The Moorish Wanderer

Quarterly Data for the Moroccan Economy: A Shortcut

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 30, 2012

This is some heavy stuff: the post proposes to use statistical results from computations on cycles to develop, in turns, the broad aggregates and expand the level of details; we move from 56 years to 224 quarters (1 years = 4 quarters). Obviously, this gainsaid much of the computations performed in other posts: the HP filter does usually a lot better with quarterly data, and these do not come in hand – not so much a gainsay as it is a complete reformulation of any past doodling. On the other hand, the closer any official study got to it was the Finance Ministry’s 2009 study on Cycles, considered too short a time sequence – 1980 to 2008. This will explain some discrepancies in their results – it also explains why the Hodrick-Prescott filter works better, although I suspect any non-parametric filter would do equally fine.

If you torture the data long enough, it will confess.

(Ronald Coase)

Annual GDP is usually computed as follows: y_t = \sum_{q=1}^{4} y_q (adjusted for seasonal fluctuations). On the other hand, we might substitute this expression with a more probabilistic setting, with y_t the cumulative density for quarterly GDP (with a normalized annual GDP to 1) this statistical device is needed to generate the moments needed for further computations: mean, standard deviation and perhaps skewness. Obviously, this denies the modelthe possibility of capturing outstanding fluctuations, but there is an arbitrage to be made: scarce data, persistent fluctuations and the easy in computations.

Scarce data: it is a pity HCP or any other public institution does not publish long time series pertaining to the Moroccan economy – reliable data goes as far as the early 1980s, and annual data is usually not available on domestic sources (I have yet to find some lonely pdf file on the Finance Ministry’s website with dates from the 1960s…)

Persistent fluctuations: to capture these means eliminating outliers; no doubt the process will underestimate negative shocks because of the constraints put on the model.

Handiness in computations: there are some models available, for which assumptions -sometimes strong ones- have to be made in order to make sense of it all. In that respect, the results are not supposed to be iron-cast; in uncharted territories, it is hardly the case, and Moroccan business cycles certainly are.

The idea is to find a distribution across quarters so as to minimize differences in relative GDP over the considered period (graph depicts annual output)

From the beginning of the year till its end, growth is somehow randomly distributed across quarters. Perhaps ‘random’ is not the right word: what matters here are the moments of interest; it matters little to ‘guess’ the appropriate form quarterly growth displays over the very long run, and these errors will cancel out over almost 230 quarters. the initial step is to adopt the overly simplistic assumption that growth is uniform across quarter, that is, growth adopts the cumulative density of a uniform distribution, from Q1 to Q4, while the assumption is indeed very strong, it has the convenience to present us with smoothness: uniformity means inter-quarter growth will be very close to the yearly trend growth. In that sense, those recorded disturbances around the trend will be considered as the historical volatility we need to compute for more advanced distributions.

How do we check the results make sense? There is a benchmark out there for us to see: Quarterly data for US GDP per Capita is available, as well as the annual data for the percentage of GDP the Moroccan economy represents with respect to that of the US. A successful estimation for quarterly growth in Morocco means the relative GDP to the US should be very similar to that in yearly setting. The idea is simply to compute both countries’ trends, and from then on the ration across the available 196 quarters (usable US Data runs from 1955:I to 2004:IV)

We proceed to generate a normal distribution at each year, with N \left(\bar{y_{t,t+1}},\sigma_{229}\right) where \sigma_229 is a measure of volatility derived for the time being from levels of annual growth, and centred around an average measure computed on annual growth values. We thus obtain the following results compared to annual data:

                            GDPY
-------------------------------------------------------------
      Percentiles      Smallest
10%     6.252841       6.162857       Obs                  57
25%      7.11526       6.189924       Sum of Wgt.          57
50%     8.232385                      Mean           7.942243
                        Largest       Std. Dev.      .9970512
90%     9.121388       9.263059       Variance       .9941111
95%     9.263059       9.275018       Skewness      -.4843868
                      Quarterly_GDP
-------------------------------------------------------------
      Percentiles      Smallest
10%     6.259518       6.089419       Obs                 228
25%     7.096377       6.104532       Sum of Wgt.         228
50%      8.24034                      Mean           7.941979
                        Largest       Std. Dev.      .9909281
90%     9.101249       9.296097       Variance       .9819385
95%     9.253781       9.301066       Skewness      -.4863844
99%     9.296097       9.343733       Kurtosis         1.9077

As one can see, the quarterly data does not distort the original series too much, the trade-off being at the cost of a marginally smaller volatility and average GDP.

Brand new Morocco’s Quarterly RBC, and HP-filtered.

