Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of Morocco’s (Morocco) long-term local- and foreign-currency issuer and senior unsecured debt ratings at BB+ and affirmed the short-term issuer ratings at S-3 in local and foreign currency. All credit ratings have a Stable Outlook.

The affirmation of Morocco’s ratings reflects its sound and credible economic institutions and continuous enhancement of its monetary and fiscal frameworks, which supports macro-economic stability and effective policymaking in response to external shocks and structural challenges. Economic and fiscal resilience is further underpinned by the government’s strong funding flexibility and favourable debt profile, as reflected in good access to domestic and international capital markets, alongside robust official sector assistance anchoring a solid reform momentum that is expected to continue over the coming years. Still, moderate wealth levels and economic diversification limit growth potential, while fiscal flexibility remains constrained by difficulties in significantly raising government revenue because of high social risks. Against this backdrop, further progress on the execution of the reform agenda is critical to enhance the country’s economic diversification, tackle socio-economic challenges, structurally raise tax mobilisation, and bolster credit fundamentals.

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Key rating drivers

Sound economic institutions and track record of macro-economic stability. Morocco made significant progress in enhancing its monetary policy framework in recent years, which has supported a strong record in terms of anchoring inflation expectations, including during the cost-of-living crisis. The modernisation of the monetary policy was initiated with the 2019 central bank law and followed by the gradual enhancement of the policy modelling. Although the dirham has continued to move within the +/-5% band since its widening in 2020, the Bank Al-Maghrib (BAM) is committed to transition towards an inflation-targeting framework. The IMF made a positive assessment of that transition process, in line with improvements in the functioning of foreign currency markets and the BAM’s macro-forecasting framework.¹

Furthermore, Morocco’s fiscal framework has improved materially over the past decade, notably reflecting the full implementation of the 2015 Organic Budget Law, which led to the regular publication of multi-annual budgetary plans and raised the transparency of fiscal policy. Ongoing reforms are expected to bear results, with the implementation of the reform launched in 2021 to broaden the tax base, simplify the tax structure and raise the progressivity of the tax system – notably via a streamlining of the corporate income and value added taxes as well as an increase in the capacity of the tax administration. Moreover, the authorities plan amendments to the Organic Budget Law, which would include the adoption of a new fiscal rule based on the introduction of a medium-term debt anchor.

Overall, Morocco’s strong institutional policy framework anchored the economy’s resilience to geopolitical uncertainties and the Al Haouz earthquake. The output growth recovered to 3.4% in 2023 thanks to robust private consumption, amid decelerating inflation. Dynamic services (both tourism and non-tourism) and manufacturing exports (aeronautics, automotive, mining) benefited from infrastructures such as the Tanger Med port complex. Real GDP growth is expected to decelerate to 3.0% in 2024 as adverse weather conditions weigh on agricultural output, before converging around 3.5%.

Strong funding flexibility and favourable debt profile. The government benefits from a strong funding flexibility as reflected in its solid track record of accessing international capital markets. Following the issuance of a USD 2.5bn Eurobond in February 2023 in the context of high economic uncertainty and tight global funding conditions, Morocco is expected to continue accessing international capital markets on favourable terms. The continuation of Morocco’s precautionary access to the IMF’s Flexible Credit Line (FCL) reflects solid macro-economic fundamentals that should support funding flexibility. Moreover, Morocco benefits from a diversified investor base, with a large and stable domestic investor base, and the support of official-sector creditors. External debt represented 30% of total debt in June 2023, nearly three quarters of which consisted of concessional loans.

Furthermore, Morocco’s prudent and pro-active debt management strategy anchors a comparatively resilient debt profile. Average maturity of public debt is relative long (at 6.8 years in 2023), while the share of short-term debt is moderate (under 20%). Foreign currency risk is manageable, with around three-quarters of public debt denominated in local currency. The authorities continue to actively manage debt, aiming to opportunistically refinance old debt with new issuance at more favourable terms.

Sustained reform momentum could yield long-term economic and social dividends. Morocco has continuously pursued structural reforms over the recent years, building a favourable track record of implementing long-term structural policies and constructive engagement with international institutions. Currently, the authorities are implementing an ambitious reform of the social protection system by 2025 that includes the generalisation of the social protection system, via the extension of the compulsory basic health insurance scheme and the extension of family allowances. The authorities also aim to increase the coverage of the old-age pension and unemployment benefit systems, laying the ground for a universal social protection coverage. If sustained over the coming years, those policies should improve social conditions for lower income households and support a more inclusive growth path.

Moreover, the government has made progress in enhancing the business environment. The ongoing reform of State-Owned Enterprises (SOEs), and the creation of the National Agency for the Strategic Management of State Participations is expected to foster structural improvements regarding the governance of public companies. Progress has also been achieved in stepping up the fight against corruption and anti-competitive practices. These structural improvements have supported robust foreign direct investment, with announced greenfield investments by international firms quadrupling to USD 20.4bn between 2021 and 2023, significantly outperforming the trend observed among African peers.² Finally, Morocco has unveiled an ambitious climate policy strategy, as outlined in the 2030 National Climate Plan and National Strategic Adaptation Plan, aiming to strengthen resilience to the adverse effects of climate change and to position the country favourably within the emerging global green value chains.

Rating challenges: modest growth potential; constrained fiscal space; and elevated social risks

First, Morocco’s moderate economic size (nominal GDP of USD 144bn in 2023), income levels (GDP per capita in purchasing power terms estimated at 10,460 international USD) and economic diversification are structural constraints. While capital accumulation has been robust in recent decades, driving a growth potential estimated at 3.5%, labour productivity gains have been slow, pointing to persistent hurdles to private sector dynamism. Scope expects the ongoing reforms around competition and management of SOEs to improve labour and capital allocation, and support productivity gains³. Even so, tackling persistent bottlenecks and reducing the size of the informal sector require sustained investment in human capital to unlock economic opportunities, increase financial inclusion, and broaden the tax base.

