For the rating report accompanying this rating action, click here.

Rating action

Scope Ratings GmbH (Scope) has today affirmed and published the Kingdom of Morocco long-term foreign- and local-currency issuer and senior unsecured debt ratings of BB+ with a Stable Outlook. The rating agency has also affirmed and published Morocco short-term issuer ratings of S-3 in local- and foreign-currency, with a Stable Outlook.

Summary and Outlook

Morocco’s BB+ ratings reflect the country’s: i) sound and established economic institutions, including enhanced monetary and fiscal policy frameworks, supporting macro-economic stability and effective policymaking; ii) steady market access and strong funding flexibility and a favourable debt profile, underpinned by good access to domestic and international markets as well as to official sector financing; and iii) robust structural reform momentum, which Scope expects will be sustained under the New Development Model with prospects for bolstering long-term creditworthiness.

Credit weaknesses include: i) low growth potential given moderate wealth levels and modest economic diversification; ii) elevated public debt coupled with rising spending pressures and elevated contingent liabilities; and iii) high social risks underpinned by poor employment prospects and high inequality.

The ratings/Outlooks could be upgraded if, individually or collectively: i) structural reforms progress materially and set the stage for more inclusive, resilient, and sustainable economic growth; ii) there is tangible progress on the government’s fiscal strategy and budgetary consolidation plans, for instance via a widening of the tax base or elimination of subsidies; and/or iii) governance quality improves substantially thanks to institutional reforms.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) public finances deteriorate, for instance due to a rising interest burden, overly loose fiscal policy, or the crystallisation of contingent liabilities; ii) the external position deteriorates, for instance due to weakening reserve holdings or balance of payment pressures; and/or iii) social and/or geopolitical tensions worsen, affecting policy credibility, and/or institutional and macro-economic stability.

Rating rationale

Firstly, Morocco’s BB+ credit ratings are underpinned by the country’s sound economic institutions. Morocco has made notable progress in enhancing the institutional frameworks, administrative capacities, and technical expertise of major economic institutions in recent years, supported by strong engagement with international economic institutions such as the International Monetary Fund (IMF), the World Bank, and the African Development Bank (AfDB).

The fiscal framework has been strengthened in recent years. Already in 2016, a joint evaluation by the World Bank, the AfDB and the EU of Morocco’s public financial management frameworks highlighted the fiscal framework as being very favourable to the realisation of budgetary discipline objectives thanks to reliability of the budgeting process, good quality information systems, and robust internal controls¹. In 2022, Morocco fully implemented its 2015 Organic Budget law by publishing its first three-year budgetary plan in tandem with the 2023 Budget, providing a transparent medium-term framework for fiscal policymaking. In addition, the government embedded its fiscal strategy and main priorities for tax reform in the 2021 Framework Law on Fiscal Reform. Such priorities included a broadening of the tax base, increased progressivity of tax systems, a simplified tax structure, and more productive investment. Morocco is also considering implementation of a debt anchor rule in collaboration with the IMF, though discussions are still in early stages. The government’s ability to deliver on this strategy and adhere to medium-term fiscal objectives are critical to underpinning budgetary resilience, discipline, and credibility, and effectively anchor its fiscal strategies in support of long-run policy goals, including public investment needs of the New Development Model.

The monetary policy framework has historically been a strength. The central bank holds a strong record in terms of maintaining macro-economic stability and anchoring inflation expectations, with inflation dynamics on par with that of advanced economies. Over the decade to December 2020, headline consumer price inflation averaged 1%, well below that of Morocco’s peer economies. Since then, inflation picked up substantially. Consumer price inflation peaked at 10% in February 2023 and declined to 5% by July. The Bank Al-Maghrib (BAM) responded by increasing its policy rate by 150bps to 3% by March, though the real official rate remains negative. The government has actively pursued modernisation of its monetary policy, including via the 2019 central bank law and gradual enhancement of the policy modelling framework through IMF-led technical assistance. This has been a crucial part of institutional reforms. The central bank is moving towards a more flexible exchange rate regime with an inflation-targeting framework. The dirham fluctuation band was widened to +/-2.5% (from +/-0.3%) in 2018, and then again to +/-5% in 2020. The IMF stated that Morocco is expected to become the first emerging economy to adopt inflation targeting from a position of strength, that is without a domestic financial crisis or external pressure². The country also made progress in enhancing financial-sector oversight. It has fully phased in Basel III standards, enhanced bank resolution, adopted International Financial Reporting Standards, and completed an action plan for anti-money laundering and countering the financing of terrorism, the latter resulting in its removal from the Financial Action Task Force’s grey list in February this year³.