The newly generated doesn’t look much like the earlier results I posted on. Simply put, the data was not fit for cycle-generation. Some short-term fluctuations were not taken into account precisely because the data was annual, and subsequently, some outstanding quarters (in both ways) were skipped or instead exacerbated because of their effects on annual growth.

Overall, the essential features of ‘yearly’ cycles can be found in the graph too: boom-and-bust in the second half of the 1960s, the boom of the 1970s, and then the quagmires in short cycles in the 1980s and 1990s.

Interestingly enough, volatility is much smaller compared to initial projections; in fact, 38% smaller, as we can observe on the descriptive statistics:

    Variable |Obs      Mean     Std. Dev.       Min        Max
-------------+--------------------------------------------------
HP_Quarter_1 |228    2.28e-19    .048117   -.1296305   .1497003
HP_AnnualY_1 | 57   -7.30e-19    .078588   -.1399502   .1696304

(the difference in mean is not very significant, as both are very close to zero)

How does this cycle perform with respect to that computed by the Finances Ministry in their 2009 paper?

Les huit cycles d’affaires enregistrés durant les décennies 80 et 90 ont été marqués par la comptabilisation de 13 années de sécheresse entrainant de fortes oscillations de la production agricole et des secteurs de l’activité économique qui lui sont associés à l’amont et à l’aval. […] La phase expansionniste que connait aujourd’hui l’économie marocaine se démarque clairement de l’expérience des décennies précédentes […] Ce contexte d’évolution démontre distinctement dans quelle mesure l’économie nationale a réussi à amorcer un changement positif de structures économiques et à développer une grande capacité d’adaptation et d’amortissement des chocs. Les gains de stabilité et de durabilité enregistrés au cours de ces dernières années tiennent dans une grande partie à l’amélioration de la conduite de la politique économique et de la qualité des dispositifs institutionnels.

The findings about the expansionary cycle beginning from late 2000 are somewhat mitigated when one considers a longer time series: true, the average cycle has been less volatile (25% less than the 229 quarters-long time series) but these fluctuations are under-estimated in the MINEFI study because of the historical volatility they embed: the 1980s have been very volatile indeed, and the great moderation that followed makes cycles in the 2000s very moderate, hence the optimistic view held in the ministry’s findings. On the other hand, it seems the last 40 quarters have exhibited historically low volatility, which, when combined with those in the period 1980-2000, can be under-stated.

Bonds, Yield and Morocco’s Future

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

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

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

 

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

 

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

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

 

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

 

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

The Ministry (and la Vie Eco as well it seems) keep on comparing the level of debt to the GDP. Though it provides a good idea of how indebted a country is, or how likely a country is able to pay back its debt, it is, in all fairness not accurate nor a good indicator of the actual capabilities in paying back the debt. We should instead look at how well our foreign trade is performing. The reason for such choice is clear: because Moroccan Dirham is not a worldwide currency, we cannot expect the whole economy to pay back a debt. The stream of currency cash flow it generates through trade would instead. Our terms of trades, as well as our present balance of payment are the essential key to understand how crucial the bond emission is, and how equally important it is that we do not mess up with the money. As pointed before, the terms of trades are steadily degrading; Our exports are losing value with respect to the imports’, and the currency reserve is subsequently (but also due to other factors as well) degrading. According to the Office Des Changes and Bank Al Maghrib Figures, not only the balance of good deficit is deepening, but the capital balance does not follow suit (in the opposite direction that is) in facts, while the trade deficit steadily gets worse, capital net inflows are comparatively volatile, a volatility that has a sizeable impact on the national currency holdings. One might ask the question: why should we bother about capital inflows? Does it have any relation with our growth? As a matter of fact, it does. The import structure is very capital intensive. Indeed, according to the Office des Changes statistical survey, 44.6% of the total imports between January and August 2010 were capital-intensive: agricultural and industrial equipment, but also consumption goods such as cars, electronic and household equipment. Oddly enough, Oil imports do not amount to such values (Oil represents less than 8% of total 2010 imports). To sum up, the imports, capital and high skill intensive are less and less met by equal export value, and that could give some idea on how the bond emission could be used.

