London, Asharq Al-Awsat—Building on several years of growth prompted in part by a comprehensive economic reform strategy, Morocco has just announced its decision to return to the euro market after a 4-year absence with a 1 billion euro issue.
Speaking with Asharq Al-Awsat as he visited London as part of a seven-city European tour, Moroccan Finance Minister Mohamed Boussaid explained the bond issue would help finance his country’s ongoing economic reform program and its continued efforts to diversify the economy.
Asharq Al-Awsat: Some reports are claiming that the economic crisis in Europe has actually benefitted the Moroccan economy, as companies look for other markets as outlets. Is this a correct assessment?
Mohamed Boussaid: This is simply not true; the crisis that hit Europe had a negative impact on Morocco. There are several aspects to the economic crisis, most notably the economic downturn and decline in investments. In general, when there is economic decline, it leads to reduced investment. This economic crisis also had a negative impact on tourism, and on the immigrant community, whose revenues were affected, and therefore so too were [currency] conversions in Morocco. The economic crisis also affected foreign trade and commercial transactions.
Despite all of this, however, Morocco was able to alleviate the impact of this crisis thanks to its policy that aims to support public investment and encourages national consumption. On the other hand, we must acknowledge that it had a great impact on the budget because strengthening consumption requires the provision of great prospects, which is what impacted the balance of the budget, and therefore increased the deficit. As a result, the government was forced to take serious reforms in order to mitigate costs and to rebalance the budget gradually. We were able to reduce the deficit by two points over the past year, from 7.3 [percent of GDP] in 2012 to 5.5 [percent] in 2013. We worked tremendously to rebalance the budget.
Q: In London last week, you announced Morocco would issue eurobonds to the value of 1 billion euros, with a maturity period of 10 years and at an interest rate of 3.5 per cent. Do you have any comment on this?
Mohamed Boussaid: Before arriving in London, we held meetings with a number of major investors living in Paris, Frankfurt, Munich, Zurich, Geneva and Amsterdam, as part of a campaign to be in touch with investors, as it preceded the announcement that Morocco would be issuing international bonds worth 1 billion euros over ten years. The underwriting process for these bonds took place recently, and the visit to London was very successful for a number of reasons, the most important of which was the value of these bonds—1 billion Euros—and the interest rate, which is low in comparison to previous issues.
[The visit to London was particularly successful] in light of the difficult financial situation within Europe. We consider the low interest rate a clear indication of the confidence foreign investors have in the Moroccan economy and in its credibility. In addition, the nature of the investors vary from one another, as these bonds were underwritten by non-speculative investors such as banks, insurance companies, asset-management companies and sovereign funds.
There is also the geographical distribution of the investors to take into consideration. The European countries dominate, but there are also underwriters from the US and the Gulf market, in addition to Europe. We held meetings with investors from all different nationalities that focused on explaining the nature of the Moroccan economy and its current status, how certain crises over the past few years were dealt with, especially the implications of the European crisis on the Moroccan economy, as well as the problem of increasing prices of raw materials, particularly the price of oil, which is rising at a staggering rate.
Despite all these external crises and the impact they have on our country, the Moroccan economy has dealt with these blows efficiently. The diversity within the economy has begun to pay off in various fields as a result of us putting in place clear and well-defined strategies. Those strategies have begun to produce positive and tangible results in many sectors, such as the aeronautics and automobile industries and remote services, et cetera. This diversity [within the economy] has been a very effective way to reduce the intensity of the external crises.
There is also diversification in Morocco’s economic partnerships thanks to Morocco’s openness to the world and its modernization. For example, Morocco has signed approximately 55 free trade agreements, which increases foreign participation in the fabric of Morocco: for example, its partnership with the Gulf countries in the field of tourism and real estate. There is also the King Mohammed VI initiative that looks towards the sub-Saharan countries as part of the South–South Cooperation initiative.
Q: You previously stated that Morocco is in need of loans of up to 3.44 billion dollars to keep the budget deficit at 4.9 per cent; that’s the equivalent of 28.5 billion Moroccan dirhams. However, the 2014 budget does not allow the government to borrow more than 24 billion Moroccan dirhams. How will you solve this dilemma?
Forecasting the deficit within the framework of the Finance Act [the budget] is merely forecasting. No effort is spared to reduce the deficit. When the deficit is reduced, debt is reduced and so too is the need to borrow. We must acknowledge that at the end of the day, borrowing is the result of a budget policy and a fiscal policy. Debt can be managed, but it cannot be completely controlled. All economic policies and other policies are linked to debt. Therefore, we must take precautions from the outset and start up the economy’s engines. Growth must be increased more and more to achieve greater tax revenues, so that we can take control of the costs. This is what we have started to do through the Compensation Fund (a fund that supports basic materials). If we carry out these reforms, the deficit will shrink, and we will remain in control of debt.
