Despite not possessing hydrocarbon wealth, the economy will remain a relative outperformer in North Africa over the medium term. Investor interest in the country as an export-orientated manufacturing hub for the European market and increasingly to West Africa, as well as relative security compared to the rest of the MENA region, will bode well for Morocco’s underlying growth momentum in the next few years. The all-important agricultural sector will nevertheless remain exposed to unpredictable weather pattern, resulting in significant volatility in headline growth.
Real GDP growth will significantly pick up in 2017, following an underperformance in 2016 on the back of a lower than average harvest. Given the importance of the primary sector for output and employment, greater agricultural output in 2017 will have a positive impact on economic activity directly and indirectly through private consumption.
The rationalisation of current spending will continue under the new al-Othmani government in Morocco, which will result in a reduction of its budget deficits over coming years. Continued emphasis on capital expenditures in order to support the country’s transformation into a manufacturing and exporting hub will constrain the pace of deficit reduction, although it poses virtually no risk to the country’s sovereign profile.
Bank al-Maghrib will gradually move towards a more flexible exchange rate regime over coming years, with the first step being to widen the trading band against the currency basket (60% euro; 40% dollar).
We believe the transition will be smooth and gradual, amid a strong fiscal position, low inflation and the broad alignment of the dirham with fundamentals.
The formation of a new government led by Saadedine el-Othmani in April 2017, almost six months after the legislative elections, will mark strong policy continuity with its predecessor, which bodes well for fiscal consolidation and economic growth. The weakening of the Justice and Development Party (PJD) in favour of the palace-aligned National Rally of Independents (RNI) reflects the king’s willingness to assert his grasp over the country’s political life, suggesting limited prospects for further liberalisation.
We see tensions remaining elevated in Morocco’s Rif region in the north of the country as the ongoing wave of protests does not seem to be abating and socio-economic grievances are still high among the population. Our core view has not changed; we still believe the protests will remain largely contained in the Rif, most specifically to the town of al-Hoceima and its surroundings, where the movement started, and will pose limited risks to regime stability.