So there we are: we need money because the terms of trade are less and less in our favour. The borrowed money could be invested in machinery, industrial plants and agricultural investment, or, equally, to please the growing crowd of would-be middle-class aspirations and allow for some rise in wages in order to secure cheap publicity. A blogger colleague offered to vote for the Finance Minister’s party in order to bind him with the debt and urge him to spend it wisely. M. Mezouar does not have to, and even if he wants, he couldn’t. He is just overseeing the spending modalities; As for the strategic thinking, the decisions are taken higher up. a Bloomberg analyst reported M. Mezouar stating that: “The government forecasts economic growth to reach 5 percent in 2011, increasing by 0.5 percent annually through 2013”. I don’t know about this forecast, but it does not say a thing about the economy’s ability to pay back each year MAD 513Mn. In facts, if growth is fuelled by domestic demand, that would be bad news indeed, for domestic demand consumes high amounts of capital-intensive (and ultimately, expensive) goods that are not produced in Morocco. If anything, M. Mezouar has the opportunity of an easy ride: There is an election in 2012, and he could easily tempted to back up substantial tax cuts (or wage increase) to win him some popularity. Now this is all politics, and it does not say much about how the money could expand the economy. As mentioned before, the money could be in turn invested in another sovereign debt as well. Which one then? the US Treasury Bonds? Well, the higher yield is 3.40% for a 20-years maturities; What about the French or German debts then? same level of return and it is riskier to invest the money in another emerging country. The only viable alternative (or as Thatcher used to say, TINA) is to boost the exports with the billion in hand. The targeted sectors would be the semi-manufactured goods, consumption and equipment goods (all of which make up for 68% of the total exports) That involves tax cuts and tax incentives the government cannot deliver; The inflow will actually be used by the treasury and the central bank, subsequently pumped up in the financial markets and would end up in the private banks’ hands. The problem lies in the way the banks will use the money; The most dynamic sector (and for the banks, quite lucrative one might say) is real estate, a sector that is notoriously unable to deliver currency cash flow. So how’s to trust?

The idea of employing the CDG fund remains therefore the least disagreeable solution. Mezouar loses every authority over the money, and the sovereign fund gets it all, which is all for the best to generate cash. As an institutional investor, the CDG will look for the best opportunities to offset the money. The core question remains: would this benefit to all Moroccans? or rather, would it benefit to those working in export industries? Wait and See I think, until the first coupon payment that is.

Meanwhile, as another blogger stated: “Moroccans, keep in mind this ISIN code: XS0546649822. You will answer for it in 2020 “

The inflationist food for thought

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on June 26, 2010

According to the latest (to date) IMF working paper concerning Morocco, everything is going fine in Morocco; Indeed,

Moroccan banks are stable, profitable, adequately capitalized, and resilient to shocks, but the financial system as a whole will need to adapt to the inherent risks of changing macroeconomic policies and conditions. Major reforms have been achieved since the 2002 FSAP within a policy of actively promoting economic and financial sector opening”.

So in essence, the banking and financial system is stable. It is however, quite fragile, or rather, should develop some more resilient mechanisms. The IMF namely states that:

BAM and other supervisory bodies require the necessary operational independence and resources, supported by accountability structures, to conduct an autonomous monetary policy and effective supervision. The authorities have taken welcome steps in this context, and promulgated the new articles of incorporation of BAM confirming its autonomy, a new banking law, a new anti-money laundering law, and a large number of secondary regulations.

The Moroccan economy is doing well, admittedly because of the sound macroeconomic policy successive governments followed since the late 1990’s. These policies included low inflation-oriented policies, conservative fiscal policy, and shy attempts in implementing a policy rate by conceding more autonomy to the Central Bank. This set of policies is considered to be the standard and sound macroeconomic policy every responsible government should follow.

Let us first tackle the inflation policy. Bank Al Maghrib made an announcement of the ‘target inflationfor 2010, and set it to 1.2%, a rate of historical low of course. It is, however, a figure quite difficult to match, because of the other economic parameters party in ‘shaping’ the inflation rate.

According to the Bank’s own monthly monetary report (Dec.2009), inflation rate set at 1.4% in September 2009, a figure in line with the global inflation (due mainly to the effects of a global recession).

Going back to the inflation policies, the national/total consumption is considered to be of sizable influence on inflation rate (I will come back on that later on). Basically, the report points out:

La consommation finale nationale devrait croître de 7,3% en 2009, rythme moins rapide que celui des trois dernières années mais qui demeure supérieur à la moyenne de la décennie. Concernant plus particulièrement la consommation finale des ménages, elle devrait augmenter de 7,1% après une progression moyenne de 10,9% durant la période 2006-2008.

Globalement, les principaux indicateurs disponibles à fin octobre laissent présager la poursuite de la bonne orientation de la consommation des ménages durant les prochains trimestres.’

(a trend confirmed in the June issue : ‘Au total, la consommation finale nationale devrait croître en 2010 à un rythme situé entre 6 et 7% en termes réels.’)