The second key strength, underpinning the BB+ ratings, is the government’s steady market access, strong funding flexibility and a favourable debt profile. The government benefits from a large and stable domestic investor base and has successfully tapped international capital markets at favourable rates, successful issuing a USD 2.5bn dual-tranche Eurobond in February this year, with 5- and 10-year maturities at 5.95% and 6.5% coupons respectively despite high global economic uncertainty and tight funding conditions. Favourable funding conditions underpinned a steady decline in the country’s implicit cost of debt from 5.6% in 2008 to 3.2% in Q3 2022. The country also benefits from the support of a diversified base of official-sector creditors, including the World Bank (holding 29% of Morocco’s official debt), the AfDB (16.5%), France (12.1%), the European Investment Bank (11.4%), and other Arab countries.

A pro-active debt management strategy underpins a favourable debt profile. The share of short-term and foreign-currency public debt stood at 14% and 24% respectively in June 2022. The average maturity of debt is long and stood at 7.2 years in 2021, up from 5.4 years in 2013. Authorities actively manage debt, aiming to opportunistically swap old debt with new issuance at more favourable terms, including longer maturities and lower rates. External debt represented 23% of total debt in June 2022, of which concessional loans accounted for 72%. These factors mitigate risks associated with more elevated debt levels.

Finally, strong structural reform momentum underpins the BB+ credit ratings. Moroccan authorities have a good record of designing and implementing long-term, sectoral, and cross-sectoral strategies. This includes structural adjustment and liberalisation efforts initiated in the 1980s, as well as growth and employment oriented strategic plans such as the Green Plan for agriculture, the National Energy Strategy, and the Vision 2020 for tourism. These strategies provide long-term visibility to investors, channel public and private resources to important sectors and have underpinned growth since 2000, as highlighted by the AfDB⁴. This capacity for long-term planning is particularly important in the context of climate change. The nation has adopted an ambitious set of strategies such as the 2030 National Climate Plan and National Strategic Adaptation Plan to enhance climate governance, strengthen climate resilience and accelerate the transition to a low-carbon economy, which could position Morocco as a global climate leader if successfully executed⁵.

Reforms are accelerating under the New Development Model, an ambitious long-term plan outlining government reform priorities for the coming decade. Such priorities include economic diversification, private sector development, human capital formation, more protective social systems, and enhanced territorial cohesion to support more inclusive and resilient economic growth. Scope views such plans as ambitious and well-tailored to address socio-economic development bottlenecks. They could substantially improve long-run growth and social resilience, as also highlighted by the IMF⁶ and World Bank⁷. The government has already made important progress in multiple strategic policy areas such as the ongoing generalisation of social protection, the extension of the Unified Social Registry, improvements to healthcare and education systems, and reform of the state-owned sector.

Scope notes that the successful implementation of the New Development Model and the country’s other long-term plans can prove pivotal in supporting the long-term trajectory of the country’s credit quality. The IMF’s approval of Morocco’s request for a USD 5bn Flexible Credit Line in April 2023 constitutes an institutional recognition of Morocco’s sustained record of “very strong policies, institutional policy frameworks, and economic fundamentals and continued commitment to maintaining such policies in the future”⁸. However, important implementation challenges remain and tangible improvements in the country's socio-economic development path will take time to realise.

Despite these important strengths, Morocco’s BB+ ratings face important credit challenges.

Firstly, the growth potential is weaker than that of peers, remains highly dependent on the performance of the agriculture sector, and is insufficient to meaningfully close income gaps with more developed economies. Morocco posted average annual growth of 3.5% over 2010-19 with growth slowing since the great financial crisis despite very high investment, representing 28% of output in 2022. The continued process of capital accumulation has not resulted in a commensurate rise in productivity while lagging educational outcomes and high informality remain constraints to potential growth.

The moderate size, diversification, and income level of the Moroccan economy remain important constraints to the ratings. GDP per capita in power purchasing terms stood at GDP 9,878 in 2022, versus USD 15,718 and USD 16,090 in South Africa (BB+/Negative) and Egypt (B/Negative). Similarly, with nominal GDP at USD 138bn, the size of the economy remains modest. The agriculture sector, which represented 12% of output on average over the 2016-20 period, employs around one third of the population and accounts for 11% of exports. Agricultural output tends to be highly variable and subject to the adverse impacts of droughts. These factors structurally constrain Morocco’s economic resilience.