Q: Some critics of government policy are fearful of these loans taken out by Morocco. They say that the money is not spent on domestic investment, but mainly used to cover regular expenses, which means that Morocco will need to borrow continuously. To what extent is this fear justified? Is it the case that borrowed money is used mostly to cover regular expenses?
We must acknowledge that debt is a problem. The modern economy cannot be managed without adequate funding. Our country does not produce oil, and it wants to make huge investments in order to develop programs to equip cities and villages, and to invest in various sectors. All of this requires external funding, and all the basic mechanisms to manage the budget are based on this foundation.
Today, there is an increasing desire to cover the basic needs of the citizens and the country, for example through social programs. This desire needs to be accompanied by a carefully thought out fiscal policy, therefore, of course, resorting to debt. For your information, debt in Morocco is still within reasonable limits and is by no means a cause for concern. It is enough to know in this regard that in some countries the rate of debt has reached 300 percent of the domestic and foreign product, while in Morocco it has not exceeded 63 per cent. All the studies regarding debt and all the financial institutions say that the level of debt in Morocco is still within reasonable limits. What does this mean in economic terms? It means that it can be controlled. But when, for example, it reaches 80 percent, then it’s time to sound the alarm.
I believe that the policies of controlling the balance, managing debt and deficit control could soon lead to the stability of debt and eventually the reduction of debt. With the beginning of the economic recovery in Europe, we expect this to have a positive impact on the economy of Morocco.
Q: Statements made by international financial institutions and by IMF chief Christine Lagarde have all been positive regarding Morocco and have praised Morocco’s economic progress. Despite that, however, some economists argue that there are still obstacles that are blocking the path to financial stability. In your view, what is the most prominent challenge?
Thank you for mentioning the positive reports from these institutions and the reports from rating agencies that have a stable outlook on Morocco, which is placed in the same group as major countries like Russia, Spain, Turkey and Romania in terms of ratings. This is very positive and means that Moroccan sovereign loans, in terms of ratings, occupy the same level as these other countries. This rating didn’t come from nowhere; it takes into account the overall economic reforms carried out in Morocco, which were expressed clearly in these reports. For our part, we took the financial market test with complete transparency and we entered it without any guarantees, and we succeeded as we have advanced the reality of the Moroccan economy and the prospects that lie ahead. We have demonstrated the size of our reforms and social and political stability. The ruling on Morocco was positive, and this is another example of strong and supportive recognition of the Moroccan economy and implied praise of our national economy.
Q: This year, Morocco is witnessing an average season in terms of agriculture. There is also a decline in the rate of conversion of hard currency by [Moroccan] immigrants because of the high unemployment rate among them, in addition to a decline in tourism revenues compared to previous years. Could all of these factors combined have an impact on Morocco’s reserves of hard currency? Is it possible that there will be economic constraints for the current year?
Morocco’s reserves of hard currency have been increasing since the beginning of the current year. The bonds will raise the stockpile. There are several positive signs in this context that confirm that there is no threat to hard currency. Exports have been increasing since the beginning of the year by 3.5 percent, and there has also been an increase in tourism revenues by 5.3 percent. There has been relative stability of imports since the beginning of the year due to the stability of the prices of raw materials. There has also been a rise in foreign investment. All these factors combined have had a positive impact on Morocco’s reserves of hard currency. It is true that there has been a decrease in [hard currency] conversions by Moroccan immigrants, but the expectations of the development of Moroccan exports in the coming months, especially in the automotive sector, as well as our hope that the prices of phosphate will return to what they were, makes us optimistic regarding Morocco’s reserves of hard currency.
Q: Some analysts argue that difficult reforms are in store for the Moroccan government next year, particularly in relation to the support system, taxes and pensions. How difficult will these reforms be in your view?
The difficulty of reforms lies in the delay of their completion. We could have reformed the Compensation Fund gradually over the past decades, but perhaps the conditions were not suitable for this reform and we must acknowledge the difficulty surrounding it. Everyone [agrees] that this fund is no longer fulfilling its role. It was intended for the poor and middle classes, but it has strayed from the road it was meant to go down and now even the privileged classes are benefiting from it . . . People are now looking at this reform despite the difficulties surrounding it, its weight and its social, economic and political costs. To start with, we consider this reform very encouraging and a brave and radical reform that could save Morocco’s budget from the burden and constraints that have always existed.