Now, Olivier Blancard, with other economist colleagues, produced an interesting piece (rather a working paper, really) a couple of months ago for the IMF. Rethinking Macroeconomic Policy; and there was a bit about inflation policy:

Stable and low inflation was presented as the primary, if not exclusive, mandate of central banks. This was the result of a coincidence between the reputational need of central bankers to focus on inflation rather than activity (and their desire, at the start of the period, to decrease inflation from the high levels of the 1970s) and the intellectual support for inflation targeting provided by the New Keynesian model. In the benchmark version of that model, constant inflation is indeed the optimal policy, delivering a zero output gap (defined as the distance from the level of output that would prevail in the absence of nominal rigidities), which turns out to be the best possible outcome for activity given the imperfections present in the economy

What about our own policies on that matter? First off, let us have a look to the Bank’s views on inflation; the latest issue of the Revue de la Conjoncture Monétaire et Financière (May, 2010); They produced a couple of interesting graphs that speak for themselves:

Monthly versus Year-to-Date Inflation (Source: BAM)

The good news is, core inflation is pretty stable. Economists tend to use the core inflation rather than CPI (Consumer Price Index) fluctuations because they need to capture the relevant data, and oust any volatile random error term (mainly in econometrical techniques)

However, the graph below somewhat confirms a thesis I held to be true: our inflation is heavily correlated to current consumption goods (say, food like edible oil, sugar, wheat, etc…) as shown on the following graph:

 

 

Inflation component breakdown

 

 

 

 

While it is true inflation is gradually beaten down (which, ceteris paribus, is a good thing for the consumer), the Central Bank, as well as the Finance ministry, seem to have failed to address its volatility. In essence, the finance ministry implemented stabilizing inflation policies, succeeded in doing so, but only with the core inflation, and not on the CPI, which is quite critical, for it has a definite impact on the Moroccan consumers’ purchase power.

Blanchard then goes on: There was an increasing consensus that inflation should not only be stable, but very low (most central banks chose a target around 2 percent). […] In a world of small shocks, 2 percent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant. Thus, the focus was on the importance of commitment and the ability of central banks to affect inflation expectations.

Leaving the neo-Keynesian theoretical background aside, the kind of inflation the Moroccan economy experiences is of the highest interest to me: I believe every sound government and every sensible Central Bank should make inflation control policy on of their top priorities (beside economic growth and addressing inequalities, for the ministry that is).

However, it is quite odd that, while it undeniably preserves purchase power and good public finances, a certain ‘acceptable’ level of inflation is needed to boost businesses and, to some extent, help retail investors as well. In layman’s terms, the ‘good level’ of inflation alleviates the real debt burden a bit on businesses (for they actually pay lower real interest) and allow for retail investors to build up their portfolio on financial markets and exchange. However, the kind of inflation we are discussing here does not benefit to businesses neither household in Morocco.

We have seen earlier on that while core inflation is remarkably stable, the CPI components are much more volatile. And it is recognized to be so : Impactée principalement par des chocs ponctuels, l’inflation demeure modérée au cours des derniers mois. En effet, après s’être établie à 0,1% en février, l’inflation annuelle est passée à 0,9% en mars. L’analyse détaillée des différentes composantes de l’IPC laisse indiquer que cette évolution traduit exclusivement le renchérissement des prix des produits alimentaires volatils, l’inflation sous-jacente n’ayant que légèrement progressé, pour se situer à 0,2% au lieu de 0,1% un mois auparavant.

We are through the looking glasses here: the CPI is definitely what makes the inflation rate goes up, and there are several ways to explain it so:

CPI underlying commodity prices went up on the period from Q4 2009 to Q2 2010. It is quite possible, for a constant domestic demand, to take on inflation because of a rise in commodity prices. The first idea is to look at future commodities indices. According to the Bloomberg figures, futures prices were quite volatile from October 2009 to May 2010, but were they

Various composite commodities index (Bloomberg)

Let us take an even more systematic approach. The following graphs depict Exchange Traded Commodities tracking benchmark indices, all of which give a fair idea of how likely the commodities’ prices behaved during the past 6 months. The selected commodities benchmark are Oil Brent for Oil (ETF Securities Brent Oil Index), then the UBS CMCI Wheat Index for Crop/Wheat and finally UBS CMCI Sugar Index for Sugar. (All of which are listed on the London Stock Exchange, and for anyone interested in discussing the technicalities of index rebalancing as well as the relevant choices, I would with vivid alacrity)

CPI inflation in Morocco looks quite decorrelated with respect to commodities fluctuations

The result is quite puzzling: there seems to be no noticeable relation (lagging or dynamic) between inflation fluctuations, and the selected commodities, though these are most important in the Moroccan consumption basket. The commodities’ prices are, therefore, not the main explaining factor for the CPI inflation.

Domestic demand went up on the same period:

‘La consommation finale nationale devrait croître de 7,3% en 2009, rythme moins rapide que celui des trois dernières années mais qui demeure supérieur à la moyenne de la décennie. Concernant plus particulièrement la consommation finale des ménages, elle devrait augmenter de 7,1% après une progression moyenne de 10,9% durant la période 2006-2008’.
Basically, in a moody conjecture, the main variable that pulled our economic growth was the domestic consumption.
My two cents are up. I shall write very soon on the topic of inflation and conumption relation. However, It must be pointed out that the Central Bank and the FInance Ministry, while achieving a relative success in dealing with inflation, the two bodies failed in addressing volatility inflation, and thus, the main objective every policymaker should make theirs: stable long term growth.