In addition, the war in Ukraine and intense droughts weighed on the recovery last year with economic growth slowing substantially to 1.1% in 2022. While Scope’s baseline is for growth to accelerate to 3% this year as price pressures ease, external demand strengthens and agricultural output normalises, the risk of drought remains a downside risk both near- and long-term. As such, climate change poses a serious long-term risk to the agriculture sector for which rainfed crops account for 85% of total output. Diversifying the economy and addressing growing water scarcity are essential for preserving and increasing potential growth and enhancing resilience to climate and external shocks.

Secondly, Morocco faces several fiscal pressures. Public debt, estimated at around 69% of GDP in 2022, is elevated and increased markedly because of the Covid-19 crisis. The country has historically posted wide budget deficits, averaging 3.8% of GDP over 2015-19. The government responded to the pandemic crisis and subsequent commodity price shock with support measures, including reinstatement of subsidies for basic goods. While critical for mitigating the impact of the crises for the general population, the budget deficit resultantly widened to 7.1% in 2020, before gradually narrowing to an estimated 5.1% of GDP by 2022.

Furthermore, the ambitious reform agenda will lead to a substantial increase in public spending, estimated in the New Development Model to be about 4% of GDP annually by 2025 and about 10% of GDP by 2030⁹. Morocco will have to substantially restructure its budget in the coming years to avoid a structural weakening of its fiscal position. The authorities detailed important first steps in their multi-annual budgetary plans, which project material consolidation through a gradual elimination of subsidies, as well as higher corporate income tax and value-added tax receipts, which should more than offset the 1.4% of GDP increase in current spending related to health and education. As such, the budget deficit will narrow to around 4% of GDP by 2026 and debt should stabilise at around 69% of GDP by 2028, although further fiscal policy adjustments would help ensure debt reduction.

Thirdly, social bottlenecks continue to pose substantial risks to the ratings. Morocco’s growth model has not generated broad-based employment gains across large segments of the population, particularly youth and women do not actively participate enough in the labour force while inequalities remain high. These factors constrain the country’s economic potential and hinder efforts to diversify the economy. Inequality is an especially complex phenomenon, as it reflects gender and regional inequality as well as income inequalities. An important contributor to inequality is uneven access to the labour market. Unemployment is structurally elevated and stood at 12.4% in Q2 2023, with youth unemployment much higher at 33.6%. Similarly, World Bank estimates for the labour force participation rate for people aged 15 to 64 stood at 49% as of 2021, while estimates for the ratio of female to male participation stood at 30% in 2022, among the lowest globally. Social discontent has sparked recurrent spouts of unrest historically and is exacerbated by the cost-of-living crisis, which disproportionately impacts vulnerable citizens. Nationwide protests in April and June against the cost-of-living crisis reflect a trend of more frequent social demonstrations that began before the pandemic crisis and illustrate lingering social discontent. However, Scope notes that these protests have remained peaceful and sporadic thus far. In addition, the government’s strong management of recent crises bolsters political resilience while its long-term socially-progressive reform agenda could alleviate such tensions over time, if successful.

Finally, vulnerabilities related to external imbalances, and the potential rise in financial stability concerns present additional, albeit less salient risks. Morocco has posted consistent current account deficits, averaging 3.4% of GDP over 2015-19, while the net investment position is negative, at -59% of GDP in 2022. The negative trade balance reflects the economy’s import dependence and low value added of agriculture exports which is only partly offset by tourism service exports and remittances inflows. Scope notes that the external position remains broadly in line with fundamentals and desirable policies and that the country maintains comfortable external buffers thanks to reserve holdings of USD 35bn in June 2023, further bolstered by the recently announced USD 5bn (4% of GDP) IMF facility. Financial risks are on the rise following the Covid-19 and cost-of-living-crisis shocks. The NPL ratio reaching 8% in January 2023 with notable credit quality challenges in the tourism and accommodation sector, while the Tier 1 capital ratio stood at 11.8% of risk-weighted assets. This poses a risk in a context of elevated private sector debt relative to peers, but such risks are mitigated by sound financial oversight frameworks.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative credit rating of ‘b+’. Morocco receives no adjustment to this indicative rating via the reserve-currency adjustment under the methodology. As such, under the methodology, ‘b+’ final indicative ratings can thereafter be adjusted by the Qualitative Scorecard (QS) by up to three notches, depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis.

