Economic Analysis - C/A Deficit Improvements Constrained By Rising Energy Imports - SEPT 2017


BMI View: An improving outlook for Moroccan exporters, amid rising phosphate production and a positive economic momentum in the eurozone, will be mitigated by rising energy imports as oil prices recover. Strong foreign direct investment flows, remittances and rising foreign reserves over the past few years will ensure the country ' s capacity to finance its deficits.

We see some improvements in Morocco's current account position over the coming years, although they will be constrained by rising energy imports. Morocco's current account deficit widened to 4.4% of GDP in 2016, up from 2.1% of GDP in 2015, amid rapidly rising imports and sluggish exports. We now forecast the current account deficit to shrink to 3.5% of GDP in 2017 and 3.3% in 2018, benefiting from the recovery of key exports sectors.

Gradual Reduction of C/A Deficits Ahead
Morocco - Current Account Position, EURbn
f = BMI forecast. Source: Office des Changes, BMI

Exports Growth Picking Up...

We expect Moroccan exports to pick up over the coming years, benefiting from strong government support and an improving macroeconomic outlook in key trading partners in the eurozone. The all-important phosphate sector has been on a positive trajectory since the start of the year, with exports expanding by 8.5% y-o-y over January-May 2017. While we expect prices to remain relatively subdued over the coming years, investment by state-owned company Office Cherifien Des Phosphates (OCP) will support production growth and exports ( see ' Government Support To Boost Phosphate Sector ' , June 13 2017). Despite modest growth in the first months of 2017, we maintain our positive long-term outlook for autos exports over a multi-year timeframe, as the country remains a destination of choice for foreign autos companies in the region, on the back of political support, relative stability and an advantageous geographic location.

Phosphates Recovery Boosting Exports
Morocco - Breakdown Of Exports, MADbn
Source: Office des Changes, BMI

More broadly, exporters will benefit from a positive economic momentum in the eurozone ( see 'Quick View: Q1 GDP Paints Bright Picture', June 8 2017), given that Spain and France accounted for almost 45% of Morocco's total exports in 2016. Meanwhile, the government's efforts to diversify trade towards Sub-Saharan Africa should also support exports over the coming years.

... But Imports Will Remain Strong

That said, robust import growth will prevent any improvement in the balance in trade of goods, at least over the next three years. Morocco is a net energy importer, with energy accounting for close to 25% of Morocco's import bill in 2014. Therefore, the country has been a net beneficiary from the slump in oil prices since H214. As oil prices recover, demand for energy imports will also pick up. Government efforts to increase the share of renewable energy in the total energy mix will somewhat mitigate the need to import fossil fuels, but it will take years to materialise. Lower demand for food imports amid recovering agricultural production domestically will also mitigate the impact of higher energy imports, but that will not be sufficient to prevent robust growth in imports.

Robust Financial Buffers To Finance C/A Deficits
Morocco - Foreign Reserves And Import Cover
f = BMI forecast. Source: Bank al-Maghrib, BMI

Risks To External Stability Still Low

We maintain a positive outlook over Morocco's ability to finance its external deficits. Morocco will continue to attract large foreign investments in the autos, aeronautic, energy, and tourism sectors, as the government continues to implement business-friendly reforms. Foreign reserves increased by 44.1% between 2012 and 2016, covering 7.0 months of imports at the end of 2016. Morocco can also rely on strong remittances inflows. In 2016, the balance of current transfers (remittances account for the bulk of it) came in at 7.9% of GDP, and we expect more gains over the coming years. At a time when Morocco is planning to gradually move towards a flexible exchange rate regime, strong financing capacities support our view for a positive transition ( see ' Smooth Path Towards Greater Exchange Rate Flexibility ' , April 6 2017).