The Case Against Monopolies

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on April 26, 2010
I speculated earlier on the need for a hypothetical government to nationalize private monopolies in order to crush any ‘financial coup d’état’, under the condition that theses trusts should be re-privatized in smaller bits, in order to get the competition going (I thought something of 4-5 years is a good reference) However, I failed to prove my point (rigorously I mean) And indeed, how do we assess the previous hypothesis? How do we prove that 

a). these companies enjoy private monopoly over some, not if all, vital consumption goods

b). these goods are quite important to Moroccan households, who are very price-sensitive to any changes.

Before that, I will just develop some basic microeconomics theory on Monopoly. The starting point is about how a company charges the ‘market price’, if it has any grip on it. We do assume that prices are exogenous to any market player; it seems that price-taking process, the core structure of market economics, is ignored by the companies, though they cling to the very idea of open markets. That’s a contradiction in terms, since a true market economy is not rent-providing, or even profit-providing in market equilibrium.
Coming back to pricing process: in an ideal world, the firm adapts itself to the market price by adjusting to its marginal cost (i.e; with reasonable extrapolation, the marginal productivity of its inputs). Second year economic students do know about that graph I believe:

As long as market price is above the marginal cost, the firm will produce till it reaches the optimal* quantity (which, in comparison to other market situation, is the highest) for a social equilibrium.

You know what? This has never existed, though many economic and financial models base their assumptions on a near-perfect market structure (after all, Hedge funds were once described as ‘market clearing mechanism’, enabling security pricing to be more efficient). Nonetheless, in a true market-competitive structure, a single company has a very small margin on prices and quantities, so they do take price market as a given or rather, in their majority, follow a ‘signal’ (another subject to be discussed in another post perhaps)
The Moroccan economic structure for the described goods is closer to what A. Marshall described as a rent economics. He had some interesting thoughts on the matter: “It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the well-being of society regarded as a whole, he himself being reckoned as of no more importance than any other member of it. The doctrine of Maximum Satisfaction has never been applied to the demand for and supply of monopolized commodities.” He then goes on: “The prime facie interest of the owner of a monopoly is clearly to adjust the supply to the demand, not in such a way that the price at which he can sell his commodity shall just cover its expenses of production, but in such a way as to afford him the greatest possible total net revenue.”

Clearly, the academic definition of a monopoly is quite revealing: there’s nothing beneficial for a society from a monopoly –save perhaps for the monopolist themselves-, in that sense that they capture the consumers’ surplus (the premium between the market price and their maximum reserve price), the captured surplus is therefore a rent, which is in turn spent as dividend –rather than investments as we are ld to believe in our ‘national’ economic model- to the wealthy.

There’s of course a fine line between a ‘Marshallian’ pure economics and the actual and factual economics we are dealing with. In facts, absolute/pure monopolies do not exist. However, in a more refined economic theory, duopoly and strong-form oligopolies do replicate the same pricing methods, but in a two-times model. I am of course referring to the Cournot/Stackelberg models, for which we need to understand the academics underlying before we can go further: indeed, aggressive moves on prices at a particular market does not necessarily mean competition (and therefore, outcomes to the benefit of consumers) since the tides could change to a much less price-friendly market structure. Basically, the Cournot model starts with the ‘best response’ strategy each company draws up against their competitors, they end up producing with monopoly quantities (because of their respective strategies) each firm enjoys a captured portion of total demand, but cannot charge it with the full marginal revenue, so they end up charging the pure competition market price, namely their marginal cost.

The general assumption is that all competitors enjoy similar cost structures, and subsequently, the same marginal cost (save for the fixed cost) otherwise; the one with the lowest cost takes it all. Despite its simplistic assumptions, the model could, for the available data, provide interesting insights on how particular markets are doing, and how some companies are taking advantage of it.

The Stackelberg model is even more accurate; the dynamic dimension is more important, and in our case, suits perfectly the edible-oil market: there’s a leader that has a first-move advantage, and can subsequently use an advantage it has –in it’s cost structure that would be discussed later on- to fix a certain amount of production that would, in the long run, simply oust any serious competitor, and leave little of market shares to the smaller followers.
Let us just have a look at two sets of the main consumption goods for a Moroccan household, Edible oil and Milk derivatives.