For Morocco, the following relative credit strengths via the QS have been identified: i) monetary policy framework; ii) fiscal policy framework; iii) external debt structure; iv) resilience to short-term external shocks; v) banking sector oversight; vi) environmental factors; and vii) governance factors. No relative credit weaknesses were identified in the QS.

Combined relative credit strengths and weaknesses identified in the QS result in a three-notch uplift to the ratings and indicate a sovereign credit rating of BB+ for Morocco.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

Scope explicitly factors in ESG sustainability issues during its rating process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS) and 20% weighting in the qualitative overlay (QS).

On the sovereign ESG pillar’s environmental risk sub-category, Morocco’s quantitative scores are strong in terms of the CO2 intensity of its economy (as measured by emissions per capita), and its footprint of consumption relative to available biocapacity. Morocco is particularly exposed to natural disaster risks given the economy’s reliance on agriculture, fishery, and tourism sectors, which are affected climate change. The economy has average levels of greenhouse gas emissions intensity both in per capita and per unit of GDP terms vis-à-vis peers while it receives average scores on its ecological footprint per capita compared with available biocapacity. Morocco has been pro-actively implementing climate policies, especially in renewable energy. It is ranked fourth in the world according to the Climate Change Performance Index¹⁰, which tracks countries’ efforts in combatting climate change. Morocco’s climate targets include an unconditional emissions reduction target of 18.3% below a business-as-usual scenario by 2030 and an additional conditional 27.2% reduction objective. Morocco is furthermore implementing a comprehensive adaptation strategy covering multiple sectors to reduce the impact and improve the management of climate change, with a strong focus on effective water management.

As regards social-risk factors, Morocco scores weakly under Scope’s quantitative model, reflecting low labour force participation rates and elevated income inequalities, which are only partly offset by favourable demographics. Morocco is among the African countries with the lowest poverty rates both as regards the international and national poverty lines. Morocco has achieved significant gains in poverty reduction since the early 2000s. Inequalities are elevated but have improved in recent years and remain slightly below that of peers. The country has sound education and health outcomes relative to peers, supporting human capital formation. However, poor employment opportunities, regional inequalities, and high social exclusion for some segments of the population pose risks, which could result in social and political instability if left unaddressed. Ongoing efforts to widen social protection and reform healthcare and education systems are crucial steps in addressing social challenges.

Finally, under governance-related factors captured in the Core Variable Scorecard (quantitative model), Morocco has a low score for governance although it performs better than most peers with regards to governance quality as measured by the Worldwide Governance Indicators. Morocco benefits from strong political stability although power remains highly concentrated. King Mohammed VI has been in power since 1999 and has adopted a pro-reform policy stance. The King appointed a new government comprising a coalition of liberal and conservative parties, led by Prime Minister Aziz Akhannouch, after the victory of his National Rally of Independents (RNI) party in general elections in September 2021. A new coalition government was thus formed by the liberal RNI and Authenticity and Modernity parties together with the conservative Istiqlal. The three parties together secured a comfortable parliamentary majority, holding 270 seats compared with the 198 needed to pass legislation, announcing a shared policy platform focusing on economic and social reform. Morocco faces important geopolitical risks from the ongoing Western Sahara conflict, which has stressed relations with neighbouring nations.

Rating committee
The main points discussed by the rating committee were: i) Morocco’s economic performance and growth outlook; ii) fiscal developments and debt trajectory; and iiii) structural reform momentum and medium-term fiscal strategy.

Rating driver references
1. EU, World Bank, African Development Bank (2016), Kingdom of Morocco: Public Expenditure and Financial Accountability Report
2. IMF (2018), Morocco: A Practical Approach to Monetary Policy Analysis in a Country with Capital Controls
3. Financial Action Task Force (2023), Jurisdictions under Increased Monitoring - 24 February 2023
4. African Development Bank (2015), Morocco’s Growth Diagnostic
5. World Bank (2022), Morocco: Country Climate and Development Report
6. IMF (2023), Morocco: 2022 Article IV Consultation Staff Report
7. World Bank (2021), Morocco: Economic Monitor
8. IMF (2023), Morocco: Request for an Arrangement Under the Flexible Credit Line
9. Commission spéciale sur le Modèle de développement (2021), The New Development Model
10. Germanwatch (2023) Climate Change Performance Index

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign CVS model version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    NO
With access to internal documents                                  NO
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Thibault Vasse, Associate Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings were first released by Scope Ratings on 28 July 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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