Second, Morocco’s fiscal space is constrained by limited domestic resources mobilisation, high public debt and contingent liabilities. The public debt-to-GDP ratio is expected to decline from an estimated 70.6% of GDP in 2023 to about 67% in 2029, thanks to lower fiscal deficits projected to decrease from 4.3% in 2023 to about 3.3% over the period. This will result from a gradual reduction in current expenditures, as the roll out of direct transfers to vulnerable households is offset by the phasing-out of existing social programmes and the reduction in subsidies to households. Moreover, the unification of value added tax rates and the simplification of corporate income tax are expected to yield improvements, although remaining hindered by still-elevated informality. Other challenges relate to the continued reliance on agriculture and tourism-related revenues, as well as continent liabilities (resulting from the large size of the SOE sector and a non-negligible stock of direct guarantees, around 3.6% of GDP as of 2022).

Third, Morocco faces important socio-economic challenges. Despite robust output growth over the past decade, employment gains have remained modest. Inactivity remains high (average inactivity rate of 57.4% as of Q1 2024) and is singularly elevated for women (81.7%) and young people (78.5%). Labour market metrics have further deteriorated over the recent years, importantly owing to job destructions in the primary sector due to weak agricultural output, which outweighed a favourable job creation momentum in services. Together with high regional inequalities, these bottlenecks weigh on the growth potential and constitute a key hurdle on placing Morocco on a more resilient and inclusive economic growth path.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s opinion that risks to the credit ratings over the next 12 to 18 months are balanced.

The upside scenarios for the ratings and Outlooks are (individually or collectively):

1. Improved growth outlook, for example, due to structural reforms raising the country’s growth potential;
    
2. Improved fiscal outlook, for example, due to a widening of the tax base and elimination of subsidies resulting in budgetary consolidation;
    
3. External resilience improves substantially, for instance via tangible progress in the transition towards a flexible exchange rate regime.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Public finances deteriorate, for instance, due to a rising interest burden, overly loose fiscal policy, or the crystallisation of contingent liabilities;
    
2. The external position deteriorates, for instance, due to weakening reserve holdings or balance of payment pressures;
    
3. Social and/or geopolitical tensions worsen, affecting policy credibility, and/or institutional and macro-economic stability.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘bb’ for Morocco. Under Scope’s methodology, the indicative rating receives 1) no positive adjustment from the methodological reserve-currency adjustment; and 2) a one-notch negative adjustment from the methodological political-risk quantitative adjustment. On that basis, a final SQM quantitative rating of ‘bb-’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Morocco’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified the following QS relative credit strengths for Morocco: 1) monetary policy framework; 2) fiscal policy framework; 3) debt profile and market access; 4) external debt structure; and 5) governance factors. Conversely, Scope did not identify any QS relative credit weaknesses for Morocco. On aggregate, the QS generates a two-notch positive adjustment for Morocco’s credit ratings, resulting in final BB+ long-term ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

Under environmental-related factors, Morocco scores moderately on carbon emissions per unit of GDP but comparatively strongly on greenhouse gas emissions per capita. The reliance on agriculture, fishery, and tourism sectors, makes the economy more vulnerable to the adverse effects of climate change.⁴ However, Morocco has been pro-actively implementing policies to support the green transition, notably capitalising on its geographical advantages to develop renewable energy and the country’s integration in global electric battery and green hydrogen value chains. Morocco’s climate targets include raising the share of renewables in total energy consumption to 40% by 2035 (from 19.5% in 2021) and a 45.5% reduction in GHG emissions by 2030.⁵ This drives our ‘neutral’ assessment against the sovereign peer group.

Under social-related factors, Morocco scores above the global average, reflecting weak marks on income inequality and labour-force participation, which are partly offset by strong scores on the old-age dependency ratio. Morrocco’s poverty rates, education and health outcomes compare favourably to regional peers. Still, economic inequalities, weak labour market outcomes and social exclusion of certain segments of the population pose risks and may fuel social discontent. Positively, the ongoing reform of the welfare and education systems constitute important steps in addressing social risks. This drives our ‘neutral’ assessment relative to sovereign peers.

Finally, under governance-related factors, Morocco displays low scores on the World Bank’s Worldwide Governance Indicators, while comparing favourably to regional peers. The government is supported by a coalition of liberal and conservative parties that was formed following the 2021 general elections. Political tensions have risen in the recent period, in a context of persistent food inflation, rising unemployment and of protests concerning the normalization of the country’s relations with Israel in the wake of the Israel-Hamas conflict. Additionally, Morocco faces persistent geopolitical risks from the ongoing Western Sahara conflict. Still, Morocco benefits from a robust track record of political stability. This drives our ‘strong’ assessment under against the sovereign peer group.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. IMF – Morocco: 2024 Article IV Consultation, May 2024
2. World Bank – Morocco Economic Monitor, Summer 2024
3. IMF Working Paper - Assessing the Impact of Structural Reforms on Potential Output: The Case of Morocco, October 2023 
4. African Natural Capital Alliance – Nature stress test: Assessing exposure of five African banking systems
5. Royaume du Maroc, Ministère de la Transition Energétique et du Développement Durable – Stratégie Bas Carbone à Long Terme, Maroc 2050

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), 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 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 July 2023. The Credit Ratings/Outlooks were last updated on 8 September 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.  

Conditions of use / exclusion of liability
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