* Oil derivatives:

I’ve always wondered: how many firms are there in the Oil derivatives market in Morocco? Yes, we know Lesieur-Cristal, a notable subsidiary of the well-known SNI-ONA Holding, and according to their website (you’ve got to give them credit for that) they own the following products;

– in edible oil sub-sector : Huilor Graine d’Or Lesieur Plus Oméga 3 Lesieur FritureSafia Cristal Oméga 3 Cristal Friture Cristal Maïs Oléor

– in olive oil sub-sector : Jawhara Cristal Olive MabroukaSalamZitouna

That’s a lot of products, and anyhow, no competitor in the market is strong enough to field the same product portfolio, so it’s a lost cause for any challenger… (And, If I may, you sell oil if you want to, Lesieur’s not for leaving.. I know, my puns are terrible…) The Oil market is notorious for the fierce rows that sprung between the incumbent monopoly (i.e. Lesieur-Cristal) and any strong-hearted competitor trying to get in, most notoriously Savola; Unfortunately, our good friends the medias (the newspapers of course) consider it to be the very image of a healthy competition, or, in simple terms, a competition. Of course, I can understand that a journalist has a weak grasp of proper academic definitions (I mean, the Journalists’ school doesn’t graduate specialists) though I feel they are mixing market competition and Cournot-like competition. Let us for a moment assume their primary market is the consumers’ basket of goods (namely, 8.6% of the national average consumption as defined by the HCP) the Median told us that overall edible-oil market is roughly divided up between three main firms. It evolves around something like 80% of the Market for Lesieur, Savola & Huiles du Souss… I know, I couldn’t hold of proper data so I had to make some very extensible extrapolations). These companies have none but the price to attract the consumers. And seemingly the price range is wide enough (8 to 12 MAD/Lt) to create specific niches for each competitor;

However, these prices come to a cost, not really the marginal cost, but on the total –or sunk- costs: Lesieur-Cristal has a tremendous advantage, for their incumbent status allow them to keep fixed costs quite low; their balance sheet does show up a relatively low (their intangible fixed-asset ratio is around 71% for 2009 figures) and therefore, can afford to go further down their theoretical marginal cost. The Cournot model does assume the equilibrium price eventually settles at the lowest marginal cost. However, the main competitors are going in for a dumping, making the fixed cost –or, in Savola’s case, the entry cost- the ultimate efficiency criterion. Savola could cope with dumping, but certainly not for long, and I wouldn’t be surprised Savola would quit (which it did, eventually) All in all, Lesieur-Cristal is now in a near-monopoly situation, with a huge rent-situation, that is not invested –as we might hope- but rather spent in dividend-distribution policy. Because no substantial investment was made, they managed to increase the total distributed dividends to 187Million MAD, something like 44.68% over the year. Actually, they could have distributed twice the amount as they settled for an overall self-working capital of 300M MAD which can be virtually wholly distributed (save for the legal compulsory reserve), that’s a nice rent the Moroccan people are paying for… to give you an idea of what we might do with it, the 2009 Budget devoted a similar amount to the Wildlife & Forests departments (145 Million MAD investment allowance) or to the Families & Social affaires department (195 Million MAD) or even the jails and prisons office (264 Million MAD)

– Milk derivatives/eggs

Let us just focus on the Milk derivatives (it so happens egg-production is relatively out of line here) I can still remember the cooperative Jaouda struggling successfully against the other SNI/ONA-subsidy (come to thing of that, SNI/ONA are everywhere, quite disturbing !) How do we make up for this one? Is the market really ‘competitive’? First off, Jaouda (or shall we say, the Copag) is a cooperative, it works with a different economic paradigm (they do try to maximize their profit, but their cost structure has an additional term that changes that changes somewhat the classic optimization scheme, anyway, I think this article is quite interesting to read) the fact is, Copag is treating the local farmers with a win-win co-partnership, which allows for a steadier rate of profits, though at any rate Copag is posing a serious threat to Centrale Laitière.

Of course, they are taking away market share bits, but it does certainly not affect Centrale Laitière profits as we can draw up from their financial statements (2009): They managed to get 1Billion MAD in terms of cash result, which enabled them to distribute dividends for a total amount 461 Million MAD (2009). [Again, that could provide money for 5 regional departments for the Education ministry investment’ allowance] The idea of dismantling Central Laitière and selling it by bits to local cooperatives is, I believe the right move for a government to ensure a lower market price and a fairer distribution of wealth, instead of spending it all on dividends to the wealthy.I shall devote another piece on the oligopolistic structure of the Moroccan economy –or at least, for some of the essential goods- and the need for a genuine democratic government to crack down radically this intolerable rent-seeking economics. I would be quite interested to write something on the ‘grima’ system; it looks as though the whole economic structure moves in a bizarre and rather unhealthy paradigm, namely the permanent quest of comfortable and effortless rents, just like ‘grima’ seekers.

