because it will harm growth and household consumption, and the latest HCP figures on that matter provide evidence to that effect. As for massive recruitment in the civil service, it will not do good, especially when the new civil service labour force is ill-suited to their selected job: is it enough to get more teachers and nurses, when quality is in higher demand?

So tax cuts are the way to go, specifically on distortionary taxes, like VAT and/or Income tax, which means there are 81Bn to be cut, with perhaps a targeted 31Bn worth of various taxes and duties on imports; on the other side of the balance sheet, potentially 50Bn, the Compensation Fund have to be cut one way or the other. Let us suppose this tax cuts-based stimulus wants to go back to direct fiscal pressure observed in the early 1990s, which means there are 2.07% worth of tax cuts to be enacted, 17Bn that is. This means 2,554dhs worth of tax cuts on average to Moroccan households, and that contributes a full percentage point to output in 2012, close to 4% GDP. The remaining .8% (to get to potential output) can be scrapped somewhere, surely, but it cannot go beyond 2014.

Unfortunately, I cannot go on about what a Stimulus-based budget policy can do, but it seems to me the exogenous factors from Morocco’s commercial partners are best matched with structural reforms, and these are better served in an austerity-based government program.

Deficits and Cycles in Morocco

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on September 12, 2012

No one needs to be hardcore Keynesian to understand why governments – and Morocco is no exception to that- prefer to go deficit-spending when the economy is in recession, especially when it is a serious one. Indeed, Robert Lucas (a big name from the University of Chicago) quipped:

I guess everyone is a Keynesian in a foxhole.

(TIME, Oct. 23, 2008)

And Morocco has been -and continues to be- a Keynesian-style economy. Unfortunately, it indulges a lot more into Zombie Keynesianism, fiscal and expenditure policies are indeed supposedly designed to stimulate domestic demand, but they do not reach the majority of our citizens (just think of household consumption distribution in Morocco: a third of its aggregate total is controlled by 10% richest households) the same can be said of public investment, although the argument is not as clear-cut as one might think it is.

relatively strong negative correlation might lead to think deficits are there to smooth economic fluctuations (captured by GDP growth volatility)

Look at the graph: deficit as a percentage of GDP opposite GDP growth over the period 1960-2011. correlation seems strong enough to sustain the assumption deficits are there to alleviate deficit. However, beware of confusing correlation with causality; we can also produce equally good evidence that deficits are the ones responsible for GDP volatility.

There is also the question of how much historical volatility is linked to deficits. The choice of 3-years deviation of GDP growth was purely arbitrary, and if anything, the strongest correlation between deficit and volatility in GDP is observed for 6-years periods, and immediate correlation between GDP growth (as it is) and deficit in percentage of GDP is equally significant. Finally, there is relatively weak evidence deficits limit somehow fluctuations in the economy (less than two years). This result seem to be in line with usual assumptions in taking 5-years averages to smooth things over.

We therefore have a glimpse to the double effect of deficits: in the shorter run as well as the longer run, deficits are negatively correlated to GDP volatility and growth.

Why do we care about standard deviation in GDP growth? For many reasons, chiefly because of government targets and growth itself; large deviation in GDP from one year to the other reflects badly on average growth – think about the 5.5% average growth projected for 2012-2016 and the impact of large ups-and-downs in GDP growth; as it stands, 2014-2016 needs to deliver consecutive growth figures close to 6.75% each year.

Second, volatility in growth means higher uncertainty. Last year, Morocco created in 2008 some 72.6Bn dirhams worth of goods and services. But the next year, only 43Bn where created, and the next years after, an average of 36Bn. These differences in expected additional GDP – about 30 Bn from one year to the other that could have benefited to many businesses and individuals, but did not, because GDP growth fluctuated a lot (not as much as the  10-year average).

Let us take a leaf from serious academia from the World Bank about the matter:

This paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries. Based on a consistent treatment of the government budget constraint, it finds evidence of a threshold effect at a level of the deficit around 1.5% of GDP.

While there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction. The magnitude of this payoff, but not its general character, necessarily depends on how changes in the deficit are financed […] and on how the change in the deficit is accommodated elsewhere in the budget.

Now, this paper (from 2005) shows the optimal level for budget deficit is 1.5% for emerging economies, even as Morocco tends to flaunt the 3% target as an article of faith. A 1.5% deficit today means the government needs to cut about 38.7Bn from its deficit, or enact a net cut of 21.8Bn in the 2012 Budget – a 6.3% reduction in the Budget size. But then again, the figure of 1.5% GDP is not absolute: there are other parameters to take into account, which makes the ‘optimal’ deficit for Morocco a bit higher, and more manageable; in fact, 3% deficit GDP falls within the 95% confidence interval for the estimated, optimal 1.5% deficit. With a 3% deficit target, the Government needs to cut the deficit some 24Bn dirhams, or enact net spending cuts of 14Bn (on the basis of a maximum tax increase of 14.6Bn)

All in all, the past 40 years have been a period of relentless deficit spending policies, that ultimately culminated with the 1970s (8% over the period 1970-1981). Even the Structural Adjustment programs did not do that well; while they did indeed reduce the budget deficit considerably with respect to the spendthrift years of the 70s, the deficit between 1983 and 1992 averaged 6%, while the deficit between 1999 and 2010 was cut in half, close to 2.9%, with two surplus consecutive years.

In many respects, Budget deficits in Morocco are not deficit-spending per say. The ‘Rapport du Cinquantenaire‘ correctly pointed out in this graph that investment lags behind current expenditure (pay-wage and stationary, for instant). The deficit has a lot more to do with weak fiscal structure, that prefers to tax easy aggregates (consumption mainly, and it companies are actually the ones collecting the money) instead of taking on special interests (the supplementary report to the Budget bill estimates 33Bn in tax exemptions and breaks are embedded in the 2012 Budget) and broadening the tax base.