Basically, these firms that supposedly proud themselves to be leading the Moroccan growth are just following the same old scheme of rent-seeking, of course with much modern management techniques, but the fact of the matter remains what it is: Moroccan capitalism follows ‘grima’ scheme. It became so much of a norm that even the Cour des Comptes acknowledges the fact in many parts of their 2008 Report:

Il a été relevé que l’octroi de l’agrément ne repose pas sur des règles précises” or “En terme d’agréments octroyés, l’évolution du nombre des agréments octroyés permet de constater que […]1749 agréments ont été accordés en cinq ans, soit en moyenne 350 agréments par an. En dépit de l’amélioration constatée dans l’évolution annuelle du nombre des agréments d’une année à l’autre, il convient de souligner que les 4445 déclarations d’intention de création exprimées entre 2003 et 2007 se répartissent comme suit:

• 1829 déclarations seulement ont été suivies par des demandes d’autorisation, soit un taux de désistement inquiétant de près de 60% de la part des déclarants;

• 1749 agréments seulement ont été accordés, soit un taux d’agrément de 39%. Ce taux modeste trouve son explication, en partie, dans la lourdeur remarquable de la procédure […]

All in all, temporary nationalization is not the pristine and flawless strategy we might think of. It is only the governmental move to deal with private monopolies and oligopolies. The ‘grima-seeking’ mentality, on the other hand, cannot and will not be done away only by abolishing these rents: to abolish oligopolies means also to abolish the licenses-approval system as well.

Thou shall not bow thee economic plans

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on April 19, 2010

In essence, the left-leaning chum would be anti-monopoly (private monopoly of course). Why ? Because it makes people pay more for fewer goods, and it uses its dominant position to lock the market away and setup some kind of rent economy.

Does it sound odd? I mean, for a radical to advocate market competition instead of an old-fashion planned, centralized, state-owned economy. Of course, if you keep cluttering your mind about it, one can never get to the bottom of it anyway.

I think even the radicals are not sure about it. The fact is, they entirely focused their struggles on the political issues (including personal choices, free speech, religion, sexual orientation and other individual choices) that they lost more or less sight of the economy.

Save for those with some economics-reading background economics, as I underlined before, is a weakness.

Morocco had got only two opportunities when left-leaning governments were in power. A. Ibrahim in 1959 had to supervise building up the economy from little, pre-colonial shamble (and it does count, though it provided the land with some invaluable assets) and in 1998, when A. Youssoufi started the so-called ‘Alternance Consensuelle’, with a finance minister with so narrow a margin, that he had to get on with it and basically to implement right-wing policies. In facts, save for some nationalization and planned economy, radical left-wing economics has little to provide. I came across some cooperative theories that can be of use, but they are not widely considered suitable for manifestos, but I believe it to be something the new left should promote.

Not that I reject completely economic plans, but it seems to me the economy, like the society, is part of the collective and individual rights and liberties. Besides, centralized, soviet-like economic structures are contingent plans, and more likely to be (relatively) efficient when a country is either in autarky –with enough resources to stand its needs- at war or emerging from one (very much like former USSR in 1921-1928 and after 1945)

I fear I’m losing your attention. Let me just sum up real quick my own stand –with a simplistic description for the moment-: market economy is not fundamentally evil, and when properly monitored (meaning that the government has a neutral role of umpire), could deliver a good deal of wealth to society, and thus preventing income gaps, poverty and the social problems that ensue.

Of course, that’s just a utopia that might never be achieved. I should perhaps add that I still favor collective ownership, in the sense that employees should take over and be their respective own companies’ shareholders; the idea that communism or socialism means all productive units (businesses and firms as it were) should be state-owned is a distorted opinion –based on a historical experience that didn’t do justice to itself- of what ‘collective ownership’ means; Of course, I am not an expert in Marxist theory, but I seem to remember, that first, Marx didn’t advocate for state-owned economy (and in facts, his views on government are quite interesting to study) and second, he started, late in his life, to take interest in the mathematical background he needed to make the dialectic more ‘scientific-like’.

However, before such principles could be applied to the Moroccan context, there are so many roadblocks one has to do away with; the present system (what is considered to be the Makhzen) has its economic bastions too, and in the event of a constitutional reform, a democratic government, whatever its political stance, will face considerable resistance from occult economic lobbies.

The idea is that an ‘honest’ government (in the sense that they genuinely care about the public welfare) would be broken within weeks if they do not comply with what some powerful lobbies dictate as terms of appeasement. In that case, a hypothetical radical left-leaning government will have to deal with it in the most direct way, i.e. to nationalize –or any similar decision these institutions. If I may add something else, the nationalizations or such as they would be described, are not definitive, nor part of a move to control a monopoly and turn it to the state benefit, for these institutions will be privatized afterwards into small pieces, none of which could recover –at least for a certain time- the monopoly position they had, with all the perks and the rents that ensue.

It’s not a clever solution, I know, though it’s the intricate question of how democracy and economic power can cope with each other: the ruling majority has a popular mandate, but economic lobbies will block the government of the day because it may harm their interest (and believe me, the same applies to the unions, for they do not always act on behalf of the workers’ interest, let alone their own members’) Temporary nationalization is two-fold: first, to ensure a little cash security for the government –nationalizing is quite expensive, unless one is set not to compensate the previous owners and a bit extra to finance some project or whatever the government wants but cannot achieve (black ops or electoral bribing are not included)

How do we proceed? I am not a trained lawyer, though I think it might go like this: at an unspecified moment, the government seizes the targeted companies, and delivers the opening price for the shareholders on the stock exchange market. There is no need to stress on how crucial this move has to be in terms of secrecy and swiftness: an expectable government move will lead to a dramatic rise in the stock price, making the whole operation very difficult to carry on. That’s not the difficult part: actually, the hardships to follow are to ensure the staff loyalty, a sustainable profit margin and possible retaliation from other companies (especially foreign interest, because, let’s be honest, a couple of multinationals will be infuriated when the decision comes into effect)

I already hear some reservations: why take on large companies, aren’t the ‘national champions’ the key players of our global strategy? I refer to what seems to be the economic model adopted by the high spheres to ensure our economic development. It imitates, in a very amateurish way, the South Korean and Japanese models of large conglomerate of private monopolies on the national markets, and aggressive, rent-seeking entities in similar markets (Maroc Telecom in Mauretania for instance), the ultimate goal being a progressive accumulation of a rent that would be later on invested, and subsequently provide Morocco with the boost it need to develop itself. The strategy, however, has a major flaw: the rent is almost systematically paid as dividends to the shareholders. Ok, Châabi does invest in ‘social responsibility’ sectors –and those moves should be encouraged indeed but there’s a huge amount of profits that lies there, and it’s just divided up between a tiny yet powerful mob of upper-class people. I think the following figures could give you indeed an idea of how it goes down.

Millions MAD

ONA-SNI

IAM

Addoha

Attijari

Total Sales

18 277.9

30 339.0

6 011.96

11 927.7

Operating Profit

1 148.3

14 008.0

1 552.45

4826.69

Operating Margin %

6.3%

46.2%

25.8%

40.5%

Net Profit

1 863.6

9 779.0

1 023.79

3 940.84

(CDVM regular financial statements, 2009)

These figures show a high operating margin, too high for a good company. Its quite difficult to state that they sustain that high a level of profits, but if so, we can then reasonably assume that their profits are not the result of competition in their own sector, but rather the benefit of a rent or quasi-rent they get out their monopoly –or close to it- situation. Furthermore, these companies happen to be loaded with cash (I didn’t have a close look to their cash statements, but it seemed quite high) and distribute much of their profits as dividends. I won’t bring out of the wood some fancy econ theory, but I would like to discuss in length what the seemingly narrow margin ONA holding displays hides in terms of rent: the company has an indecent rent situation on consumer goods such as Sugar, Oil, Milk & Derivatives, Waters and so on… (Incidentally, ONA is to merge with SNI soon, so precious information will disappear, as the new entity will no longer be listed on Casablanca Stock Exchange, and therefore, will have no statutory obligation to display its financial statements… I hope they will list under the new entity, after all, it’s in their interest to display some financial transparency, foreign investors-wise)

Let us first enquire about what does the Moroccan household consumes, or rather, how do they affect their income.

The national statistics office produced a survey in 2001 in which 46% of the total average income (253.186 MAD yearly) is devoted to consumption goods.

In a nutshell, the consumption structure is as follows:

Why do we have to bore ourselves with these figures? Well, the idea is to prove that, because of the important percentage devoted to consumption, the average household is very sensitive to price changes, and therefore, any monopoly on these products is indeed a rent provider, and therefore, should be disbanded.

And apparently, it appears to be the case. The average Moroccan household are quite sensitive to any price changes (which were quite in an upward trend, it should be pointed out). Without dipping into fancy theories, the sole fact that nearly half the annual income is devoted to consumption (just to maintain bodily functions going on, roughly speaking) gives a pretty good idea about how consumption might change function of price changes.

In essence, the profit margin these companies are making –for the consumption goods at least- are more part of a rent profit –sucked up from the consumers’ surplus.

In these conditions, a penalizing move against those companies is and has to be in the interest of the public. The good news is, cracking down on private monopolies can be a popular policy among small and middle-size businesses (as well as the final consumer). I will devoted another post to this issue, in more rigorous terms, that is.